-----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, S/C2ZXZ/Ml1QZ0acnLxpBwofpCR8ZwlIOgVUho78C5y5imGXrRVCll5KBwqdJH5x nCFUSVKf8oByx8utgW0fFQ== 0000912057-00-026175.txt : 20000525 0000912057-00-026175.hdr.sgml : 20000525 ACCESSION NUMBER: 0000912057-00-026175 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000226 FILED AS OF DATE: 20000524 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STROUDS INC CENTRAL INDEX KEY: 0000927760 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-HOME FURNITURE, FURNISHINGS & EQUIPMENT STORES [5700] IRS NUMBER: 954107241 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24904 FILM NUMBER: 642688 BUSINESS ADDRESS: STREET 1: 780 SOUTH NOGALES ST CITY: CITY OF INDUSTRY STATE: CA ZIP: 91748 BUSINESS PHONE: 6269122866 MAIL ADDRESS: STREET 1: 780 SOUTH NOGALES ST CITY: CITY OF INDUSTRY STATE: CA ZIP: 91748 10-K 1 10-K AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 24, 2000 ______________________________________________________________________________ SECURITY AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM 10-K -------------------------- (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended February 26, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from_________________ to __________________ Commission File Number 0-24904 STROUDS, INC. (Exact name of registrant as specified in its charter) DELAWARE 95-4107241 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 780 SOUTH NOGALES STREET CITY OF INDUSTRY, CA 91748 (Address of principal executive offices) (626) 912-2866 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: TITLE OF EACH CLASS Common stock, par value $0.0001 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- (Page 1 of 2 Page Cover Page) 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] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sales price of the Common Stock on May 19, 2000 as reported on the Nasdaq Stock Market, was approximately $10,577,768. Number of shares of common stock, par value $0.0001 per share, outstanding at May 19, 2000: 7,146,221 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the Registrant's 2000 Annual Meeting of Stockholders are incorporated by reference into Part III, to be filed no later than June 12, 2000. (Page 2 of 2 Page Cover Page) PART I ------ ITEM 1. BUSINESS - --------------------- Strouds, Inc. ("Strouds" or the "Company") is a leading specialty retailer of better quality bed, bath, tabletop and other home textiles products, decorative accessories, window treatments, furniture and area rugs. The Company was founded in July 1979 by Wilfred C. Stroud, Jr., currently serving as the Founder, Chairman Emeritus and a director of the Company's Board of Directors. The first store opened in Pasadena, California in November 1979 under the name of "Strouds Linen Warehouse." As of February 26, 2000, the end to the Company's fiscal year, the Company operated 68 retail stores in California, Illinois, Minnesota, Nevada and Arizona. The Company defines its fiscal year as the period in which most of the business activity occurs (e.g., the year ending February 26, 2000 is referred to as fiscal 1999). MERCHANDISING Strouds carries three primary product groupings: bedding, bath, and tabletop. Bedding merchandise consists of sheets, comforters, bedding accessories, bed pillows, comforter covers, mattress pads, blankets, decorative pillows and bedspreads. Bath merchandise consists of towels, bath accessories, bath rugs, shower curtains and organization items. Tabletop merchandise consists of tablecloths, placemats, kitchen textiles and napkin rings. Strouds also carries a limited assortment of home decorating accessories in a number of its stores. The Company's merchandising strategy is to carry a full line of quality merchandise to appeal to a broad range of customers, with an emphasis on higher quality products found in better department and specialty home textile stores. Strouds' merchandise assortment includes popular brand names and a wide assortment of more fashion-oriented upscale lines and designer collections, some of which are not available at certain of its department and specialty store competitors. The Company also maintains and continues to develop its own private label lines of merchandise. Its private label line, Strouds Essentials, for pillows, down comforters and mattress pads augments its brand name linen lines offering a wide assortment at value prices. The Company believes that the breadth and depth of its selection exceeds what is generally available in department stores and is greater than most other specialty home textile stores. The Company's pricing strategy is to maintain everyday low prices that are substantially below department store regular prices, and consistently at or below department store "sale" prices and competitive with prices at its specialty retail competitors for like merchandise. As one of the leading participants in the home textiles market, the Company believes that it benefits from volume purchasing advantages that support its competitive pricing policy. Page 3 CUSTOMER SERVICE Exceptional customer service has always been a key element of the Company's business strategy. To maintain this service level, the Company continually invests in customer service training of all management, sales and support staff within each of its stores. For store management a comprehensive training program called LEAD (Leadership, Education And Development) is constantly updated to provide the most current tools available for effective in-store management, associate training and customer service. The Company employs its Linen Experts program for sale associates so customers receive the best information possible on its linen products. The Linen Experts program takes all sales associates from an initial full-day orientation through a series of activities including product study, computer education and customer service training. The program culminates in the Linen Expert Challenge - a formal examination given twice yearly that, when successfully completed, entitles the sales associate to wear the Linen Expert badge. The Company has also taken steps to improve the customer shopping experience at the point-of-sale ("POS"). This includes developing more efficient "cash wrap" areas and enhanced POS systems. The Company has upgraded its existing POS system to provide faster credit card authorization, customer returns and improved customer receipt information regarding their purchases. The continual investment in customer service and its liberal return policy, the Company believes, has allowed it to sustain a superior position to its competitors. This exceptional customer service position has always been a point of difference for Strouds. STORE FORMAT Full-line Stores In 1988, the Company changed from its original format, which included stores ranging from 5,000 to 10,000 square feet, to a larger full-line store format averaging 17,300 square feet (excluding a 50,000 square foot full-line store in Irvine, CA) as of fiscal year-end 1998. The primary purpose of the Company's shift to the full-line store format has been to meet the demands of an increasingly competitive environment. These stores feature improved merchandise presentations, new merchandise categories, higher quality fixtures and an overall ambiance that management believes substantially improves the Strouds shopping experience. These full-line stores, on average, have experienced higher sales volume but lower sales per square foot than the Company's original format stores. As a result, although occupancy costs per square foot have not risen significantly, occupancy costs as a percentage of net sales have increased. This has had a negative effect on the Company's gross profit margin percentage, which includes buying, occupancy and distribution expenses. Because of the impact of the shift in store format on average store-level performance, results in different periods may not be comparable. All of the Company's original format stores have either been converted to the full-line store or outlet store format. Strouds currently operates 46 full-line stores averaging approximately 17,300 square feet. The full-line stores that were open for the full twelve months ended February 26, 2000 generated average sales of approximately $4.0 million and average sales per square foot of approximately $222 (excluding the full-line store in Irvine, CA). Page 4 Outlet Stores In 1987, the Company developed, initially through the conversion of original format and selected full-line stores, an outlet business utilizing the name and brand development of the Strouds full-line store format. The outlet format averages 8,300 square feet and targets a more bargain-oriented customer. The outlet store carries a similar breadth of merchandise like the Company's full-line stores and consists of direct purchases, manufacturers' close-outs, overruns and irregular product. Currently, the Company operates 22 outlet stores in California and Arizona. Comparable outlet stores averaged approximately $2.0 million of sales and produced average sales per square foot of approximately $252 for the twelve months ended February 26, 2000 (excluding one outlet store which had sales of approximately $6.0 million and sales per square foot of approximately $482). Boutique Stores In May 2000, the Company opened a new retail concept store, approximately 5,000 square feet, called "Pure Linens" in the upscale community of Rolling Hills Estates, California. The Pure Linens concept targets the high-end consumer, offering an array of the finest affordable linens and accessories in an intimate boutique setting. Approximately 70% of the store's merchandise will overlap the upper end of Strouds' full-line store product; the other 30% will be a completely new assortment of even higher-end merchandise, among the finest luxury linens available anywhere. The following table shows, by store format, the number of stores in operation at the end of each of the following fiscal years and the number of stores opened, closed or converted during each year.
FULL-LINE TOTAL STORES OUTLET ORIGINAL STORES ------- ------- -------- ------- 1996 ending store count 51 14 2 67 ------- ------- ------- ------- 1997 - ---- Stores opened 2 --- --- 2 Stores closed (2) (1) --- (3) Store conversions (2) 4 (2) --- ------- ------- ------- ------- Ending store count 49 17 0 66 ------- ------- ------- ------- 1998 - ---- Stores opened 1 1 --- 2 Stores closed (2) (1) --- (3) ------- ------- ------- ------- Ending store count 48 17 0 65 ------- ------- ------- ------- 1999 - ---- Stores opened 1 5 --- 6 Stores closed (3) --- --- (3) ------- ------- ------- ------- Ending store count 46 22 0 68 ======= ======= ======= ======= Average square feet per store February 26, 2000 17,300 8,300 --- 14,900 ======= ======= ======= =======
Page 5 INTERNET BUSINESS The Company introduced its internet business in May 1999 on a relatively small scale. Internet customers are from all 50 states and make higher average purchases than store customers. California-based purchases represent only 36% of all internet sales. Since 80% of Strouds stores are located in California, this means that cannibalization of the Company's own store business is minimal. The 64% of customers from outside of California make purchasing decisions with virtually no help from the traditional impetus of advertising, direct mail or name recognition. Since the initial investment was small, limited marketing activities have been undertaken in these markets. The rapid success of the internet business has necessitated some changes that will allow the site more flexibility and equip it to handle increasing volume. The Company is working with a leading web site designer to launch a fully developed, technologically competitive web site in the fall of 2000. Recognizing that fulfillment will be crucial to the success of the internet business, the Company invested in a new 85,000 square foot warehouse facility near its corporate headquarters that will house pick, pack and ship operations to support internet sales. MARKETING AND SALES PROMOTION The Company employs an aggressive advertising program to build brand awareness and communicate its extensive selection of exceptional values. The Company utilizes an everyday low price strategy and frequently runs sales events inconnection with this strategy. The Company primarily uses full color inserts and direct mail pieces to reach existing and new customers. In addition, the Company periodically uses television during peak seasonal periods and for clearance events. MANAGEMENT INFORMATION SYSTEMS The Company's management information systems ("MIS") are designed to provide its management and other personnel with timely and easily accessible information to control and manage their businesses effectively. The Company has integrated sales activity in its stores, inventory, purchasing, planning and replenishment, distribution and financial systems. The Company's point-of sale system provides price and inventory look-up, promotional pricing as well as a number of back-office administrative features. The Company continually invests in its MIS in order to improve customer service and reduce operating costs. The Company invested heavily in remediation efforts associated with the year 2000 problem. These efforts resulted in upgrades to all its mission critical applications and provided a host of new administrative, data capturing and decision making tools. The Company continues to invest in supply chain technologies such as carton scanning and advance ship notice capabilities, faster credit authorization at the point-of-sale and internet commerce. Page 6 PRIOR EXPANSION STRATEGY Strouds expanded into markets outside of its core California markets during 1994 through 1997. The Company opened 13 full-line stores in the greater Chicago, Minneapolis and Washington, D.C. markets and Nevada. These stores averaged over 23,000 square feet and were approximately 35% larger than the Company's average California full-line stores. These new full-line stores carried expanded product lines and new merchandise categories including housewares. The majority of these stores experienced high occupancy and operating costs as a result of low sales volume. Due to the poor operating results of these stores in particular, the Company suspended its expansion into new markets outside of California and initiate a restructuring plan, in part, for the purpose of closing underperforming stores in its expansion markets. As of February 26, 2000, the Company has closed 4 stores in the greater Chicago and Minneapolis markets, 2 in the Washington, D.C. market and 1 in the Nevada market. The Company has continued a strategy to expand in its core California markets. This expansion strategy consists of strategic in-filling with new stores, relocations of existing stores to adjust to demographic shifts and store expansions to meet increasing demands. For its fiscal year ended February 26, 2000, the Company opened 1 full-line store in Woodland Hills, California and 2 outlet stores in San Ysidro and Tustin, California. The continued store development activity in California has from time to time negatively impacted the sales of existing Strouds stores. Management believes that the benefits of strengthening its market presence and adjusting to demographic shifts in the California market have generally outweighed the reduced sales impact experienced by an existing Strouds store that may share a particular trade area. In fiscal 1999, January and February 2000, the Company opened 3 new outlet stores in the Phoenix market. Management believes that Phoenix is an ideal market for Strouds because of its growth potential and its proximity to California. FUTURE EXPANSION The Company has completed its restructuring efforts, made changes to a number of merchandise categories which its stores will carry, improved the physical layout to more visually stimulate the customer, modified the use of advertising media and increased the frequency of sales events. The combination of these efforts has resulted in improved operating performance for most of the Company's stores. Additionally, the revision to the stores' merchandise categories will result in a scaled down store size which management believes is more economically efficient. As a result, management believes that it is now positioned to expand outside of California in a more effective manner than in its previous expansion efforts. In fiscal 1999, January and February 2000, the Company opened 3 new outlet stores and in March 2000, opened 1 full-line store in the Phoenix market. While this name recognition will assist in supporting the introduction of the Strouds stores, the geographic proximity to California will offer logistical efficiencies in terms of distribution and management. Page 7 COMPETITION The specialty home textile business is fragmented and highly competitive. The Company competes with many different types of retail stores that sell many or most of the products sold by the Company. Such competitors include (i) department stores, (ii) specialty stores (such as specialty home textile retailers) and other companies operating full-line stores selling similar product lines as the Company, (iii) national chain and mass merchandise stores and (iv) catalog retailers. Many of the Company's competitors have substantially greater financial and other resources than the Company, including, in some cases, better name recognition. The Company believes that the ability to compete successfully in its geographic markets is determined by several factors, including pricing; breadth and quality of product selection; in-stock availability of merchandise; effective merchandise presentation; customer service; and store locations. The Company believes that it is well-positioned to compete on the basis of these factors. Nevertheless, there can be no assurance that any or all of the factors that enable the Company to compete favorably will not be adopted by companies having greater financial and other resources than the Company. The home textiles industry is becoming increasingly competitive as several specialty retailers are expanding into new geographic markets, including opening stores in California. In addition, as the Company expands into new geographic markets, it will face new competitors. SEASONALITY AND QUARTERLY FLUCTUATIONS The Company's business is subject to seasonal and quarterly fluctuations. Historically, the Company has realized a higher portion of its net sales and an even greater proportion of its profits in the months of November, December and January. Additionally, the timing of promotional events may affect the Company's results in different quarters from year to year. The Company may encounter different seasonality factors as it enters new markets outside of California. The timing of new store openings and related preopening expenses, and the amount of net sales contributed by new and existing stores, may also cause the Company's quarterly results of operations to fluctuate. EMPLOYEES As of February 26, 2000, Strouds employed approximately 1,613 people, of which 1,315 were hourly employees and 298 were salaried. Of these employees, 1,422 were store employees, 47 were distribution center employees and 144 were corporate level employees. None of the Company's employees is covered by a collective bargaining agreement. Management believes that the Company enjoys good employee relations. TRADEMARKS The Company has registered in the United States Patent and Trademark Office its service marks "Strouds," "Strouds, The Linen Experts," "The Linen Experts," "Strouds Linen Outlet" and "Strouds Home Compass" for retail services. Strouds private label merchandise use the registered marks "Essentials" and "Palette" for bedding, bath and kitchen textile products. Page 8 CAUTIONARY STATEMENT FOR PURPOSE OF "SAFE HARBOR PROVISIONS" OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements contained in this Form 10-K (including the information incorporated herein by reference) that are not related to historical results are forward-looking statements. The statements are made a number of times throughout the document and may be identified by such forward-looking terminology as "believe," "expect," "may," "will," "intend" or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties including levels of sales, store traffic, acceptance of product offering and fashions, competitive pressures from other home furnishings retailers, availability of suitable future store locations and schedules of store expansion plans. These and other important factors that may cause actual results to differ materially from such forward-looking statements are included in the "Risk Factors" section of the Company's Registration Statement on Form S-1 as filed with the Securities and Exchange Commission on September 13, 1994, and may be contained in subsequent reports filed with the Securities and Exchange Commission. You are urged to consider such factors. The Company assumes no obligation for updating any such forward-looking statements. Reliance on Key Personnel The Company is dependent on the services of its Chairman, President and Chief Executive Officer, Charles R. Chinni and its Chief Operating Officer, Robert M. Menar. The Company has employment contracts with Mr. Chinni and Mr. Menar ending on February 28, 2003 and August 8, 2002, respectively. The loss of services of Mr. Chinni, Mr. Menar or other key officers or employees could have a material adverse effect on the Company's operations. In addition, there can be no assurance that the Company will be able to attract and retain additional key personnel with the skills and expertise to manage its operations. Business Disruption / Geographic Concentration The Company's corporate headquarters, principal distribution facility and the majority of its stores are located in California, a state known for seismic activity. Operating results could be materially affected by a significant earthquake if such an event should occur in a geographic area where there is a concentration of stores. In addition, there can be no assurance that operating results would not be permanently affected due to such an event. Anti-Takeover Effect of Certain Provisions of the Company's Certificate of Incorporation and Bylaws Certain provisions of the Company's Restated Certificate of Incorporation (the "Certificate") and Restated Bylaws (the "Bylaws"), as well as Delaware corporate law, may be deemed to have anti-takeover effects and may delay, defer or prevent a takeover attempt that a stockholder might consider to be in the stockholder's best interest. These provisions (i) provide that only the Board of Directors or Chief Executive Officer of the Company may call special meetings of the stockholders and that stockholders may not act by written consent, (ii) establish certain advance notice procedures for nomination of candidates for election as directors and for stockholder proposals to be considered at stockholders' meetings and (iii) restrict certain business combinations with interested stockholders. The Board of Directors of the Company has the authority to issue preferred stock in one or more series Page 9 without the approval of the holders of the Common Stock, par value $0.0001 per share "Common Stock." In certain circumstances, the fact that provisions are in place which inhibit or discourage takeover attempts could reduce the market value of the Common Stock. Volatility of Stock Price The Company's Common Stock began trading on the Nasdaq Stock Market on October 12, 1994. The market price of the shares of Common Stock could be subject to significant fluctuations in response to the Company's operating results and other factors. In addition, the stock market in recent years has experienced significant price and volume fluctuations that often have been unrelated or disproportionate to the operating performance of particular companies. These fluctuations as well as a shortfall in sales or earnings compared to public market analysts' expectations, changes in analysts' recommendations or projections, and general economic and market conditions, may adversely affect the market price of the Common Stock. ITEM 2. PROPERTIES - ---------------------- The Company leases all of its retail stores. The leases expire at various dates principally between 2001 and 2015. The average new lease is 10 years, and generally has multiple five-year renewal options. Each store lease is negotiated individually. Lease terms usually include a fixed minimum rent plus a percentage of sales in excess of a specified amount. A proportionate share of certain operating costs such as common area maintenance, utilities, insurance, and taxes are typically paid by tenants. The table below sets forth certain information concerning the Company's stores at the end of fiscal 1999:
State Full-line Store Outlet Total ----- --------------- ------ ----- California 38 19 57 Illinois 4 -- 4 Minnesota 2 -- 2 Nevada 2 -- 2 Arizona -- 3 3 --- --- --- Total 46 22 68 === === ===
The Company leases its corporate offices (approximately 40,000 square feet) in City of Industry, California, its distribution center (approximately 100,000 square feet) in Walnut, California and its fulfillment warehouse facility (approximately 85,000 square feet) in City of Industry, California. ITEM 3. LEGAL PROCEEDINGS - -------------------------- The Company is not a party to any material legal proceeding and is not aware of any pending or threatened litigation that, if decided adversely to the Company, would have a material adverse effect upon the Company's business, results of operations or financial condition. Page 10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ At the Company's Special Meeting of Stockholders held on January 26, 2000, the following proposal was approved:
Votes Votes Votes Broker For Against Abstain Non-votes --------- --------- ------- --------- Approve certain amendments to the Company's Amended and Restated 1994 Equity Participation Plan to, among other things (i) increase the number of shares of the Company's Common Stock available for issuance thereunder from 1,680,000 to 3,680,000 and (ii) increase the maximum number of shares that may be granted to any individual in any calendar year from 500,000 to 1,000,000, and (iii) restate the 1994 Plan, as Amended as the Second Amended and Restated 1994 Equity Participation Plan. 2,516,505 1,494,094 6,899 ---
Page 11 PART II ------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS - ------------------------------------------------------------------------------ Stroud's Common Stock is listed on the Nasdaq Stock Market under the symbol "STRO." On May 19, 2000, there were approximately 1,990 stockholders of the Company, including beneficial stockholders whose stock is held in nominee or street name by brokers. The table below sets forth the high and low sales prices for Strouds' Common Stock as reported by the Nasdaq Stock Market during the fiscal periods specified:
Fiscal Year 1999 High Low - ---------------- ------ ------ First Quarter $ 2.06 $ 1.50 Second Quarter 2.63 1.03 Third Quarter 2.59 1.88 Fourth Quarter 2.94 1.75 Fiscal Year 1998 High Low - ---------------- ------ ------ First Quarter $ 3.94 $ 1.63 Second Quarter 3.50 2.38 Third Quarter 2.50 1.41 Fourth Quarter 2.13 1.25
The Company has never declared or paid cash dividends on its Common Stock and does not anticipate paying cash dividends in the foreseeable future. In addition, the Credit Facility effectively prohibits the payment of cash dividends by the Company. On November 17, 1995, the Board of Directors of the Company declared a dividend of one preferred stock purchase right (the "Rights") for each share of Common Stock outstanding at the close of business on November 30, 1995. Each Right will entitle the registered holder thereof, after the Rights become exercisable and until November 17, 2005 (or the earlier redemption, exchange or termination of the Rights), to purchase from the Company one one-hundredth of a share of Series B Junior Participating Preferred Stock, par value $0.0001 per share ("Preferred Stock"), at a price of $30.00 per one one-hundredth of a Preferred Share, subject to certain anti-dilution adjustments. The Rights also, under certain conditions, entitle the holders to purchase $60.00 worth of Common Stock for $30.00. The Rights expire on November 17, 2005, unless the Company decides to redeem them earlier at $0.01 per Right or upon the occurrence of certain events. The Rights will not be exercisable or transferable apart from the Common Stock until the earlier to occur of (i) the 10th day after a public announcement that a Person (broadly defined as any individual or other entity) or group of affiliated or associated Persons has become an Acquiring Person (a Person or group of affiliated or associated Persons who has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the Common Stock), or (ii) the 10th day after a Person or group commences, or announces an intention to commence, a tender or exchange offer, the consummation of which would result in the beneficial ownership by a Person or group of 20% or more of the Common Stock. On January 31, 2000, the Company entered into a First Amendment to Rights Agreement between the Company and American Stock Transfer & Trust, as Rights Agent, pursuant to which the beneficial ownership threshold that would trigger the Rights was increased from 15% to 20%. Page 12 ITEM 6. SELECTED FINANCIAL DATA - -------------------------------- STROUDS, INC. SELECTED FINANCIAL AND OPERATING DATA
IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA 1999 1998 1997 1996 1995(1) - ------------------------------ ---------- ---------- ---------- ---------- -------- OPERATING STATEMENT DATA: Net sales $ 223,965 $ 227,571 $ 221,828 $ 209,778 $190,316 Operating income (loss) $ 3,256 $ 2,990 $ (918) $ (22,766) $ 4,754 Net income (loss) $ 1,303 $ 214 $ (3,798) $ (21,968) $ 2,570 Basic Net income (loss) per share $ 0.18 $ 0.02 $ (0.44) $ (2.58) $ 0.31 Weighted average common shares outstanding 7,242 8,597 8,553 8,521 8,409 Diluted Net income (loss) per share $ 0.18 $ 0.02 $ (0.44) $ (2.58) $ 0.30 Weighted average common shares outstanding(2) 7,335 8,889 8,553 8,521 8,622 OPERATING DATA: Stores at end of period: Full-line stores 46 48 49 53 51 Outlet stores 22 17 17 14 10 ---------- ---------- ---------- ---------- -------- 68 65 66 67 61 ========== ========== ========== ========== ======== Total square footage at end of period 1,012,802 1,012,674 1,042,704 1,050,080 850,858 Comparable store net sales increase (decrease)(3) (1.7)% 3.3% 0.3% 0.1% (3.4)% BALANCE SHEET DATA (AT END OF PERIOD): Working capital $ 47,003 $ 30,612 $ 36,723 $ 44,663 $ 42,879 Total assets $ 101,783 $ 96,443 $ 101,078 $ 112,104 $ 94,007 Long-term debt, including current maturities $ 45,648 $ 27,511 $ 30,031 $ 32,693 $ 12,683 Stockholder's equity $ 29,632 $ 30,117 $ 29,839 $ 33,573 $ 55,469
(1) 53 weeks (2) Includes as common equivalent shares the shares of Common Stock issuable upon exercise of the warrants and outstanding employee stock options, unless antidilutive. (3) A new store or a converted or expanded store becomes comparable after it has been open under the same format for 13 months. Comparable store net sales are calculated by comparing new sales for comparable stores on a fiscal month basis in the respective periods. Page 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION - ------------------------------------------------------------------------ STROUDS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following sets forth certain factors that have affected the Company's results of operations and management believes may continue to affect the Company in the future. The Company defines its fiscal year as the period in which most of the business activity occurs (e.g., the year ending February 26, 2000 is referred to as fiscal 1999). Prior Store Expansion Strategy Strouds expanded into markets outside of its core California markets during 1994 through 1997. The Company opened 13 full-line stores in the greater Chicago, Minneapolis and Washington, D.C. markets and Nevada. These stores averaged over 23,000 square feet and were approximately 35% larger than the Company's average California full-line stores. These new full-line stores carried expanded product lines and new merchandise categories including housewares. The majority of these stores experienced high occupancy and operating costs as a result of low sales volume. As a result of the poor operating results of these stores in particular, the Company suspended its expansion into new markets outside of California and announced a restructuring plan, in part, for the purpose of closing underperforming stores in its expansion markets. As of February 26, 2000, the Company has closed 4 stores in the greater Chicago and Minneapolis markets, 2 in the Washington, D.C. market and 1 in the Nevada market. The Company has continued a strategy to expand in its core California markets. This expansion strategy consists of strategic in-filling with new stores, relocations of existing stores to adjust to demographic shifts and store expansions to meet increasing demands. For its fiscal year ended February 26, 2000, the Company opened 1 full-line store in Woodland Hills, California and 2 outlet stores in San Ysidro and Tustin, California. The continued store development activity in California has from time to time negatively impacted the sales of existing Strouds stores. Management believes that the benefits of strengthening its market presence and adjusting to demographic shifts in the California market have generally outweighed the reduced sales impact experienced by an existing Strouds store that may share a particular trade area. In fiscal 1999, January and February 2000, the Company opened 3 new outlet stores in the Phoenix market. Management believes that Phoenix is an ideal market for Strouds because of its growth potential and its proximity to California. Page 14 Restructuring Plan The Company initiated a comprehensive restructuring and cost reduction plan (the "Restructuring Plan"), resulting in pretax restructuring and asset impairment charges of $16.3 million in fiscal 1996. The Restructuring Plan included the closure of 9 stores which were closed by not renewing leases upon expiration and negotiating settlements with landlords for stores with unexpired leases at dates of anticipated closure. In fiscal 1997 and 1998, 7 stores were closed. In June 1999, the Company closed 1 store in the Washington, D.C. market and in February 2000, the Company closed 1 store in the Chicago market. These store closures completed the Company's Restructuring Plan. The remaining reserve in excess of actual Restructuring Plan costs in the amount of $0.3 million was reversed in the fourth quarter of fiscal 1999 and is included in other income on the Statements of Operations. During fiscal 1999, cash used related to the Restructuring Plan totaled $2.5 million, related primarily to lease termination costs, workforce reductions and consulting and advisory fees associated with the Company's restructuring and cost reduction efforts. The total revenue and operating losses related to the 9 stores identified in the Restructuring Plan are summarized as follows:
February 26, February 27, February 28, (in thousands) 2000 1999 1998 - -------------- ----------- ----------- ----------- Revenues $ 3,263 $ 9,283 $12,995 =========== =========== =========== Operating Loss $ 926 $ 3,038 $ 4,658 =========== =========== ===========
Future Expansion The Company has completed its restructuring efforts, made changes to a number of merchandise categories its stores will carry, improved the physical layout to more visually stimulate the customer, modified the use of advertising media and increased the frequency of sale events. The combination of these efforts has resulted in improved operating performance for most of the Company's stores. Additionally, the revision to the stores' merchandise categories will result in a scaled down store size which management believes is more economically efficient. As a result, management believes that it is now positioned to expand outside of California in a more effective manner than in its previous expansion efforts. In fiscal 1999, January and February 2000, the Company opened 3 new outlet stores and in March 2000, opened 1 full-line store in the Phoenix market. While this name recognition will assist in supporting the introduction of the Strouds stores, the geographic proximity to California will offer logistical economies in terms of distribution and management. Page 15 RESULTS OF OPERATIONS The following table sets forth selected statements of operations data expressed as a percentage of net sales for the period indicated:
February 26, February 27, February 28, Fiscal year ended 2000 1999 1998 - -------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of sales, buying and occupancy 71.0 71.9 73.6 ------ ------ ------ Gross profit 29.0 28.1 26.4 Selling and administrative expenses 27.4 26.7 26.7 Amortization of intangibles 0.1 0.1 0.1 ------ ------ ------ Operating income (loss) 1.5 1.3 (0.4) Other income 0.2 0.1 0.1 Interest expense, net (1.5) (1.3) (1.6) ------ ------ ------ Income (loss) before income taxes 0.2 0.1 (1.9) Income taxes 0.4 --- 0.2 ------ ------ ------ Net income (loss) 0.6% 0.1% (1.7%) ====== ====== ======
Fiscal 1999 Compared To Fiscal 1998 Net sales for fiscal 1999 decreased $3.6 million, or 1.6%, to $224.0 million versus $227.6 million in fiscal 1998. Comparable store sales decreased $3.6 million, or 1.7%, for the period. Sales from new stores and expanded or replacement stores increased by $8.8 million. Sales were reduced by $8.8 million due to 6 store closures, 4 in fiscal 1999 and 2 in fiscal 1998. Net sales for full-line stores in fiscal 1999 decreased $5.8 million, or 3.0%, to $184.6 million versus $190.4 million in fiscal 1998. Comparable full-line store sales decreased $3.6 million, or 2.0%, for the period. Outlet store net sales in fiscal 1999 increased $2.2 million, or 5.9%, to $39.4 million versus $37.2 million in fiscal 1998. Comparable outlet store sales remained the same for the period. Management believes that the decrease in comparable full-line store sales is attributable to the fact that there were no intense promotional sales campaigns in the current year designed for inventory liquidation this year as there were last year to eliminate underperforming merchandise categories as identified in the Company's Restructuring Plan. The comparable outlet sales remained the same as there were no material changes in the operations of these stores. Approximately 21.3% of the comparable stores were affected by new competitive openings for fiscal 1999 compared to approximately 10.8% for the same period last year. Cost of sales, buying and occupancy for fiscal 1999 were $159.1 million versus $163.6 million for the same period a year ago, a $4.5 million decrease. This dollar decrease was attributable, primarily, to the decreased sales volume over fiscal 1998. As a percent of net sales, cost of sales, buying and occupancy decreased to 71.0% from 71.9% for the same period a year ago. The Page 16 improved gross margin points was primarily the result of the Company's Restructuring Plan which resulted in better inventory management and fewer markdowns and sales of inventory in underperforming merchandise categories. Selling and administrative expenses for fiscal 1999 increased $0.6 million to $61.3 million versus $60.7 million for the same period in fiscal 1998 and increased as a percentage of net sales from 26.7% to 27.4%. The increase was primarily due to increased labor staffing and higher credit card fees due to increased consumer credit card usage. The Company had operating income for fiscal 1999 of $3.3 million versus $3.0 million for the same period a year ago, a $0.3 million improvement, as a result of the factors noted above. Operating income for full-line stores in fiscal 1999 was $2.8 million versus an operating income of $2.3 million in fiscal 1998. The increase in operating profit for the full-line stores were a result of the various factors discussed above. Operating income for the outlet stores was $0.5 million in fiscal 1999 versus $0.7 million in fiscal 1998. The decrease in operating profit for the outlet stores was primarily due to preopening costs for 5 new outlet stores this fiscal year. Interest expense, net, increased $0.5 million to $3.5 million for fiscal 1999 versus $3.0 million in fiscal 1998. The increase was primarily the result of higher average borrowings and increased interest rates during fiscal 1999. The Company recorded an income tax benefit of $0.9 million for fiscal 1999 versus no income tax expense or benefit associated with its income for fiscal 1998. The income tax benefit for fiscal 1999 was due to a reduction in the valuation allowance for certain deferred tax assets. Fiscal 1998 Compared To Fiscal 1997 Net sales for fiscal 1998 increased $5.8 million, or 2.6%, to $227.6 million versus $221.8 million in fiscal 1997. Comparable store sales increased $7.1 million, or 3.3%, for the period. Sales from new stores and expanded or replacement stores increased by $3.9 million. Sales were reduced by $5.2 million due to 6 store closures, 3 in fiscal 1998 and 3 in fiscal 1997. Net sales for full-line stores in fiscal 1998 increased $3.6 million, or 1.9%, to $190.4 million versus $186.8 million in fiscal 1997. Comparable full-line store sales increased $5.7 million, or 3.1%, for the period. Outlet store net sales in fiscal 1998 increased $2.2 million, or 6.2%, to $37.2 million versus $35.0 million in fiscal 1997. Comparable outlet store sales increased $1.4 million, or 4.7%, for the period. Management believes that the increase in comparable full-line store and outlet store sales over the same period a year ago can be attributable to the Company's increased promotional efforts, a strong California economy where the majority of the Company's stores are located and a favorable impact related to fewer competitive openings. Approximately 10.8% of the comparable stores were affected by new competitive openings for fiscal 1998 compared to approximately 21.2% for the same period last year. Cost of sales, buying and occupancy for fiscal 1998 were $163.6 million versus $163.2 million for the same period a year ago, a $0.4 million increase. This dollar increase was attributable, primarily, to the increased sales volume Page 17 over fiscal 1997. As a percent of net sales, cost of sales, buying and occupancy decreased to 71.9% from 73.6% for the same period a year ago. The improved gross profit percentage was primarily due to the favorable impact of increased sales volume on occupancy costs for existing stores, rent reductions and the decrease of occupancy costs from the closure of 6 stores over the past two fiscal years. Selling and administrative expenses for fiscal 1998 increased $1.4 million to $60.7 million versus $59.3 million for the same period in fiscal 1997 and remained constant as a percentage of net sales at 26.7% for the same period a year ago. The dollar increase was primarily the result of increased administrative labor staffing and expense recognition for newly established employee incentive plans. In addition, the Company incurred costs of $0.7 million in fiscal 1998 related to the pursuit of a strategic acquisition opportunity. The costs primarily consisted of consulting and legal expenditures. The Company had operating income for fiscal 1998 of $3.0 million versus an operating loss of $0.9 million for the same period a year ago, a $3.9 million improvement, as a result of the factors noted above. Operating income for full-line stores in fiscal 1998 was $2.3 million versus an operating loss of $0.9 million in fiscal 1997. Operating income for the outlet stores was $0.7 million in fiscal 1998 versus no operating income in fiscal 1997. The increases in operating profit for the segments were a result of the various factors discussed above. Interest expense, net, decreased $0.6 million to $3.0 million for fiscal 1998 versus $3.6 million in fiscal 1997. The decrease was primarily the result of lower average borrowings and a lower average interest rate during fiscal 1998. The Company recorded no income tax expense associated with its income for fiscal 1998. For fiscal 1997, the Company recognized a tax benefit of $0.5 million. The income tax benefit for fiscal 1997 was due to the carryback of fiscal 1997 tax losses to prior years resulting in a refund of prior years' income taxes. LIQUIDITY AND CAPITAL RESOURCES On March 27, 1998, the Company entered into a revolving credit agreement (the "Credit Facility"). The borrowing limit under this Credit Facility is the lesser of $50.0 million or the sum of 85% of eligible accounts receivable plus the lesser of 75% of eligible inventory or 90% of appraised net liquidation value of inventory. The Company's capital requirements are primarily for inventory purchases, store expansion and refurbishment activities and systems development. The Company has historically financed its operations primarily with internally generated funds and its credit facility. At February 26, 2000, the Company's working capital was $47.0 million, while advances from its Credit Facility were $44.6 million. The Company had $1.8 million available for borrowings under its Credit Facility as determined by the Company's eligible "borrowing base," as described above, at February 26, 2000. Net cash used in operating activities for fiscal 1999 was $7.0 million versus net cash provided by operating activities $5.6 million in fiscal 1998. Cash Page 18 flows from operating activities decreased by $12.6 million primarily due to increased inventory of $4.6 million, accounts payable and accrued expenses decreased $5.6 million and the restructuring reserve decreased by $4.0 million. Net cash used in investing activities for fiscal 1999 was $6.7 million. Net cash used was for capital expenditures consisting of 6 new store openings, 1 store replacement, improvements to its distribution and warehouse facility, management information systems development and existing store refurbishments and remodels. The Company's capital expenditures for fiscal 2000 are currently expected to be approximately $5.5 million related primarily to new store development, existing store expansions, distribution and warehouse expansion and improvements to its management information systems. Management believes that funds generated from operations, its Credit Facility and use of trade credit will be sufficient to satisfy the Company's working capital requirements and commitments for capital expenditures through fiscal 2000. Net cash provided by financing activities for fiscal 1999 of $13.7 million. The Company had net borrowings of $18.1 million primarily to meet working capital needs. In addition, the Company repurchased 1,800,000 shares of its outstanding Common Stock in a private transaction for total consideration of $1.9 million. YEAR 2000 To date, the Company has not experienced any disruptions to its business in connection with Year 2000 matters. The Company will continue to monitor its critical systems but does not currently anticipate any significant impacts due to Year 2000 exposures from its internal systems as well as from the activities of its suppliers. The Company's costs incurred associated with the Year 2000 issue were approximately $1.6 million over fiscal 1999 and fiscal 1998. INFLATION The Company does not believe that inflation has had or will have a material adverse effect on net sales or results of operations. The Company has generally been able to pass on increased costs through increases in selling prices. SEASONALITY AND QUARTERLY FLUCTUATIONS The Company's business is subject to seasonal and quarterly fluctuations. Historically, the Company has realized a higher portion of its net sales and an even greater proportion of its profits in the months of November, December and January. Additionally, the timing of promotional events may affect the Company's results in different quarters from year to year. The Company may encounter different seasonality factors as it enters new markets outside of California. The timing of new store openings and related preopening expenses, and the amount of net sales contributed by new and existing stores, may also cause the Company's quarterly results of operations to fluctuate. Page 19 NEW PRONOUNCEMENTS BY FINANCIAL ACCOUNTING STANDARDS BOARD On March 31, 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation - and interpretation of APB Opinion No. 25" (FIN 44). This interpretation provides guidance for issues that have arisen in applying APB Opinion No. 25, "Accounting for Stock Issued to Employees." FIN 44 applies prospectively to new awards, exchanges of award in a business combination, modifications to outstanding awards, and changes in grantee status that occur on or after July 1, 2000, except for the provisions related to repricings and the definition of an employee which apply to awards issued after December 15, 1998. The provisions related to modifications to fixed stock option awards to add a reload feature are effective for awards modified after January 12, 2000. The new interpretation is not expected to have a material impact upon the financial statements. CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain statements contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations that are not related to historical results are forward-looking statements. The statements are made a number of times throughout the document and may be identified by such forward-looking terminology as "expect," "believe," "may," "will," "intend" or similar statements or variations of such terms. Actual results may differ materially from those projected or implied in the forward-looking statements. Further, certain forward-looking statements are based upon assumptions of future events which may not prove to be accurate. These forward-looking statements involve risks and uncertainties including levels of sales, store traffic, acceptance of product offering and fashions, competitive pressures from other full-line store retailers and from department stores which carry other products including certain designer products not carried by the Company's stores, availability of future store locations and schedule of store expansion plans. These and other important factors that may cause actual results to differ materially from such forward-looking statements are more fully described in Item 1, Part I of the Company's Annual Report on Form 10-K for the Fiscal Year Ended February 26, 2000. You are urged to consider such factors. The Company assumes no obligation for updating any such forward-looking statements. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - -------------------------------------------------------------------- The Company's $50 million Credit Facility has interest payable at a rate equivalent to the Chase Manhattan Bank Rate plus 0.25% per annum or LIBOR plus 50% per annum (8.75% and 8.38% at February 26, 2000, respectively). Changes in interest rates which dramatically increase the interest rate on the credit facility would make it more costly to borrow proceeds under that facility and may impede the Company's growth strategies if management determines that the costs associated with borrowing funds are too high to implement these strategies. The Company does not hold derivative investments and does not earn foreign- source income, except for an embedded interest-rate swap instrument that is clearly and closely related to the host long-term debt agreement. The Company believes that the existence of this derivative instrument does not pose a material risk to the Company's financial position or results of operations. All of the Company's revenues are realized in dollars and almost all of the revenues are from customers in the United States. Therefore, the Company does not believe that it has any significant direct foreign currency exchange risk. Page 20 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- STROUDS, INC. STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED ---------------------------------------- February 26, February 27, February 28, IN THOUSANDS, EXCEPT PER SHARE DATA 2000 1999 1998 - ------------------------------------ ---------- ---------- ----------- Net sales $ 223,965 $ 227,571 $ 221,828 Cost of sales, buying and occupancy 159,108 163,628 163,198 ---------- ---------- ---------- Gross profit 64,857 63,943 58,630 Expenses: Selling and administrative expenses 61,343 60,695 59,290 Amortization of excess of cost over net assets acquired 258 258 258 ---------- ---------- ---------- Operating income (loss) 3,256 2,990 (918) Other income 633 254 248 Interest expense, net (3,451) (3,030) (3,598) ---------- ---------- ---------- Income (loss) before income taxes 438 214 (4,268) Income tax benefit 865 0 470 ---------- ---------- ---------- Net income (loss) $ 1,303 $ 214 $ (3,798) ========== ========== ========== Per share of common stock: Basic: - ------ Net income (loss) per share: $ 0.18 $ 0.02 $ (0.44) ========== ========== ========== Weighted average shares outstanding 7,242 8,597 8,553 ========== ========== ========== Diluted: - -------- Net income (loss) per share: $ 0.18 $ 0.02 $ (0.44) ========== ========== ========== Weighted average shares outstanding 7,335 8,889 8,553 ========== ========== ==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. Page 21 STROUDS, INC. BALANCE SHEETS
FEBRUARY 26, FEBRUARY 27, IN THOUSANDS, EXCEPT SHARE DATA 2000 1999 - --------------------------------- -------- -------- ASSETS Current assets: Cash $ 214 $ 269 Accounts receivable 2,050 1,763 Inventory 65,475 60,832 Prepaid expenses 2,244 3,554 Deferred income taxes 806 439 -------- -------- Total current assets 70,789 66,857 Property and equipment - at cost, net of accumulated depreciation and amortization 22,366 21,354 Excess of cost over net assets acquired, net of accumulated amortization 7,015 7,273 Deferred income taxes 498 --- Other assets 1,115 959 -------- -------- Total assets $101,783 $ 96,443 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 686 $ 624 Accounts payable 12,953 15,565 Accrued expenses 10,147 15,726 Current portion of restructuring and asset impairment reserves --- 4,330 -------- -------- Total current liabilities 23,786 36,245 Long-term debt (primarily revolving debt) 44,962 26,887 Other non-current liabilities 3,403 3,194 -------- -------- Total liabilities 72,151 66,326 -------- -------- Stockholders' equity: Preferred stock, $0.0001 par value; authorized 750,000 shares, no shares issued or outstanding --- --- Preferred stock, Series B, $0.0001 par value; authorized 250,000 shares; no shares issued or outstanding --- --- Common stock, $0.0001 par value; authorized 25,000,000 shares; issued and outstanding February 26, 2000, 7,110,620 shares; and February 27, 1999, 8,624,131 shares 1 1 Treasury stock at cost; February 26, 2000, 1,800,000 shares (1,890) --- Additional paid-in capital 39,248 39,146 Accumulated deficit (7,727) (9,030) -------- -------- Total stockholders' equity 29,632 30,117 -------- -------- Total liabilities and stockholders' equity $101,783 $ 96,443 ======== ========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. Page 22 STROUDS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY
Common stock Additional Total -------------- paid-in Accumulated Treasury stockholders' IN THOUSANDS Shares Amount capital deficit stock equity - --------------------- ------ ------ ------- ----------- -------- ------------ Balance, March 1, 1997 8,536 $ 1 $39,018 $(5,446) $ --- $33,573 Net loss --- --- --- (3,798) --- (3,798) Common stock issued through 1994 Employee Stock Purchase Plan 43 --- 64 --- --- 64 ----- ---- ------- ------- ------- ------- Balance, February 28, 1998 8,579 $ 1 $39,082 $(9,244) $ --- $29,839 Net income --- --- --- 214 --- 214 Common stock issued through 1994 Employee Stock Purchase Plan 44 --- 62 --- --- 62 Common stock issued upon exercise of stock options 1 --- 2 --- --- 2 ----- ---- ------- ------- ------- ------- Balance, February 27, 1999 8,624 $ 1 $39,146 $(9,030) $ --- $30,117 Net income --- --- --- 1,303 --- 1,303 Common stock issued through 1994 Employee Stock Purchase Plan 56 --- 70 --- --- 70 Common stock issued upon exercise of stock options 18 --- 32 --- --- 32 Common stock issued upon exercise of warrants 213 --- --- --- --- --- Purchase of treasury stock (1,800) --- --- --- (1,890) (1,890) ----- ---- ------- ------- ------- ------- Balance, February 26, 2000 7,111 $ 1 $39,248 $(7,727) $(1,890) $29,632 ----- ---- ------- ------- ------- -------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. Page 23 STROUDS, INC. STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED ----------------------------------- February 26, February 27, February 28, IN THOUSANDS 2000 1999 1998 - ------------------------------------ --------- --------- --------- Cash flows from operating activities: Net income (loss) $ 1,303 $ 214 $ (3,798) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization of property and equipment 5,372 4,749 4,755 Loss on abandonment of property and equipment 2 --- 165 Amortization of excess of cost over net assets acquired 258 258 258 Deferred income taxes (865) --- 608 (Increase) decrease in: Accounts receivable (287) (113) 307 Inventory (4,643) 3,170 5,764 Prepaid expenses 1,310 (41) (1,678) Income taxes receivable --- 1,078 1,410 Increase (decrease) in: Accounts payable and accrued expenses (5,461) 2,803 (2,286) Restructuring and asset impairment reserves (3,973) (6,485) (3,524) Other 53 (17) 216 --------- --------- --------- Net cash (used in) provided by operating activities (6,931) 5,616 2,197 --------- --------- --------- Net cash used in investing activities: Capital expenditures (6,743) (5,233) (2,426) --------- --------- --------- Cash flows from financing activities: Borrowings (repayments) under long-term debt-net 18,137 (2,521) (2,616) (primarily revolving debt) Principal payments under capital lease obligations (106) --- (46) (Decrease) increase in overdraft (2,624) 1,825 2,580 Repurchase of common stock held in treasury (1,890) --- --- Other equity transactions 102 64 64 --------- --------- --------- Net cash provided by (used in) financing activities 13,619 (632) (18) --------- --------- --------- Net decrease in cash (55) (249) (247) Cash at beginning of period 269 518 765 --------- --------- --------- Cash at end of period $ 214 $ 269 $ 518 --------- --------- --------- Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 3,216 $ 2,984 $ 3,385 --------- --------- --------- Income taxes $ --- $ --- $ 28 --------- --------- ---------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. Page 24 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS 1. THE COMPANY Strouds, Inc. ("Strouds" or the "Company"), a Delaware corporation, is a specialty retailer of bed, bath, tabletop and other home textiles products, decorative accessories and other selected home furnishings. At February 26, 2000, the Company operated 68 stores (46 full-line stores and 22 outlets) in five states under the name Strouds. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Fiscal Year The Company's fiscal year is based on a 52-53 week fiscal year ending on the Saturday closest to the last day of February. The fiscal years ended February 26, 2000, February 27, 1999 and February 28, 1998 included 52 weeks. The Company has defined its fiscal year as the period in which most of the activity occurs (e.g., the year ending February 26, 2000 is referred to as fiscal 1999). Asset Impairment Long-lived assets and certain identifiable intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Long-lived operating assets are reviewed at the individual store level. Intangible assets are reviewed at an organizational level. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cashflows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. See note 5. Revenue Recognition Revenue is recognized when the customer takes possession of the merchandise, that is the point of sale . Revenue is shown net of returns. Stock Compensation The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock Based Compensation" ("SFAS No. 123"), and has elected to measure compensation cost under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and comply with the pro forma disclosure requirements of SFAS No. 123, except for options and warrants granted to non-employees, which are accounted for under SFAS No. 123. Page 25 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Segment Information Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131") requires public business enterprises to report information about operating segments in annual financial statements and selected information in the notes thereto. Operating segments, as defined, are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision makers in deciding how to allocate resources in assessing performance. The Company operates in two business segments, full-line stores and outlet stores. During the current year, the Company expanded into two new business segments; internet and boutique stores. Revenues and results of operation from these segments were minor in fiscal 1999. See note 12. Fair Value of Financial Instruments Cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are reflected in the financial statements at carrying value which approximates fair value due to the short-term nature of these instruments. The carrying value of the Company's borrowings approximates the fair value based on the current rates available to the Company for similar instruments. Use Of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the years then ended. Actual results could differ from those estimates. Inventory Inventory is stated at the lower of cost (principally average cost) or market as determined by the retail inventory method. Included in inventory costs for financial reporting purposes is the capitalization of certain buying, warehousing, storage and transportation costs. Capitalized costs in inventory at February 26, 2000 and February 27, 1999 were $1,713,000 and $1,598,000, respectively. Page 26 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Depreciation And Amortization Depreciation and amortization are provided on a straight-line basis over the following estimated useful lives: Furniture, fixtures and equipment 5 to 7 years Equipment held under capital leases Term of the lease Leasehold improvements Term of the lease or life of the asset, whichever is shorter (generally 7 to 10 years) Excess Of Cost Over Net Assets Acquired Excess of cost over net assets acquired is amortized on a straight-line basis over its estimated useful life of 40 years. As part of an ongoing review and evaluation of intangible assets, management assesses the carrying value of the Company's intangible assets if facts and circumstances suggest that it may be impaired. If this review indicates that the intangibles will not be recoverable, as determined by an undiscounted cash flow analysis over the remaining amortization period, the carrying value would be reduced to estimated fair market value. Accumulated amortization amounted to $3,311,000 as of February 26, 2000 and $3,053,000 as of February 27, 1999. No writedowns were recorded during the fiscal years ended February 26, 2000 and February 27, 1999. Concentration of Credit Risk The Company's deposits are with various high quality financial institutions. Customer purchases are transacted generally using cash or credit cards. Advertising Costs The Company charges production costs of advertising to expense the first time the advertising takes place. The advertising expense amounted to $8,311,000, $8,222,000 and $8,807,000 for fiscal 1999, 1998 and 1997 respectively. Store Preopening Costs Store preopening costs, consisting primarily of advertising, labor and supplies directly related to the opening of specific stores, are expensed as incurred. Income Taxes The Company accounts for income taxes under the asset and liability method, whereby deferred income taxes are provided for the temporary differences between the financial reporting basis and income tax basis of the Company's assets and liabilities. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Page 27 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Store Closure Reserves Management of the Company periodically determines the need to close certain underperforming stores. At the time such a decision is made, a store closure reserve is provided for representing lease termination costs, severance, tear down costs and other items. As of February 26, 2000 and February 27, 1999, the reserve balance was $50,000 and $0, respectively. The Company anticipates all of these costs to be incurred within a twelve to twenty four month period. The Company evaluates its store closure reserve on a quarterly basis and makes periodic adjustments as necessary. Reclassifications Certain reclassifications have been made to the fiscal 1998 and 1997 amounts to conform to the fiscal 1999 presentation. 3. INCOME (LOSS) PER SHARE The following is a reconciliation of the numerator and denominator used in the basic and diluted earnings (loss) per share ("EPS") calculations:
February 26, February 27, February 28, IN THOUSANDS, EXCEPT PER SHARE DATA 2000 1999 1998 - ------------------------------------ ----------- ----------- ----------- Numerator: Net income (loss) $ 1,303 $ 214 $ (3,798) Denominator: Basic EPS Weighted average common shares outstanding 7,242 8,597 8,553 Effect of dilutive securities: Warrants and stock options 93 292 --- Diluted EPS Weighted average common shares and dilutive potential common shares outstanding 7,335 8,889 8,553 - ------------------------------------ ----------- ----------- ----------- Basic EPS $ 0.18 $ 0.02 $ (0.44) Diluted EPS $ 0.18 $ 0.02 $ (0.44)
Page 28 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. INCOME (LOSS) PER SHARE (Continued) In fiscal 1999 and 1998, respectively, options to purchase 1,492,000 and 918,000 shares of common stock, par value $0.0001 par share, of the Company (the "Common Stock") were not included in the computation of diluted earnings per common share because the option price was greater than the average market price of the Common Stock during the year, and therefore their inclusion would have been antidilutive. Options to purchase 697,000 shares and warrants to purchase 213,000 shares of Common Stock in fiscal 1997 were not included in the computation of diluted earnings per common share because the Company was in a loss position and their inclusion would have been antidilutive. 4. PROPERTY AND EQUIPMENT Property and equipment is summarized as follows:
February 26, February 27, IN THOUSANDS 2000 1999 --------------------------------- --------- --------- Furniture, fixtures and equipment $ 48,106 $ 44,351 Equipment held under capital leases 597 --- Leasehold improvements 9,033 8,205 --------- --------- 57,736 52,556 Accumulated depreciation and amortization (35,370) (31,202) --------- --------- $ 22,366 $ 21,354 ========= =========
Page 29 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES The Company initiated a comprehensive restructuring and cost reduction plan (the "Restructuring Plan"), resulting in pretax restructuring and asset impairment charges of $16,250,000 in fiscal 1996 ($3.2 million related to write-downs of merchandise inventory was included in cost of sales). The write-down of merchandise inventory was based on management's estimate of markdowns necessary to liquidate underperforming merchandise categories. In determining the restructuring charge for impairment, the Company evaluated the fair market value of the impaired assets based on historical experience of the liquidation value of such assets. The Restructuring Plan was designed to improve the operating performance of the Company through the closure or disposition of certain underperforming stores, elimination of underperforming merchandise categories and implementation of cost reduction measures, including workforce reductions, to more closely align the Company's cost structure with future expected revenues. The Restructuring Plan included the closure of 9 stores which were to be closed by not renewing leases upon expiration and negotiating settlements with landlords for stores with unexpired leases at dates of anticipated closure. As of February 26, 2000, the Company had closed 9 stores related to its restructuring efforts. In June 1999, the Company closed 1 store in the Washington, D.C. market and in February 2000, the Company closed 1 store in the Chicago market. These store closures completed the Company's Restructuring Plan. The remaining reserve in excess of actual Restructuring Plan costs in the amount of $332,000 was reversed in the fourth quarter of fiscal 1999 and is included in other income on the Statements of Operations. During fiscal 1999, cash used related to the Restructuring Plan totaled $2,453,000, related primarily to lease termination costs, workforce reductions and consulting and advisory fees associated with the Company's restructuring and cost reduction efforts. The following table summarizes the original Restructuring Plan charge: (in thousands) - --------------------------------------- Occupancy, lease termination and other costs related to store closures $ 7,375 Asset write-down 4,015 Merchandise inventory reserves 3,200 Employee severance and related costs 1,660 --------- $ 16,250 =========
Page 30 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES (Continued) The asset write-downs have been recorded as a permanent reduction in the cost basis of the related assets. The merchandise inventory write-down has been recorded as a reserve against inventories and the lease termination and employee severance costs have been recorded in the restructuring reserve. The following table summarizes the Restructuring Plan activity:
Occupancy, lease Asset write-down; termination and merchandise subsidy costs inventory, associated with leasehold improve- Employee the closure or ments, furniture severance and disposition of and fixtures other related (in thousands) stores and equipment costs Total - ------------------- ---------------- ------------------ ------------- ------- 1996 Provision, March 1, 1997 $ 7,375 $ 7,215 $ 1,660 $16,250 Fiscal 1997 payments 2,176 1,444 1,262 4,882 -------- -------- -------- -------- Reserve balance, February 28, 1998 5,199 5,771 398 11,368 Fiscal 1998 payments 703 6,238 97 7,038 Adjustment ** (667) 667 -- -- -------- -------- -------- -------- Reserve balance, February 27, 1999 3,829 200 301 4,330 Fiscal 1999 payments through February 26, 2000 2,264 1,514 220 3,998 Adjustment ** (1,565) 1,314 (81) (332) -------- -------- -------- -------- Reserve balance, February 26, 2000 $ 0 $ 0 $ 0 $ 0 ======== ======== ======== ========
Page 31 STROUDS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) 5. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES (Continued) ** The adjustments made to the reserve result from a periodic reassessment of the Company's position with respect to its outstanding retail store leases. The reductions in the reserve have been reflected in the statement of operations during the period in which the adjustments were recorded. During the fourth quarter of fiscal 1999, the Company completed its restructuring efforts and accordingly reversed the remaining reserve of $332,000 which is included in other income on the Statements of Operations. Also, during fiscal 1998 and during the second quarter of fiscal 1999, the Company recorded increases to its merchandise inventory reserves related to the retail stores included in the Restructuring Plan of $780,000 and $1,353,000, respectively. These charges were recorded in cost of sales during the respective periods. The total revenue and operating losses related to the 9 stores identified in the Restructuring Plan are summarized as follows:
February 26, February 27, February 28, (in thousands) 2000 1999 1998 - -------------- ----------- ----------- ----------- Revenues $ 3,263 $ 9,283 $12,995 =========== =========== =========== Operating Loss $ 926 $ 3,038 $ 4,658 =========== =========== ===========
6. ACCRUED EXPENSES Accrued expenses consist of the following:
February 26, February 27, IN THOUSANDS 2000 1999 -------------------------------- ----------- --------- Cash overdraft $ 1,781 $ 4,405 Salary, wages and related expense 2,659 3,629 Sales tax 1,258 1,164 Other 4,449 6,528 ----------- --------- $ 10,147 $ 15,726 =========== =========
Page 32 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. LONG-TERM DEBT, PRIMARILY REVOLVING DEBT Long-term debt, primarily revolving debt, is summarized as follows:
February 26, February 27, IN THOUSANDS 2000 1999 ------------------------------------------------ ----------- ------------ Revolving promissory note payable to a financial institution ("Credit Facility"), secured by inventory, The borrowing limit is the lesser of $50,000,000 or the sum of 85% of eligible accounts receivable plus the lesser of 75% of eligible inventory or 90% of appraised net liquidation value of inventory. Interest is payable at a rate equivalent to the Chase Manhattan Bank Rate ("Bank Rate") plus 0.25% per annum or LIBOR plus 2.50% per annum (8.75% and 8.38% at February 26, 2000, respectively). The Company can lower its interest spread up to a maximum of 0.25% and 0.50% on its Bank Rate and LIBOR borrowings, respectively, if it achieves a certain fixed charge coverage ratio, as defined, measured on a quarterly rolling twelve month basis. The revolving promissory note expires March 26, 2001 and may be renewed annually thereafter. $ 44,594 $ 25,833 Promissory note payable to a financial institution, secured by equipment, fixtures and leasehold improvements at two store locations. Interest is payable at the rate of 9.580% per annum. The promissory note is for five years, payable in monthly installments through September 2001. 1,054 1,678 -------- -------- Total debt 45,648 27,511 Less current maturities 686 624 -------- -------- Total long-term debt $ 44,962 $ 26,887 ======== ========
Scheduled maturities for total debt outstanding at February 26, 2000 are as follows:
IN THOUSANDS Notes payable ------------- ------------- Fiscal year: 2000 $ 686 2001 44,962 ------- $45,648 =======
Page 33 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. LONG-TERM DEBT (Continued) The Company's Credit Facility contains various restrictions on the payment of cash dividends, incurrence of additional indebtedness, acquisitions, investments, loans, merger or consolidation and disposition of assets. The covenants also require the Company to meet a minimum net worth requirement at anytime the borrowing availability is less than $5,000,000. The Company was in compliance with the covenants at February 26, 2000. Included in this facility is a $7,000,000 letter of credit sub-facility. At February 26, 2000, the Company had letters of credit outstanding amounting to $781,000 for its purchase commitments to foreign suppliers under this sub-facility. On February 17, 2000, the Company entered into an Interest Rate Swap Agreement (the "New Agreement") with a financial institution. The New Agreement is effective March 1, 2000 and was entered into for the purpose of converting a portion of its borrowings to a long-term fixed base rate of interest. The Company converted $20,000,000 to a weighted average fixed base interest rate of 6.82% plus 2.25% until this New Agreement expires on March 3, 2003. The Company has accounted for this hybrid derivative instrument at fair value. As of February 26, 2000, the fair value of the agreement was nominal. The embedded interest rate swap is clearly and closely related to the host long-term debt agreement. The existence of the embedded swap feature does not have a material impact on the fair value of the host long-term debt agreement. In connection with the New Agreement, the Company has issued a standby letter of credit in the amount of $500,000 to secure the interest rate risk associated with this agreement. Concurrently, the Company terminated its existing agreement with the same financial institution which covered $10,000,000 at a weighted average fixed base interest rate of 6.03% plus 2.50%. Page 34 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. LEASE COMMITMENTS At February 26, 2000, the Company occupied all of its facilities under operating leases. The leases require minimum and percentage rental payments based on gross sales and provide that the Company pay property taxes and costs arising from the Company's use of the leased property. The leases are primarily for ten-year periods, and certain leases contain renewal options. For lease agreements with scheduled rent increases during the lease term or for rental payments commencing on a date other than the initial occupancy, rental expense is recognized from the date of occupancy on a straight-line basis over the lease term. Total rental expense amounted to $22,454,000, $22,756,000 and $23,778,000 for fiscal 1999, 1998 and 1997, respectively. The Company is obligated under various capital leases for certain machinery and equipment that expire in August 2003. The gross amount of machinery and equipment and related accumulated depreciation recorded under the capital leases at February 26, 2000 and February 27, 1999 was $597,000 and $209,000, respectively. The Company has operating leases for equipment. These leases are for six month to five year periods, and certain leases contain renewal options. The rental expense amounted to $178,000, $983,000 and $797,000 for fiscal 1999, 1998 and 1997 respectively. Minimum rental commitments under all operating leases are as follows:
CAPITAL OPERATING IN THOUSANDS LEASES LEASES -------------- --------- --------- Fiscal year: 2000 $ 148 $ 19,998 2001 148 18,810 2002 148 16,966 2003 37 15,018 2004 13,783 Thereafter 37,385 --------- --------- Total minimum lease payments 481 $ 121,960 Less amount representing interest 64 ========= --------- Present value of minimum capital lease payments 417 Less current installments of obligations under capital leases 116 --------- Obligations under capital leases excluding current installments $ 301 =========
Page 35 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. INCOME TAXES The components of income tax expense (benefit) are as follows:
February 26, February 27, February 28, IN THOUSANDS 2000 1999 1998 -------------- ----------- -------- --------- Current: Federal $ --- $ --- $(1,078) State --- --- --- ------- ------- ------- Total current income tax benefit --- --- (1,078) ------- ------- ------- Deferred: Federal (738) --- 303 State (127) --- 305 ------- ------- ------- Total deferred income tax (benefit) expense (865) --- 608 ------- ------- ------- Net income tax benefit $ (865) $ --- $ (470) ======= ======= =======
A summary of the deferred tax assets (liabilities) is as follows:
February 26, February 27, IN THOUSANDS 2000 1999 ------------------- ----------- -------- Deferred tax assets: Inventory $ 541 $ 772 Cash versus accrual basis 2,630 4,428 Net operating loss and tax credit carryovers 6,481 5,052 ------- ------- 9,652 10,252 Valuation allowance (6,729) (7,950) ------- ------- Total deferred tax assets 2,923 2,302 Deferred tax liabilities: Property and equipment (1,619) (1,863) Capital equipment held on lease --- --- ------- ------- Total deferred tax liabilities (1,619) (1,863) ------- ------- Net deferred tax assets $ 1,304 $ 439 ======= =======
Page 36 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. INCOME TAXES (Continued) During fiscal 1999, the Company recorded a reduction in its valuation allowance of $1,221,000 reflecting management's assessment of the expected benefit to be derived from deferred tax assets which is considered more likely than not to be realized. Such estimate is based upon management's projections of taxable income for the immediate periods it is able to forecast. The reconciliation of the Federal statutory rate to the effective tax rate is as follows:
February 26, February 27, February 28, 2000 1999 1998 ----------- ----------- ----------- Federal statutory rate 35.0% 35.0% 35.0% Amortization of excess of cost over net assets acquired 24.2 42.2 (2.1) Change in valuation allowance (304.3) (97.5) (19.8) Non-deductible expenses and other 47.6 20.3 (2.1) ------- ------- ------- (197.5)% 0.0% 11.0% ======= ======= =======
The Company has net operating loss carryforwards of approximately $15.2 million and $9.6 million for Federal and California income taxes, respectively. These loss carryforwards expire in fiscal years ending after 2020 and 2005, respectively. 10. STOCKHOLDERS' EQUITY On November 17, 1995, the Board of Directors of the Company declared a dividend of one preferred stock purchase right (the "Rights") for each share of Common Stock outstanding at the close of business on November 30, 1995. Each Right will entitle the registered holder thereof, after the Rights become exercisable and until November 17, 2005 (or the earlier redemption, exchange or termination of the Rights), to purchase from the Company one one-hundredth of a share of Series B Junior Participating Preferred Stock, par value $0.0001 per share, at a price of $30.00 per one one-hundredth of a Preferred Share, subject to certain anti-dilution adjustments. The Rights also, under certain conditions, entitle the holders to purchase $60.00 worth of Common Stock for $30.00. The Rights expire on November 17, 2005, unless the Company decides to redeem them earlier at $0.01 per Right or upon the occurrence of certain events. Page 37 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. STOCKHOLDERS' EQUITY (Continued) The Rights will not be exercisable or transferable apart from the Common Stock until the earlier to occur of (i) the 10th day after a public announcement that a Person (broadly defined as any individual or other entity) or group of affiliated or associated Persons has become an Acquiring Person (a Person or group of affiliated or associated Persons who has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the Common Stock), or (ii) the 10th day after a Person or group commences, or announces an intention to commence, a tender or exchange offer, the consummation of which would result in the beneficial ownership by a Person or group of 20% or more of the Common Stock. No event during fiscal 1999 made the Rights exercisable. The Company issued 1,025,077 warrants to purchase shares of Common Stock related to a prior year's financing arrangement. The warrants were exercisable at any time at the exercise price of $0.0002 per share. Such warrants to purchase 212,850 shares of common stock were exercised during fiscal 1999. As of February 26, 2000, no warrants to purchase shares of Common Stock were outstanding. On April 19, 1999, Strouds repurchased 1,800,000 shares of its outstanding Common Stock in a private transaction. The average cost in the repurchase was $1.05 per share. The repurchased shares were put into the Company's treasury stock valued at cost. Concurrently, warrants for 212,850 shares of Common Stock were exercised. 11. EMPLOYEE BENEFITS Strouds sponsors the Strouds Profit Sharing and Retirement Plan (the "Plan"), a qualified plan under Section 401(k) of the Internal Revenue Code of 1986, as amended (the "Code"). The Plan covers substantially all full-time employees and provides for Company matching of employee contributions, at the discretion of the Board of Directors of the Company, up to 3% of each employee's salary. Effective April 1997, the Company suspended matching contributions. Matching contributions totaled $16,000 for fiscal 1997. At the end of each fiscal year, the Board of Directors of the Company recommend a specific annual amount to be awarded to the profit sharing portion of the Plan. In fiscal 1998, the Company contributed $100,000 to the profit sharing plan. No contributions were made in fiscal 1999. Page 38 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11. EMPLOYEE BENEFITS (Continued) On May 19, 1994, the Company's Board of Directors adopted the Second Amended and Restated 1994 Equity Participation Plan ("1994 Plan") to attract and retain directors, officers and key employees. The 1994 Plan authorizes the Compensation Committee of the Board of Directors to issue 3,680,000 shares of Common Stock upon exercise of options, stock appreciation rights, and other awards, or as restricted or deferred stock awards. Under this plan, 1,351,466 shares are available to be granted. The exercise price of the non-qualified stock options awarded under the 1994 Plan is determined by the Compensation Committee and can be less than fair market value but not less than par value ($0.0001). The Compensation Committee can determine the period of exercisability and the vesting schedule; however, the life of the option is limited to ten years from the date of grant. On October 20, 1999, the Company's Board of Directors adopted the 1999 Special Purpose Stock Option Plan ("1999 Plan") to retain key employees who are not officers or directors and to attract new employees who may become officers or directors of the Company. The 1999 Plan authorizes the Compensation Committee of the Board of Directors to issue 2,000,000 shares of Common Stock upon exercise of options, stock appreciation rights, and other awards, or as restricted or deferred stock awards. Under this plan, 1,524,000 shares are available to be granted. The exercise price of the non-qualified stock options awarded under the 1999 Plan is determined by the Compensation Committee and can be less than fair market value but not less than par value ($0.0001). The Compensation Committee can determine the period of exercisability and the vesting schedule; however, the life of the option is limited to ten years from the date of grant. There were 12,900 options outstanding at February 26, 2000 related to the Stock Option Plan for Executives and Key Employees (the "1988 Plan"). The 1988 Plan was amended to prohibit the issuance of any additional options after September 1, 1994. On May 14, 1997, the Compensation Committee approved repricing all previously granted options to current employees to $1.75 per share with credit for accrued vesting in the option. Repriced options could not be exercised for a period of one year from the date of repricing. The number of options cancelled and reissued due to the repricing were 447,284. Page 39 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11. EMPLOYEE BENEFITS (Continued) Information with respect to the Company's option plans is summarized as follows:
February 26, February 27, February 28, 2000 1999 1998 ----------------- ----------------- ----------------- Weighted- Weighted- Weighted- average average average exercise exercise exercise Shares price Shares price Shares price ------- -------- ------- -------- ------- -------- Outstanding at beginning of year 1,087,984 $2.11 909,205 $2.14 755,109 $7.06 Granted 1,942,000 $1.88 373,100 $2.70 1,067,434 $2.01 Exercised (19,370) $1.80 (840) $1.75 --- $ -- Cancelled (213,390) $2.22 (193,481) $3.39 (913,338) $6.06 ------- -------- ------- -------- ------- -------- Outstanding at end of year 2,797,224 $1.94 1,087,984 $2.11 909,205 $2.14 ======= ======== ======= ======== ======= ======== Exercisable at end of year 517,587 245,810 133,000 ======= ======= ======= Weighted-average fair value of options granted during the year $1.88 $2.70 $2.00 ===== ===== =====
The following table summarizes information about the stock options outstanding at February 26, 2000:
Options Outstanding Options Exercisable ---------------------------------- --------------------- Weighted- Weighted- Weighted- Number average average Number average Range of outstanding contractual exercise exercisable exercise exercise prices at 02/26/00 life price at 02/26/00 price ---------------- ----------- ----------- -------- ----------- -------- $ 1.06 to $ 1.50 565,770 9.19 $ 1.30 21,520 $ 1.39 1.63 to 1.78 345,224 6.49 1.73 178,497 1.75 1.81 to 2.06 339,500 7.50 1.89 159,600 1.89 2.06 to 2.16 1,126,000 9.89 2.07 100,000 2.16 2.25 to 3.25 420,730 8.86 2.68 57,970 2.89 ---------------- ----------- ----------- -------- ----------- -------- $ 1.06 to $ 3.25 2,797,224 8.88 $ 1.94 517,587 $ 1.98 ================ =========== =========== ======== =========== ========
Page 40 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 11. EMPLOYEE BENEFITS (Continued) On September 1, 1994, the Company's Board of Directors adopted the 1994 Employee Qualified Stock Purchase Plan (the "Purchase Plan"). The purpose of the Purchase Plan is to enable the Company to grant options to employees to buy shares of its Common Stock, at a 15% discount from the then fair market value without commissions and other charges, to attract and retain experienced and capable employees and to help employees to further identify their interests with those of the Company's stockholders generally. The Purchase Plan is intended to qualify as an "employee stock purchase plan," as defined in Section 423(b) of the Code. An aggregate of 250,000 shares of Common Stock has been reserved for issuance under the Purchase Plan, subject to adjustment for stock splits, stock dividends and similar events. In fiscal 1999, the Company issued 55,659 shares under the Purchase Plan. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). Accordingly, no compensation cost has been recognized for the stock option or stock purchase plans. Had compensation cost for the Company's 1999, 1994 and 1988 plans been determined consistent with SFAS No. 123, the Company's net income (loss) and net income (loss) per share for 1999, 1998 and 1997 would approximate the pro forma amounts below:
February 26, February 27, February 28, IN THOUSANDS, EXCEPT PER SHARE DATA 2000 1999 1998 - ------------------------------------- ------------ ----------- ----------- Net income (loss): As reported $ 1,303 $ 214 $ (3,798) Pro forma $ (295) $ (348) $ (4,153) Net income (loss) per share: Basic As reported $ 0.18 $ 0.02 $ (0.44) Pro forma $ (0.12) $ (0.04) $ (0.49) Diluted As reported $ 0.18 $ 0.02 $ (0.44) Pro forma $ (0.12) $ (0.04) $ (0.49)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model using the following weighted-average assumptions:
February 26, February 27, February 28, Weighted-average assumptions 2000 1999 1998 ---------------------------- ------------ ----------- ----------- Risk-free interest rate 6.0% 5.1% 6.0% Expected volatility 45% 45% 45% Expected dividend yield 0% 0% 0% Expected life (years) 9 9 9
Page 41 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 12. SEGMENT INFORMATION In accordance with the requirements of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," the Company's reportable business segments and respective accounting policies, policies of the segments are the same as those described in note 2. Management evaluates segment performance based primarily on revenue and earnings from operations. Interest income and expense is evaluated on a consolidated basis and not allocated to the Company's business segments. Segment information is summarized as follows:
February 26, February 27, February 28, IN THOUSANDS 2000 1999 1998 - ------------------------------- ----------- ----------- ----------- Net revenue: Full-line stores $ 184,639 $ 190,390 $ 186,827 Outlet stores 39,326 37,181 35,001 ----------- ----------- ---------- $ 223,965 $ 227,571 $ 221,828 =========== =========== ========== Operating income (loss): Full-line stores $ 2,824 $ 2,320 $ (946) Outlet stores 432 670 $ 28 ----------- ----------- ---------- $ 3,256 $ 2,990 $ (918) =========== =========== ========== Total assets: Full-line stores $ 68,241 $ 65,715 Outlet stores 11,117 7,330 Other (1) 22,425 23,398 ----------- ----------- $ 101,783 $ 96,443 =========== =========== - ---------------------------------------------------------------------------
(1) Other includes corporate and distribution center property, equipment and assets which are not attributed to a business segment. Page 42 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The results of operations for fiscal 1999 and 1998 were as follows:
First Second Third Fourth IN THOUSANDS, EXCEPT PER SHARE DATA Quarter Quarter Quarter Quarter - ---------------------------------------- ------- ------- ------- ------- FISCAL 1999: Net sales $53,605 $53,399 $57,192 $59,769 Gross profit $14,727 $15,665 $17,049 $17,416 Operating income (loss) $ (528) $ 747 $ 1,056 $ 1,981 Net income (loss) $(1,182) $ 31 $ 248 $ 2,206 Basic net income (loss) per share (1) $ (0.15) $ (0.00) $ 0.04 $ 0.31 Diluted net income (loss) per share (1) $ (0.15) $ (0.00) $ 0.03 $ 0.31 FISCAL 1998: Net sales $55,015 $54,190 $59,162 $59,204 Gross profit $14,678 $15,000 $17,411 $16,854 Operating income $ 106 $ 358 $ 1,196 $ 1,330 Net income (loss) $ (596) $ (366) $ 506 $ 670 Basic net income (loss) per share (1) $ (0.07) $ (0.04) $ 0.06 $ 0.08 Diluted net income (loss) per share (1) $ (0.07) $ (0.04) $ 0.06 $ 0.08 - ----------------------------------------------------------------------------------
(1) Net income per share amounts for each qaurter are required to be computed independently and may not equal the amount computed for the total year. Page 43 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING The integrity and objectivity of the financial statements and related financial information in this report are the responsibility of the management of the Company. The financial statements have been prepared in conformity with generally accepted accounting principles and include, when necessary, the best estimates and judgments of management. The Company maintains a system of internal accounting controls designed to provide reasonable assurance, at appropriate cost, that assets are safeguarded, transactions are executed in accordance with management's authorization, and the accounting records provide a reasonable basis for the preparation of the financial statements. The system of internal accounting controls is continually reviewed by management and improved and modified as necessary in response to changing business conditions and recommendations of the Company's independent auditors. The Audit Committee of the Board of Directors, currently consisting solely of outside non-management directors, meet periodically with management and the independent auditors to review matters relating to the Company's financial reporting, the adequacy of internal accounting controls and the scope and results of audit work. The independent auditors have free access to the Audit Committee. KPMG LLP, certified public accountants, are engaged to audit the financial statements of the Company. Their Independent Auditors' Report, which is based on an audit made in conformity with generally accepted auditing standards, expresses an opinion as to the fair presentation of these financial statements. /s/Charles R. Chinni - -------------------- Charles R. Chinni Chairman of the Board, President and Chief Executive Officer /s/Robert M. Menar - ------------------ Robert M. Menar Director, Chief Operating Officer and Secretary /s/Gary A. Van Wagner - --------------------- Gary A. Van Wagner Vice President - Chief Financial Officer Page 44 INDEPENDENT AUDITORS' REPORT The Board of Directors Strouds, Inc.: We have audited the accompanying balance sheets of Strouds, Inc. as of February 26, 2000 and February 27, 1999 and the related statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended February 26, 2000. 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 in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Strouds, Inc. as of February 26, 2000 and February 27, 1999 and the results of its operations and its cash flows for each of the years in the three-year period ended February 26, 2000 in conformity with generally accepted accounting principles. /s/KPMG LLP - ----------- Los Angeles, California April 18, 2000 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE - ------------------------------------------------------------------------ Not applicable. Page 45 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------ DIRECTORS The information required by this Item is incorporated by reference to the Company's 2000 Proxy Statement (the "Proxy Statement") under the heading "General Information - Election of Directors." EXECUTIVE OFFICERS The information required by this Item is incorporated by reference to the Company's Proxy Statement under the heading "Executive Officers and Certain Key Personnel." COMPLIANCE WITH SECTION 16(a) UNDER THE SECURITIES EXCHANGE ACT The information required by this Item is incorporated by reference to the Company's Proxy Statement under the heading "Section 16(a) Beneficial Ownership Reporting Compliance." ITEM 11. EXECUTIVE COMPENSATION - -------------------------------- The information required by this Item is incorporated by reference to the Company's Proxy Statement under the headings "Compensation of Directors" and "Executive Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT - ------------------------------------------------------------------------ The information required by this Item is incorporated by reference to the Company's Proxy Statement under the heading "Security Ownership of Certain Beneficial Owners and Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------------------------------------------------------- The information required by this Item is incorporated by reference to the Company's Proxy Statement under the heading "Certain Relationships and Related Transactions." Page 46 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: The following financial statements of Strouds, Inc. are included under Item 8: Statements of Operations - for the fiscal years ended February 26, 2000, February 27, 1999 and February 28, 1998 Page 21 Balance Sheets - as of February 26, 2000 and February 27, 1999 Page 22 Statements of Stockholders' Equity - for the fiscal years ended February 26, 2000, February 27, 1999 and February 28, 1998 Page 23 Statements of Cash Flows - for the fiscal years ended February 26, 2000, February 27, 1999 and February 28, 1998 Page 24 Notes to the Financial Statements Page 25 Management's Responsibility for Financial Reporting Page 44 Independent Auditors' Report Page 45 2. Not applicable 3. Exhibits:
The exhibits on the accompanying Index to Exhibits are filed as part of, or incorporated by reference into, this report.
Exhibit No. Description - ----------- ----------- 3.1 Form of Restated Certificate of Incorporation of the Company. Incorporated herein by reference to Amendment No. 1 to the Company's Form S-1, Registration No. 33-82090, as filed with the Commission on September 13, 1994. 3.2 Restated By-laws of the Company. Incorporated herein by reference to Amendment No. 1 to the Company's Form S-1, Registration No. 33-82090, as filed with the Commission on September 13, 1994. 4.1 Rights Agreement, dated as of November 17, 1995, between Strouds, Inc. and American Stock Transfer & Trust Company. Incorporated herein by reference to the Company's Form 8-K, as filed with the Commission on December 1, 1995. * 4.2 First Amendment to Rights Agreement, dated as of January 31, 2000, between Strouds, Inc. and American Stock Transfer & Trust Company.
Page 47
Exhibit No. Description - ----------- ----------- ** 10.1 Second Amended and Restated 1994 Equity Participation Plan of the Company. Incorporated herein by reference to the Company's Form S-8, Registration No. 333-34684, as filed with the Commission on April 13, 2000. ** 10.2 1999 Special Purpose Stock Option Plan of the Company. Incorporated herein by reference to the Company's Form S-8, Registration No. 333-91515, as filed with the Commission on November 23, 1999. ** 10.3 Form of the Company's Employee Qualified Stock Purchase Plan. Incorporated herein by reference to Amendment No. 1 to the Company's Form S-1, Registration No. 33-82090, as filed with the Commission on September 13, 1994. ** 10.4 Amendment to the Strouds, Inc. Employee Qualified Stock Purchase Plan dated January 5, 1995. Incorporated herein by reference to the Company's Form 10-K for the fiscal year ended February 25, 1995, as filed with the Commission on May 25, 1995. 10.5 Security Agreement between Lyon Credit Corporation and Strouds, Inc., dated July, 1996. Incorporated herein by reference to the Company's Form 10-Q for the period ended August 31, 1996, as filed with the Commission on October 11, 1996. 10.6 Financing Agreement between The CIT Group/Business Credit, Inc. and Strouds, Inc. dated March 27, 1998. Incorporated herein by reference to the Company's Form 10-K for the fiscal year ended February 28, 1998, as filed with the Commission on May 27, 1998. * 10.7 Interest Rate Swap Agreement between Wells Fargo Bank, National Association and Strouds, Inc. dated February 17, 2000. 10.8 Employment Agreement between Charles Chinni and Strouds, Inc., dated October 20, 1999. Incorporated herein by reference to the Company's Form 10-Q for the period ended November 27, 1999, as filed with the Commission on January 11, 2000. 10.9 Employment Agreement between Robert M. Menar and Strouds, Inc., dated August 9, 1999. Incorporated herein by reference to the Company's Form 10-Q for the period ended November 27, 1999, as filed with the Commission on January 11, 2000. 10.10 Employment Agreement between Harry Brown and Strouds, Inc., dated November 1, 1999. Incorporated herein by reference to the Company's Form 10-Q for the period ended November 27, 1999, as filed with the Commission on January 11, 2000. * 23 Consent of Independent Auditors * 27 Financial Data Schedule - ------------------------------
* Filed herewith ** Management contract or compensatory plan or arrangement required to be filed as an exhibit to the form pursuant to Item 14(a)3 of Form 10-K. (b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company during the last fiscal quarter of fiscal 1999. Page 48 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. STROUDS, INC. (Registrant) /s/Charles R. Chinni May 19, 2000 -------------------- Charles R. Chinni Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on its behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ---- /s/ Charles R. Chinni Chairman of the Board, May 19, 2000 - --------------------- President and Chief Executive Officer Charles R. Chinni (Principal Executive Officer) /s/ Wilfred C. Stroud Founder, Chairman Emeritus May 19, 2000 - --------------------- and Director Wilfred C. Stroud /s/ Dale D. Achabal Director May 19, 2000 - ------------------- Dale D. Achabal /s/ Larry R. Bemis Director May 19, 2000 - ------------------ Larry R. Bemis /s/ Marshall S. Geller Director May 19, 2000 - ------------------------ Marshall S. Geller /s/ Marco F. Weiss Director May 19, 2000 - ------------------ Marco F. Weiss /s/ Robert M. Menar Director, Chief Operating May 19, 2000 - --------------------- Officer and Secretary Robert M. Menar /s/ Gary A. Van Wagner Vice President - May 19, 2000 - ---------------------- Chief Financial Officer Gary A. Van Wagner (Principal Financial Officer and Principal Accounting Officer)
Page 49 EXHIBIT INDEX
Exhibit No. Description - ----------- ----------- 3.1 Form of Restated Certificate of Incorporation of the Company. Incorporated herein by reference to Amendment No. 1 to the Company's Form S-1, Registration No. 33-82090, as filed with the Commission on September 13, 1994. 3.2 Restated By-laws of the Company. Incorporated herein by reference to Amendment No. 1 to the Company's Form S-1, Registration No. 33-82090, as filed with the Commission on September 13, 1994. 4.1 Rights Agreement, dated as of November 17, 1995, between Strouds, Inc. and American Stock Transfer & Trust Company. Incorporated herein by reference to the Company's Form 8-K, as filed with the Commission on December 1, 1995. * 4.2 First Amendment to Rights Agreement, dated as of January 31, 2000, between Strouds, Inc. and American Stock Transfer & Trust Company. ** 10.1 Second Amended and Restated 1994 Equity Participation Plan of the Company. Incorporated herein by reference to the Company's Form S-8, Registration No. 333-34684, as filed with the Commission on April 13, 2000. ** 10.2 1999 Special Purpose Stock Option Plan of the Company. Incorporated herein by reference to the Company's Form S-8, Registration No. 333-91515, as filed with the Commission on November 23, 1999. ** 10.3 Form of the Company's Employee Qualified Stock Purchase Plan. Incorporated herein by reference to Amendment No. 1 to the Company's Form S-1, Registration No. 33-82090, as filed with the Commission on September 13, 1994. ** 10.4 Amendment to the Strouds, Inc. Employee Qualified Stock Purchase Plan dated January 5, 1995. Incorporated herein by reference to the Company's Form 10-K for the fiscal year ended February 25, 1995, as filed with the Commission on May 25, 1995. 10.5 Security Agreement between Lyon Credit Corporation and Strouds, Inc., dated July, 1996. Incorporated herein by reference to the Company's Form 10-Q for the period ended August 31, 1996, as filed with the Commission on October 11, 1996. 10.6 Financing Agreement between The CIT Group/Business Credit, Inc. and Strouds, Inc. dated March 27, 1998. Incorporated herein by reference to the Company's Form 10-K for the fiscal year ended February 28, 1998, as filed with the Commission on May 27, 1998. * 10.7 Interest Rate Swap Agreement between Wells Fargo Bank, National Association and Strouds, Inc. dated February 17, 2000. 10.8 Employment Agreement between Charles Chinni and Strouds, Inc., dated October 20, 1999. Incorporated herein by reference to the Company's Form 10-Q for the period ended November 27, 1999, as filed with the Commission on January 11, 2000. 10.9 Employment Agreement between Robert M. Menar and Strouds, Inc., dated August 9, 1999. Incorporated herein by reference to the Company's Form 10-Q for the period ended November 27, 1999, as filed with the Commission on January 11, 2000.
Exhibit No. Description - ----------- ----------- 10.10 Employment Agreement between Harry Brown and Strouds, Inc., dated November 1, 1999. Incorporated herein by reference to the Company's Form 10-Q for the period ended November 27, 1999, as filed with the Commission on January 11, 2000. * 23 Consent of Independent Auditors * 27 Financial Data Schedule - ------------------------------
* Filed herewith ** Management contract or compensatory plan or arrangement required to be filed as an exhibit to the form pursuant to item 14(a)3 of Form 10-K. EX-4.2 2 EXHIBIT 4.2 FIRST AMENDMENT to RIGHTS AGREEMENT between STROUDS, INC. and AMERICAN STOCK TRANSFER & TRUST COMPANY as Rights Agent Dated as of January 31, 2000 FIRST AMENDMENT TO RIGHTS AGREEMENT FIRST AMENDMENT, dated as of January 31, 2000 ("First Amendment"), to Rights Agreement dated as of November 17, 1995 (the "Rights Agreement"), between Strouds, Inc., a Delaware corporation (the "Company"), and American Stock Transfer & Trust Company, a New York banking corporation, as Rights Agent (the "Rights Agent"). Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Rights Agreement. WHEREAS, the Company and the Rights Agent previously entered into the Rights Agreement; and WHEREAS, pursuant to Section 26 of the Rights Agreement, the Company and the Rights Agent may from time to time supplement or amend any provision of the Rights Agreement in accordance with the terms of such Section 26. NOW, THEREFORE, in consideration of the foregoing premised and mutual agreements set forth in the First Amendment, the parties hereby amend the Rights Agreement as follows: 1. Section 1.1 of the Rights Agreement is hereby amended by deleting the percentage "15%" in each of the first and third (including the proviso thereto) sentences thereof and substituting the percentage "20%" therefor. 2. The second sentence of Section 1.ll of the Rights Agreement is hereby amended by deleting the percentage "15%" and substituting the percentage "20%" therefor. 3. The first sentence of Section 3.1 of the Rights Agreement is hereby amended by deleting the percentage "15%" and substituting the percentage "20%" therefor. 4. The second paragraph of Exhibit C to the Rights Agreement ("SUMMARY OF RIGHTS TO PURCHASE PREFERRED SHARES") is hereby amended and rested in its entirety as follows: "Until the earlier to occur of (i) the 10th day after a public announcement that a person or group of affiliated or associated persons (an "ACQUIRING PERSON") has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the Common Shares or (ii) the 10th day after the commencement or announcement of an intention to make a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 20% or more of the Common Shares (the earlier of (i) and (ii) being called the "DISTRIBUTION DATE," whether or not either such date occurs prior to the Record Date), the Rights will be evidenced, with respect to any of the Common Share certificates outstanding as of the Record Date, by such Common Share certificate. Notwithstanding the foregoing, BT Capital Corporation ("BT CAPITAL") shall not be an Acquiring Person unless and until BT Capital shall acquire beneficial ownership of any Common Shares of the Company on or after November 17, 1995." 5. The seventh paragraph of Exhibit C to the Rights Agreement ("SUMMARY OF RIGHTS TO PURCHASE PREFERRED SHARES") is hereby amended and rested in its entirety as follows: "In the event that a Person becomes an Acquiring Person (except pursuant to certain cash offers for all outstanding Common Shares approved by the Board) or if the Company were the surviving corporation in a merger with an Acquiring Person or any affiliate or associate of an Acquiring Person and the Common Shares were not changed or exchanged, each holder of a Right, other than Rights that are or were acquired or beneficially owned by the 20% stockholder (which Rights will thereafter be void), will thereafter have the right to receive upon exercise that number of Common Shares having a market value of two times the then current Purchase Price of the Right. With certain exceptions, in the event that the Company were acquired in a merger or other business combination transaction or more than 50% of its assets or earning power were sold, proper provision shall be made so that each holder of a Right shall thereafter have the right to receive, upon the exercise thereof at the then current Purchase Price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction would have a market value of two times the then current Purchase Price of the Right." 6. This First Amendment shall be effective as of the date hereof and, except as expressly set forth herein, the Rights Agreement shall remain in full force and effect and be otherwise unaffected hereby. 7. This First Amendment may be executed in any number of counterparts, each of which, when executed, shall be deemed to be an original and all such counterparts shall together constitute one and the same document. IN WITNESS WHEREOF, the parties have executed this First Amendment as of the date first written above. STROUDS, INC. By: /s/Robert M. Menar ------------------ Name: Robert M. Menar Title: Chief of Operations AMERICAN STOCK TRANSFER & TRUST COMPANY By: /s/Herbert J. Lemmer ------------------ Name: Herbert J. Lemmer Title: Vice President Page 2 EX-10.7 3 EXHIBIT 10-7 EXHIBIT 10.7 INTEREST RATE SWAP AGREEMENT THIS AGREEMENT ("Agreement") is entered into as of the 17th day of February, 2000, by and between STROUDS, INC. ("Fixed Rate Payer"), and WELLS FARGO BANK, NATIONAL ASSOCIATION ("Floating Rate Payer"). WHEREAS, both Fixed Rate Payer and Floating Rate Payer seek to reduce actual or expected exposure to changes in interest rates or to lower costs of actual or expected borrowings. WHEREAS, the Fixed Rate Payer is willing to make the payments based on a fixed rate of interest as provided herein; and WHEREAS, the Floating Rate Payer is willing to make the payments based on a floating rate of interest as provided herein; NOW THEREFORE, in consideration of their mutual covenants, Fixed Rate Payer and Floating Rate Payer agree as follows: 1. DEFINITIONS. The capitalized terms, "Effective Date", "Fixed Rate", "Floating Rate", "Floating Rate Maturity", "Net Swap Settlement Payment Dates", "Reset Dates", "Swap Amount", "Termination Date" and "Trade Date" shall each be as specified in the Swap Confirmation. All other capitalized terms shall have the meanings set forth below or otherwise as set forth in this Agreement: (a) "BUSINESS DAY" means a day (other than Saturday, Sunday or holiday) on which Bank is open and conducting its customary banking transactions in the State of California. (b) "BUSINESS DAY CONVENTION" means, for purposes of determining each Calculation Period, that convention specified in the Swap Confirmation for adjusting any relevant date if it would otherwise fall on a day that is not a Business Day, so that: (i) if "following" is specified, that date will be the first following day that is a Business Day; (ii) if "modified following" is specified, that date will be the first following day that is a Business Day unless that day falls in the next calendar month, in which case that date will be the first preceding day that is a Business Day; and (iii) if "preceding" is specified, that date will be the first preceding day that is a Business Day. Page 1 (c) "CALCULATION PERIOD" means, subject to the Business Day Convention, each consecutive period designated in the Swap Confirmation, the first of which will commence on, and include, the Effective Date and extend to, but exclude, the first Reset Date. Each subsequent Calculation Period will commence on, and include, the Reset Date and extend to, but exclude the next Reset Date. The final Calculation Period will end on, but exclude, the Completion Date. (d) "SWAP CONFIRMATION" means a document, substantially in the form of Exhibit A hereto, with the information required in each blank space completed. (e) "COMPLETION DATE" shall mean the Termination Date unless an Early Termination Date has occurred, in which case the Completion Date shall be the Early Termination Date. (f) "DAY COUNT CONVENTION" means that the calculation of each Net Swap Settlement will be based on the actual number of days in the Calculation Period divided by a 360-day year. (g) "EARLY TERMINATION DATE" means the date, if any, prior to the Termination Date upon which this Agreement is terminated pursuant to Paragraph 3(a) below. (h) "LIBOR" means, with respect to each Calculation Period, the rate for deposits in U.S. Dollars for a period equal to the Floating Rate Maturity, as such rate appears on Telerate Page 3750 as of 11:00 AM, London Time, on the Reset Date (or the Effective Date in the case of the initial Period). If such rate does not appear on Telerate Page 3750, the rate for that Reset Date will be the arithmetic mean of the rates quoted by major Banks in London, selected by Floating Rate Payer, for a period equal to the Floating Rate Maturity, as of 11:00 AM, London Time, on the Reset Date. (i) "TELERATE PAGE 3750" means the display designated as "Page 3750" on the Dow Jones Telerate Service (or such other page as may replace Page 3750 on that service or such other service as may be nominated by the British Bankers' Association as the information vendor for the purpose of displaying British Bankers' Association Interest Settlement Rates for U.S. Dollar Deposits). 2. DETERMINATION; NET SWAP SETTLEMENT PAYMENTS. (a) On the first Business Day following the end of each Calculation Period, Floating Rate Payer will send Fixed Rate Payer a written notice ("Settlement Notice") specifying: (i) the amount of interest which would have accrued on the Swap Amount during the Calculation Period at a rate per annum equal to the Floating Rate ("Floating Rate Payment"). (ii) the amount of interest which would have accrued on the Swap Amount during the Calculation Period at a rate per annum equal to the Fixed Rate ("Fixed Rate Payment"); and (iii) the difference, if any, between the Floating Rate Payment and the Fixed Rate Payment ("Net Swap Settlement Payment"). Page 2 (b) All calculations under Paragraph 2(a) above will be made on the basis of the Day Count Convention. (c) On each Net Swap Settlement Payment Date: (i) if the Fixed Rate Payment exceeds the Floating Rate Payment, Fixed Rate Payer shall pay Floating Rate Payer the amount of the Net Swap Settlement Payment by, at Floating Rate Payer's option, Floating Rate Payer's debiting Fixed Rate Payer's demand deposit account with Floating Rate Payer, or by wiring funds to Floating Rate Payer; or (ii) if the Floating Rate Payment exceeds the Fixed Rate Payment, Floating Rate Payer shall pay Fixed Rate Payer the amount of the Net Swap Settlement Payment by, at Floating Rate Payer's option, crediting Fixed Rate Payer's demand deposit account with Floating Rate Payer, or by wiring funds to a designated Fixed Rate Payer account. 3. EARLY TERMINATION. (a) This Agreement shall expire on the Termination Date and neither party may terminate this Agreement prior thereto; provided, however that in the event that either Floating Rate Payer or Fixed Rate Payer fail to make any payment when due hereunder or otherwise fail to perform any of their obligations hereunder, unless such default is cured within five Business Days of the defaulting party's receipt of written notice thereof, the non-defaulting party may, so long as such default in then continuing, upon five Business Days written notice terminate this Agreement. (b) In the event of an early termination of this Agreement pursuant to Paragraph 3(a), the defaulting party shall promptly pay the non-defaulting party, on demand, an amount equal to the Termination Amount. Each party hereto acknowledges the Termination Amount to be a reasonable estimate of the value, costs and loss of compensation incurred by the other party as a result of the early termination of this Agreement. (c) "Termination Amount" means the amount in U.S. Dollars equal to the arithmetic mean of the respective one-time all-in fees (including documentation costs) communicated to the non-defaulting party on the earliest practicable Business Day following the Early Termination Date by each of three leading commercial banks or investment banking firms in San Francisco, Los Angeles or New York selected in good faith by the non-defaulting party as the fee that it would charge to assume, as of the Early Termination Date, all of the rights and obligations of the defaulting party. However, if one or more such entities fail so to communicate such a fee, the Termination Amount shall be determined on the basis of those fees so communicated by the other entities. 4. LIMITATIONS OF LIABILITY. In no event shall either party hereto be liable to the other for loss of profit or indirect, special, consequential, punitive or exemplary damages, arising out of any default under this Agreement. Page 3 5. NOTICES. All notices and other communications required or permitted to be given hereunder shall be in writing and shall be deemed served when personally delivered or, if mailed, upon the first to occur of receipt or the expiration of seventy-two hours after deposit in the United States Postal Service, certified mail, or if sent by overnight courier service, upon the first to occur of receipt or 3:00 p.m. (local time at place of delivery) the next Business Day, addressed to Floating Rate Payer or Fixed Rate Payer at their respective addresses set forth in the Swap Confirmation. 6. SUCCESSORS; ASSIGNS. This Agreement shall be binding on and inure to the benefit of the successors and assigns of the parties; provided, however, that Fixed Rate Payer shall not, without the prior written consent of Floating Rate Payer, assign (whether by operation of law or otherwise) its rights and obligations under this Agreement or any interest herein and any such attempted assignment shall be void and without force or effect. 7. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California, without giving effect to any choice of law doctrine. 8. NO THIRD PARTY BENEFICIARY. This Agreement and the payments to be made by the parties hereunder are solely for the benefit of the parties hereto for the purposes stated herein and no other person or entity shall have any rights hereunder or be a beneficiary of either party's obligations under this Agreement. 9. COUNTERPARTS. This Agreement and the Swap Confirmation may be executed in any number of counterparts and by each party hereto on separate counterparts, each of which when executed and delivered shall constitute an original, but all the counterparts shall together constitute but one and the same instrument. 10. AMENDMENTS; WAIVERS. Any amendment or waiver of any right under any provision of this Agreement shall be in writing and, in the case of an amendment, signed by both parties hereto, or in the case of a waiver, signed by the party waiving such right. No failure or delay by either party hereto in exercising any right, power or privilege hereunder shall operate as a waiver thereof. 11. TRADE DATE; INTEREST AGREEMENT NOT CREDIT COMMITMENT. This Agreement shall be effective at, and as of, 12:01 a.m., California time, on the Trade Date. Nothing in this Agreement shall be construed to (i) mean that Floating Rate Payer is committed to make a loan or extend any other credit to Fixed Rate Payer, or (ii) amend or modify any contract, instrument or document executed in connection with the Loan Facility. 12. COSTS, EXPENSES AND ATTORNEYS' FEES. In the event of any dispute or litigation between the parties hereto, the prevailing party shall be entitled to recover from the other party, immediately upon demand, all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing party in connection with the enforcement of its rights and/or the collection of any amounts which become due to it under this Agreement, and the prosecution or defense of any action in any way related to this Agreement, including any of the foregoing incurred in connection with any bankruptcy proceeding relating to such other party. Page 4 13. ENTIRE AGREEMENT. This Agreement and the Swap Confirmation constitute the entire agreement and understanding of the parties with respect to its subject matter and supersedes all oral communications and prior writings with respect thereto. 14. SECURITY. All obligations of Fixed Rate Payer are secured by a Standby Letter of Credit issued by Chase Manhattan Bank in the amount of $175,000 expiring on March 1, 2001. 15. NO RELIANCE. In connection with the negotiation of and entering into this Agreement, (i) Fixed Rate Payer acknowledges that the Floating Rate Payer is not acting as a fiduciary or a financial or investment advisor for it; (ii) Fixed Rate Payer is not relying upon any advice, counsel or representations (whether written or oral) of the Floating Rate Payer hereto other than the representations expressly set forth in this Agreement, and in any Confirmation; (iii) the Floating Rate Payer has not given Fixed Rate Payer any advice or counsel as to the expected or projected success, return, performance, result, consequence or benefit (either legal, regulatory, tax, financial, accounting, or otherwise) of this Agreement; (iv) Fixed Rate Payer has consulted with its own legal, regulatory, tax, business, investment, financial and accounting advisors to the extent is has deemed necessary and has made its own investment, hedging, and trading decisions (including decisions regarding suitability of any Transaction pursuant to this Agreement) based upon its own judgment and upon any advice from such advisors as it has deemed necessary and not upon any view expressed by the other party hereto; (v) Fixed Rate Payer has determined that the rates, prices, or amounts and other terms of each Transaction in the indicative quotations (if any) provided by Floating Rate Payer hereto reflect those in the relevant market for similar Transactions, and all trading decisions have been the result of arms length negotiations between the parties; (vi) Fixed Rate Payer is entering into this Agreement with a full understanding of all of the terms, conditions and risks thereof (economic and otherwise), and Fixed Rate Payer is capable of assuming and willing to assume (financially and otherwise) those risks; and (vii) Fixed Rate Payer is a sophisticated investor. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. Floating Rate Payer: Fixed Rate Payer: WELLS FARGO BANK, STROUDS, INC. NATIONAL ASSOCIATION By: /s/Steven D. Berg By: /s/Gary Van Wagner ----------------- ------------------ Name: Steven D. Berg Name: Gary Van Wagner Its: Vice President Its: Senior Vice President and CFO Page 5 EX-23 4 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS To Board of Directors Strouds, Inc.: We consent to incorporation by reference in the Registration Statements on Form S-8 (No. 333-34684 and No. 333-91515) of our report dated April 18, 2000, relating to the balance sheets of Strouds, Inc. as of February 26, 2000 and February 27, 1999 and the related statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended February 26, 2000, which report appears in the February 26, 2000 Annual Report on Form 10-K of Strouds, Inc. /s/KPMG LLP - -------------------------- Los Angeles, California May 24, 2000 EX-27 5 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENTS OF OPERATIONS AND BALANCE SHEETS FOUND ON PAGES 21 AND 22 OF THE COMPANY'S FORM 10-K FOR THE YEAR, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR FEB-26-2000 FEB-28-1999 FEB-26-2000 214 0 2,050 0 65,475 70,789 57,736 35,370 101,783 23,786 0 0 0 1 29,631 101,783 223,965 223,965 159,108 159,108 61,601 (633) 3,451 438 (865) 1,303 0 0 0 1,303 0.18 0.18
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