-----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, TTJ0VoXqlBIxq9Lq25RMCc7LeVgUkv0ZegHZVqNCCdTiUkRsXwUqasRlH951H4ZC tSIbipbPv2R/wP72QqP6+Q== 0000927760-97-000007.txt : 19970610 0000927760-97-000007.hdr.sgml : 19970610 ACCESSION NUMBER: 0000927760-97-000007 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970301 FILED AS OF DATE: 19970606 SROS: NASD 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/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-24904 FILM NUMBER: 97619883 BUSINESS ADDRESS: STREET 1: 780 SOUTH NOGALES ST CITY: CITY OF INDUSTRY STATE: CA ZIP: 91748 BUSINESS PHONE: 8189122866 MAIL ADDRESS: STREET 1: 780 SOUTH NOGALES ST CITY: CITY OF INDUSTRY STATE: CA ZIP: 91748 10-K/A 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 6, 1997 ______________________________________________________________________________ SECURITY AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- FORM 10-K/A (Amendment No. 1) -------------------------- (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 1, 1997 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) (818) 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. [ ] 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 20, 1997 as reported on the Nasdaq National Market, was approximately $10,446,707. Number of shares of Common Stock outstanding at May 20, 1997: 8,535,812 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for Registrant s 1997 Annual Meeting of Stockholders are incorporated by reference into Part III, to be filed no later than June 27, 1997. (Page 2 of 2 Page Cover Page) PART II ------- ITEM 6. SELECTED FINANCIAL DATA - -------------------------------- Item 6 is hereby amended and restated in its entirety as follows: STROUDS, INC. SELECTED FINANCIAL AND OPERATING DATA
(IN THOUSAND EXCEPT PER SHARE AND OPERATING DATA) 1996 1995(1) 1994 1993 1992 - ------------------------------ -------- -------- -------- -------- -------- INCOME STATEMENT DATA: Net sales $209,778 $190,316 $174,585 $158,081 $149,297 Operating income (loss) (23,118) 4,704 7,647 6,663 3,900 Net income (loss) (21,968) 2,570 3,019 2,018 1,852 Net income (loss) per share (2.58) 0.30 0.47 0.35 0.35 Weighted average common and common equivalent shares outstanding(2) 8,521 8,622 6,357 5,603 5,047 OPERATING DATA: Stores at end of period: Superstores 50 46 37 29 26 Home decorating center 1 --- --- --- --- Outlet stores 14 10 9 7 7 Original format stores 2 5 8 13 16 -------- -------- -------- -------- -------- 67 61 54 49 49 ======== ======== ======== ======== ======== Total square footage at end of 1,050,080 850,858 664,319 539,924 516,426 period Comparable store net sales increase (decrease)(3) 0.1% (3.4)% 5.4% 2.7% (0.5)% BALANCE SHEET DATA (AT END OF PERIOD): Working capital $ 44,663 $ 42,879 $ 31,264 $ 26,172 $ 18,301 Total assets 112,104 94,007 83,185 68,141 59,929 Long-term debt, including current maturities 32,693 12,683 1,367 29,729 29,804 Redeemable preferred stock --- --- --- 1,000 1,000 Stockholder s equity 33,573 55,469 52,272 13,086 11,180
(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 anti-dilutive. Shares of Common Stock subject to options and warrants issued within one year of the initial public offering date are reflected as outstanding for all periods presented, pursuant to the treasury-stock method. Page 3 (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. ITEM 7. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION - ------------------------------------------------------------------------ Item 7 is hereby amended and restated in its entirety as follows: 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 will continue to affect the Company in the future. Expansion Strategy Commencing in late 1994, the Company began its initial expansion outside its traditional core markets in California. This strategy, as in the past, was primarily centered around clustering stores in order to take advantage of operating efficiencies and to promote the Strouds brand name in each new market. Over the past two years the Company has opened 10 superstores in the greater Chicago and Minneapolis markets ( Midwest Markets ), 1 superstore in the greater Washington, D.C. market and 1 store in Reno, Nevada. Subsequent to the year just ended, the Company opened an additional store in the greater Washington, D.C. market. To date, sales volumes have been below expectations resulting in higher store operating, administrative and advertising costs as a percent of sales than is currently experienced in the Company s California markets. Management believes a critical factor associated with the lower sales is the time it takes to penetrate the market and build consumer awareness of the Strouds brand name and image in new markets. During fiscal 1996, the Company believed it achieved the critical mass necessary for advertising in its Midwest markets and increased its expenditures for advertising in an effort to develop consumer awareness of the Strouds concept and build store sales volumes. Though the Company has made progress in building sales volumes in these markets, they remain below anticipated levels. In addition to the expansion into new markets outside of California, the Company continues to open and/or reposition stores in its California markets. During fiscal 1996, the Company opened 2 new superstores, expanded 1 superstore and converted 1 superstore and 3 original format stores to Strouds outlet format. In addition, the Company opened a 50,000 square foot prototype Page 4 store in Irvine, California offering a broad range of home furnishings and design services. The Company has committed to open 2 additional superstores in 1997. This continued development activity in California has from time to time negatively impacted the sales of existing Strouds stores. Management has believed that the benefits of strengthening its market presence and adjusting to demographic shifts in the California marketplace have generally outweighed the reduced sales impact experienced by an existing nearby Strouds store. In March 1997, the Company opened 1 new superstore in the greater Washington, D.C. market. The majority of the capital expenditures and preopening expenses for this store were incurred in fiscal 1996. The Company s commitment to open 2 additional new superstores in fiscal 1997 will result in preopening expenses of approximately $100,000 per store and are expensed as incurred. The Company anticipates its required investment for each new superstore, before leasehold improvements, will be approximately $1.5 million per store in fiscal 1997, consisting of approximately $500,000 for store furniture, fixtures and equipment and approximately $1.0 million for inventory. In addition, the Company anticipates spending, in the aggregate, approximately $150,000 for leasehold improvements in connection with its new store development plans. Change in Store Format In 1988, the Company changed from its original format, which included stores ranging from 5,000 to 10,000 square feet, to a larger superstore format, which average approximately 17,600 square feet. The Company has continued to increase the size of its superstores which have averaged approximately 23,400 square feet for new and expanded stores opened in the past two years. Since the opening of the first superstore, all of the Company s new stores have used the superstore format (other than 5 stores opened as outlet stores and the Company s prototype store in Irvine, CA). By the end of fiscal 1997, the Company will have converted all of its original format stores to the superstore or outlet format. The primary purpose of the Company s shift to the superstore 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. The Company s superstores, on average, have experienced higher sales volume but lower sales per square foot than the Company s original format stores. As a result, although the Company s occupancy costs per square foot have not risen significantly, occupancy cost as a percentage of net sales have increased. This has adversely affected the Company s gross profit, 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. Restructuring and Asset Impairment In light of the factors noted above, the Company initiated a comprehensive restructuring and cost reduction plan (the Restructuring Plan ), resulting in a pretax charge of $16.3 million or $1.91 per share. The Restructuring Plan is designed to improve the operating performance of the Company through the closure or disposition of up to 16 underperforming stores and implementing cost reduction measures, including workforce reductions, to more closely align the Company s cost structure with future expected revenues. Management Page 5 believes that the closing and disposition of up to 16 stores will approximate 2 years to complete. The Company recorded a pretax charge of $1.8 million or $0.21 per share for the impairment of certain operating assets. The principal factors leading up to the charge were current and future operating losses on individual operating assets, whereby the carrying value of certain operating assets exceeded the current estimate of future cash flows from the related asset. The Company will continually evaluate the performance of its operating assets for the factors noted above and, if conditions warrant, write-down the value of such assets commensurate with the current and estimated future operating performance. RESULTS OF OPERATIONS The following table sets forth selected income statement data expressed as a percentage of net sales for the period indicated:
March 1, March 2, February 25, Fiscal year ended 1997 1996 1995 - -------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% Cost of sales, buying and occupancy 71.8 68.9 68.0 ------ ------ ------ Gross profit 28.2 31.1 32.0 Selling and administrative expenses 30.5 28.5 27.5 Restructuring costs 8.6 --- --- Amortization of intangibles 0.1 0.1 0.1 ------ ------ ------ Operating income (loss) (11.0) 2.5 4.4 Other income 0.2 0.2 0.1 Interest expense, net (0.9) (0.4) (1.3) ------ ------ ------ Income (loss) before income taxes (11.7) 2.3 3.2 Income taxes 1.2 (0.9) (1.5) ------ ------ ------ Net income (loss) (10.5%) 1.4% 1.7% ====== ====== ======
Fiscal 1996 Compared To Fiscal 1995 Fiscal 1996 was a 52-week year and fiscal 1995 was a 53-week year. For purposes of determining comparable store sales, fiscal 1995 was adjusted to reflect a comparable 52-week year. Due to ongoing changes in the Company s store format and other factors, results in different periods may not be comparable. Net sales for fiscal 1996 increased $19.5 million, or 10.2%, to $209.8 million versus $190.3 million in fiscal 1995. Comparable store sales increased $0.3 million, or 0.1%, for the period. Approximately 18% of the comparable stores were affected by new competitive openings for fiscal 1996 compared to approximately 25% for the same period last year. Sales from new stores and expanded or replacement stores increased by $19.2 million. Cost of sales, buying and occupancy for fiscal 1996 were $150.6 million versus $131.2 million for the same period a year ago, a $19.4 million increase. This Page 6 dollar increase was attributable, primarily, to new and expanded stores. As a percent of net sales, cost of sales, buying and occupancy increased to 71.8% from 68.9% for the same period a year ago. The reduced gross margin was due to a higher level of markdown volume versus a year ago. Additionally, higher occupancy costs associated with new and expanded stores, where average store sales were lower, reduced gross margin. Selling and administrative expenses for fiscal 1996 increased $9.8 million to $64.0 million versus $54.2 million for fiscal 1995 and increased as a percentage of net sales from 28.5% to 30.5%. The increase as a percent of net sales was primarily due to initial operating expenses associated with new stores and increased advertising costs to further develop the company s Midwest markets. General and administrative expense was 6.1% of net sales for fiscal 1996 and comparable to the prior year. During the fourth quarter of fiscal 1996, the Company incurred restructuring and asset impairment charges of $18.1 million. This included a pretax charge of $16.3 million or $1.91 per share for a comprehensive restructuring plan (the Restructuring Plan ). The Restructuring Plan is designed to improve the operating performance of the Company through closure or disposition of up to 16 underperforming stores and implementing cost reduction measures, including workforce reductions, to more closely align the Company s cost structure with future expected revenues. The $16.3 million cost consisted of the write-off of fixed assets, termination or lease subsidy costs, inventory liquidation expenses and employee severance and other related costs. The net sales and store level operating losses in 1996 of the stores to be closed were approximately $42.9 million and $2.5 million, respectively. Management plans to continue to operate these stores, where appropriate, in the current format or if circumstances warrant, convert to the outlet format in order to improve cash flow and minimize the ultimate cost of disposition. Accordingly, future earnings may be negatively impacted until the Restructuring Plan is completed. Cash outflows related to the Restructuring Plan will approximate $3.5 million for fiscal 1997. The cash outflow is related to disposal costs for the closure of 3 stores, including lease termination and subsidy costs and severance and related expenses for workforce reductions. In addition, the Company recorded a pretax charge of $1.8 million or $0.21 per share for the impairment of certain operating assets. The principal factors leading up to the charge were current and future operating losses on individual operating assets, whereby the carrying value of certain operating assets exceeded the current estimate of future cash flows from the related asset. As a result of the factors noted above, the Company had an operating loss for fiscal 1996 of $23.1 million versus operating income of $4.7 million for the same period a year ago, a $27.8 million decrease. Excluding charges related to the Restructuring Plan and the impairment of certain assets, the operating loss for fiscal 1996 would have been $5.1 million. Interest expense, net, increased $1.1 million to $1.8 million for fiscal 1996 versus $0.7 million for fiscal 1995. Interest expense grew as a result of increased borrowings to finance the development of new stores and the expansion of existing stores. The Company recognized a tax benefit for fiscal 1996 of $2.5 million versus income tax expense of $1.7 million for the same period a year ago. The income tax benefit in fiscal 1996 is due to the carryback of current year tax losses to prior years resulting in a refund of prior years income taxes. Page 7 Fiscal 1995 Compared To Fiscal 1994 Fiscal 1995 was a 53-week year and fiscal 1994 was a 52-week year. For purposes of determining comparable store sales, fiscal 1995 was adjusted to reflect a comparable 52-week year. Due to new store openings, ongoing changes in the Company s store format and other factors, results in different periods may not be comparable. Net sales in fiscal 1995 increased $15.7 million, or 9.0%, to $190.3 million versus $174.6 million in fiscal 1994. Comparable store sales decreased $5.2 million, or 3.4%, for the period. Sales from noncomparable stores (i.e., new stores and expanded or replacement stores) increased by $22.4 million. Net sales were reduced by $1.5 million due to one store closure last year. The decrease in comparable stores sales consisted of a decrease of 6.0% through the first three quarters of fiscal 1995 which represented a continuation of the declining sales trend which began during the fourth quarter of fiscal 1994. Management believes the decrease in comparable store sales is volume related and primarily attributable to several factors including a general economic slowdown as a result of rising interest rates. Rising interest rates in the last half of 1994 had the effect of reducing turnover of both new and existing housing and reducing disposable income as adjustable mortgages were revised upward. Management believes that spending on home furnishings is correlated with housing turnover. In addition, economic conditions in California, where the majority of the Company s comparable stores are located, were further impacted by higher levels of unemployment related to continuing reductions in defense and construction spending, as well as the Orange County bankruptcy and Los Angeles County s financial difficulties. These events prompted Southern California residents to be concerned about unemployment and increased taxes which had a dampening effect on consumer spending. Significant new competitive openings also contributed to lower sales levels. Approximately 25% of the comparable stores were affected by new competitive openings which did not exist during fiscal 1994. Similarly, the sales gains achieved in fiscal 1994 were aided by strong replacement business in the aftermath of the Northridge, California earthquake and reduced competition from competitors whose stores were damaged. Comparable net sales for the fourth quarter of fiscal 1995 increased 3.4%. An improving California economy and a smaller negative sales impact related to competitive openings for the fourth quarter of fiscal 1995 versus the same period a year ago contributed to the fourth quarter comparable sales growth. Approximately 12% of the comparable stores were affected by new competitive openings in the fourth quarter of 1995 compared to approximately 28% for the same period last year. Cost of sales, buying and occupancy for fiscal 1995 were $131.2 million versus $118.7 million for the same period a year ago, a $12.5 million increase. As a percent of sales, cost of sales, buying and occupancy increased to 68.9% from 68.0% for the same period a year ago. The increase in cost of sales, buying and occupancy was due to lower comparable store sales and below average sales volumes for new store openings in the Company s Midwest markets. Lower sales volume had the effect of increasing occupancy costs as a percentage of sales one percentage point. Selling and administrative expenses for fiscal 1995 increased $6.2 million to $54.2 million versus $48.0 million for fiscal 1994 and increased as a percentage of net sales from 27.5% to 28.5%. The increase as a percent of Page 8 sales was primarily due to labor and other store operating expense inefficiencies due to lower sales volume at comparable stores and lower than average sales volumes for new stores opened in the Midwest. General and administrative expense as a percent of sales was 6.1% versus 6.7% a year ago. Reduced spending levels for administrative support partially mitigated the overall increase in selling and administrative expenses. Operating income for fiscal 1995 was $4.7 million versus $7.6 million for the same period a year ago, a $2.9 million decrease. Operating income margin was 2.5% for fiscal 1995 and 4.4% for fiscal 1994. Operating income margin declined due to the reasons discussed above. Interest expense, net, decreased $1.6 million to $0.7 million for fiscal 1995 versus $2.3 million for fiscal 1994. The Company repaid substantially all of its outstanding indebtedness, $30.4 million, upon completion of its initial public offering in October 1994. The Company expects interest expense to increase in fiscal 1996 as it increases its borrowings to finance its expansion programs. Income tax expense was $1.7 million for fiscal 1995, a decrease of $0.7 million from fiscal 1994. The Company s lower pretax income and effective tax rate, the result of increased tax deductions related to the exercise of non- qualified stock options, contributed to the decrease in income tax expense. The estimated effective rate is subject to continuing evaluation and modification by management. LIQUIDITY AND CAPITAL RESOURCES The Company s cash needs are primarily to support its inventory requirements, store expansion and refurbishment and systems development. The Company has historically financed its operations primarily with internally generated funds and its credit facilities. At March 1, 1997, the Company s working capital was $44.7 million, while advances from its revolving promissory note (the Credit Facility ) were $29.9 million. The Company had $7.6 million and $2.1 million available for borrowings under its credit facility as determined by the Company s eligible borrowing base" at March 1, 1997 and May 3, 1997, respectively. Cash provided by (used in) operating activities for fiscal 1996 was ($4.7) million. During fiscal 1996, inventory increased $9.8 million as a result of the Company s store growth, new merchandise categories and to improve out-of- stock rates on higher sales volume goods. Net cash used in investing activities for fiscal 1996 was $13.3 million. These funds were used principally for capital expenditures supporting the Company s store expansion programs and systems development. In fiscal 1996, the Company opened a prototype home decorating center, 6 new superstores, expanded 1 superstore, converted 1 superstore and 3 original format stores into outlet stores, and closed 1 superstore. In March 1997, the Company opened 1 new superstore in the Washington, D.C. market. The majority of the capital expenditures and preopening expenses for this store were incurred in fiscal 1996. The Company s capital expenditures for fiscal 1997 are currently expected to be approximately $3.5 million and will relate primarily to the Company s commitment to develop 2 additional new superstores, convert 3 superstores and Page 9 1 original format store to outlet stores and continue to improve the Company s management information systems. The commitment to open 2 additional new superstores in fiscal 1997 will approximate $1.0 million for furniture, fixtures and equipment, and $150,000 for related leasehold improvements. The Company plans to convert 3 superstores and 1 original format store into outlet stores in fiscal 1997, which will require estimated capital improvements of $35,000 per store. Existing store expansion and improvements will cost approximately $1.0 million. In addition to capital improvements, the Company estimates that the gross inventory requirements of a new superstore will be approximately $1.0 million per store. The Company also plans to spend $1.0 million in fiscal 1997 for replacement, enhancements and upgrades of its management information systems. The actual per store costs the Company will incur in opening new stores will vary based upon, among other things, geographic location, the size of the store and the extent of the build-out required at the selected site. The Company s strategy is to lease new store sites, thus preserving its capital for store and inventory growth. Preopening costs, such as travel, hiring and training of new employees and supplies, are expensed as incurred and, prior to fiscal 1994, have not been material. The Company estimates preopening costs will average approximately $100,000 per new store, with only nominal preopening costs incurred for converted or expanded stores. Cash provided by financing activities for fiscal 1996 was $18.5 million. The Company had net borrowings of $20.2 million primarily associated with the factors noted above and to meet other working capital needs in fiscal 1996. The Company s $40 million revolving promissory note contains various restrictions on the payment of cash dividends, incurrence of additional indebtedness, acquisitions, capital expenditures, investments and disposition of assets. The covenants also require the Company to meet certain net income levels, as defined, determined at the end of each fiscal quarter on a fiscal year-to-date basis. As of March 1, 1997, the Company was in breach of its net income covenant. The provider of the Credit Facility has waived that requirement as of March 1, 1997. On May 29, 1997, the Company and the provider of its Credit Facility agreed to amend certain terms and conditions of the Credit Facility. Under the amended terms and conditions, the Company's covenants will be reset to be reflective of the Company's anticipated earnings, capital expenditures and cash flow over the remaining term of the Credit Facility. Borrowings may not exceed 65% of eligible inventory through August 31, 1998 and 60% thereafter except, borrowings may be increased to 65% for 120 consecutive days commencing April 1, 1999. Interest will be payable at the provider's prime rate plus 1.125% or LIBOR plus 3.25%. Commencing with the fiscal year beginning March 1, 1998, the Company can lower its interest rate spread up to a maximum of 1.00% provided it achieves certain specified earnings targets measured on a quarterly year-to-date basis. In addition, the Company has also agreed to provide all of its unencumbered fixed assets as additional security to the Credit Facility. In conjunction with the Company s Restructuring Plan, the Company plans to close 3 stores in fiscal 1997. These stores had combined net sales and store level operating losses of $6.3 million and $1.3 million, respectively. Cash Page 10 outflows related to the Restructuring Plan will approximate $3.5 million for fiscal 1997. The cash outflow is related to disposal costs for the closure of 3 stores, including lease termination and subsidy costs and severance and related expenses for workforce reductions. 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 1997. The Company anticipates that it will spend approximately $5 million in fiscal 1997 to finance new store openings, store conversions and expansions, information systems development, inventory and preopening costs. 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. NEW PRONOUNCEMENTS BY FINANCIAL ACCOUNTING STANDARDS BOARD In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ( SFAS ) No. 128 Earnings Per Share. SFAS No. 128 specifies new standards designed to improve the earnings per share ( EPS ) information provided in financial statements by simplifying the existing computational guidelines, revising the disclosure requirements and increasing the comparability of EPS data on an international basis. Some of the changes made to simplify the EPS computations include: (a) eliminating the presentation of primary EPS and replacing it with basic EPS, with the principal difference being that the common stock equivalents are not considered in computing basic EPS, (b) eliminating the modified treasury stock method and the three percent materiality provision and (c) revising the contingent share provisions and the supplemental EPS data requirements. SFAS No. 128 also makes a number of changes to existing disclosure requirements. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. The Company estimates that the implementation of SFAS No. 128 will not have a material impact on the Company s financial statements. Page 11 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. 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 which are more fully described in Item 1, Part I of the Company s Annual Report on Form 10-K for the Fiscal Year Ended March 1, 1997. Page 12 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA - ---------------------------------------------------- Item 8 is hereby amended and restated in its entirety as follows: STROUDS, INC. BALANCE SHEETS
MARCH 1, MARCH 2, (IN THOUSANDS, EXCEPT SHARE DATA) 1997 1996 - --------------------------------- -------- -------- ASSETS Current assets: Cash $ 765 $ 210 Accounts receivable, less allowance for doubtful accounts of $0 and $25, respectively 1,957 1,835 Merchandise inventory 69,934 60,167 Prepaid expenses 1,835 3,459 Income taxes receivable 2,488 --- Deferred income taxes 1,354 786 -------- -------- Total current assets 78,333 66,457 Property and equipment - at cost, net of accumulated depreciation and amortization 25,108 18,206 Excess of cost over net assets acquired, net of accumulated amortization 7,789 8,047 Deferred income taxes --- 117 Other assets 874 1,180 -------- -------- Total assets $112,104 $ 94,007 ======== ======== LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities: Current maturities of long-term debt $ 561 $ 237 Accounts payable 16,950 14,367 Accrued expenses 9,419 8,974 Current portion of restructuring reserves 6,740 --- -------- -------- Total current liabilities 33,670 23,578 Long-term debt 32,132 12,446 Restructuring reserves 9,510 --- Other non-current liabilities 3,219 2,514 -------- -------- Total liabilities 78,531 38,538 -------- -------- 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 March 1, 1997, 8,535,812 shares; and March 2, 1996, 8,512,059 shares 1 1 Additional paid-in capital 39,018 38,946 Retained earnings (accumulated deficit) (5,446) 16,522 -------- -------- Total stockholders equity 33,573 55,469 -------- -------- Total liabilities and stockholders equity $112,104 $ 94,007 ======== ========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. Page 13 STROUDS, INC. STATEMENTS OF OPERATIONS
FISCAL YEAR ENDED ---------------------------------------- March 1, March 2, February 25, (IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 1995 - ------------------------------------ ---------- ---------- ----------- Net sales $ 209,778 $ 190,316 $ 174,585 Costs and expenses: Cost of sales, buying and occupancy 150,625 131,179 118,697 Selling and administrative expenses 63,963 54,175 47,983 Restructuring and asset impairment charges 18,050 --- --- Amortization of excess of cost over net assets acquired 258 258 258 ---------- ---------- ---------- 232,896 185,612 166,938 ---------- ---------- ---------- Operating income (loss) (23,118) 4,704 7,647 Other income 508 349 180 Interest expense, net (1,846) (735) (2,311) ---------- ---------- ---------- Income (loss) before income taxes (24,456) 4,318 5,516 Income tax benefit (expense) 2,488 (1,748) (2,497) ---------- ---------- ---------- Net income (loss) $ (21,968) $ 2,570 $ 3,019 ========== ========== ========== Net income (loss) per share $ (2.58) $ 0.30 $ 0.47 ========== ========== ========== Weighted average common and common equivalent shares outstanding 8,521 8,622 6,357 ========== ========== ==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. Page 14 STROUDS, INC. STATEMENTS OF STOCKHOLDERS EQUITY
Retained Common stock Additional earnings Total -------------- paid-in (accumulated stockholders (IN THOUSANDS) Shares Amount capital deficit) equity - -------------------------- ------ ------ ------- ----------- ------------ Balance, February 26, 1994 4,324 $ 1 $ 2,099 $10,986 $13,086 Net income --- --- --- 3,019 3,019 Common stock issued in public offering 3,200 --- 36,184 --- 36,184 Common stock issued upon exercise of options 10 --- 36 --- 36 Common stock issued upon exercise of warrants 788 --- --- --- --- Dividends paid --- --- --- (53) (53) ----- ---- ------- ------- ------- Balance, February 25, 1995 8,322 1 38,319 13,952 52,272 Net income --- --- --- 2,570 2,570 Common stock issued upon exercise of options 172 --- 550 --- 550 Common stock issued through 1994 Employee Stock Purchase Plan 18 --- 77 --- 77 ----- ---- ------- ------- ------- Balance, March 2, 1996 8,512 1 38,946 16,522 55,469 Net loss --- --- --- (21,968) (21,968) Common stock issued through 1994 Employee Stock Purchase Plan 24 --- 72 --- 72 ----- ---- ------- ------- ------- Balance, March 1, 1997 8,536 $ 1 $39,018 $(5,446) $33,573 ===== ==== ======= ======= =======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. Page 15 STROUDS, INC. STATEMENTS OF CASH FLOWS
FISCAL YEAR ENDED ------------------------------ March 1, March 2, February 25, (IN THOUSANDS) 1997 1996 1995 - ------------------------------------ -------- -------- -------- Cash flows from operating activities: Net income (loss) $(21,968) $ 2,570 $ 3,019 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization of property and equipment 4,476 3,952 3,326 Restructuring and asset impairment charges 18,050 --- --- Amortization of excess of cost over net assets acquired 258 258 258 Deferred income taxes (451) 525 (167) (Increase) decrease in assets: Accounts receivable (122) 60 (522) Merchandise inventory (9,768) (5,812) (10,132) Prepaid expenses 1,625 (1,824) (236) Income taxes receivable (2,488) --- --- Increase (decrease) in accounts payable and accrued expenses 4,579 (5,361) 8,054 Other 1,123 461 583 ------- -------- -------- Net cash provided by (used in) operating activities (4,686) (5,171) 4,183 -------- -------- -------- Cash flows from investing activities: Purchases of marketable securities --- --- (3,223) Proceeds from sale of marketable securities --- 471 2,752 Capital expenditures (13,372) (8,236) (8,854) Other 83 --- --- -------- -------- -------- Net cash used in investing activities (13,289) (7,765) (9,325) -------- -------- -------- Cash flows from financing activities: Sale of common stock --- --- 36,184 Borrowings under long-term debt 77,441 42,894 1,630 Repayments of long-term debt (57,194) (31,094) (29,490) Loan costs incurred --- (219) (19) Principal payments under capital lease obligations (237) (484) (537) (Decrease) increase in overdraft (1,552) 1,243 (3,336) Redemption of preferred stock --- --- (1,000) Other equity transactions 72 627 (17) -------- -------- -------- Net cash provided by financing activities 18,530 12,967 3,415 -------- -------- -------- Net (decrease) increase in cash 555 31 (1,727) Cash at beginning of period 210 179 1,906 -------- -------- -------- Cash at end of period $ 765 $ 210 $ 179 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 1,839 $ 680 $ 2,853 ======== ======== ======== Income taxes $ 59 $ 1,295 $ 2,508 ======== ======== ========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. Page 16 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 March 1, 1997, the Company operated 67 stores in five states under the name Strouds. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis Of Presentation The financial statements for the fiscal year 1994 include the accounts of the Company and its wholly owned subsidiary. All significant intercompany accounts and transactions were eliminated in consolidation for that fiscal year. Effective April 2, 1995, the subsidiary was merged with and into the Company. Fiscal Year-Ended 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 March 1, 1997 and February 25, 1995 included 52 weeks and the fiscal year ended March 2, 1996 included 53 weeks. The Company has defined its fiscal year as the period in which most of the activity occurs (e.g., the year ending March 1, 1997 is referred to as fiscal 1996). Asset Impairment Effective March 3, 1996, the Company adopted Statement of Financial Accounting Standards No. 121 ( SFAS No. 121 ), Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. 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 exceed the fair value of the assets. Adoption of this standard resulted in a charge of $1.8 million for fiscal 1996. See note 4. Stock Compensation Effective March 3, 1996, the Company adopted Statement of Financial Accounting Standards No. 123 ( SFAS No. 123 ), Accounting for Stock Based Compensation. As permitted under SFAS No. 123, the Company elected not to adopt the fair- value based method of accounting for its stock based compensation plans, but will account for such compensation under the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Page 17 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Company has, however, complied with the disclosure requirements of SFAS No. 123, whereby the impact from recording the fair-values of the options granted is presented on a proforma basis on net income (loss) and related per share amounts. 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. Actual results could differ from those estimates. Inventories Merchandise 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 March 1, 1997 and March 2, 1996 were $1,701,000 and $1,171,000 respectively. See note 4. 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 $2,537,000 as of March 1, 1997 and $2,278,000 as of March 2, 1996. Store Preopening Costs Store preopening costs, consisting primarily of labor and supplies directly Page 18 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) related to the opening of specific stores, are expensed as incurred. Total preopening costs of $1,210,000, $456,000 and $516,000 were expensed in fiscal 1996, 1995 and 1994, respectively. 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. Net Income (Loss) Per Share Net income (loss) per share is based on the weighted average number of common and common equivalent shares outstanding. Common stock equivalents, as determined by the treasury stock method, represent shares which would be issued assuming the exercise of common stock options and warrants reduced by the number of shares which could be purchased with the proceeds from the exercise of those options and warrants. Common stock equivalents are not included in the calculation of net income (loss) per share if their inclusion would be anti-dilutive. Fully diluted net income per share is not presented since the amounts do not differ significantly from the primary net income per share presented. Recently Issued Pronouncements In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ( SFAS) No. 128, Earnings Per Share. SFAS No. 128 specifies new standards designed to improve the earnings per share ( EPS ) information provided in financial statements by simplifying the existing computational guidelines, revising the disclosure requirements and increasing the comparability of EPS data on an international basis. Some of the changes made to simplify the EPS computations include: (a) eliminating the presentation of primary EPS and replacing it with basic EPS, with the principal difference being that the common stock equivalents are not considered in computing basic EPS, (b) eliminating the modified treasury stock method and the three percent materiality provision and (c) revising the contingent share provisions and the supplemental EPS data requirements. SFAS No. 128 also makes a number of changes to existing disclosure requirements. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. The Company estimates that the implementation of SFAS No. 128 will not have a material impact on the Company s financial statements. Reclassifications Certain reclassifications have been made to the fiscal 1995 and 1994 amounts to conform to the fiscal 1996 presentation. Page 19 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. PROPERTY AND EQUIPMENT Property and equipment is summarized as follows:
March 1, March 2, (IN THOUSANDS) 1997 1996 --------------------------------- ------- ------- Furniture, fixtures and equipment $ 42,346 $ 30,915 Equipment held under capital leases 2,111 2,596 Leasehold improvements 7,308 5,687 --------- --------- 51,765 39,198 Impairment valuation reserve (1,800) --- Accumulated depreciation and amortization (24,857) (20,992) --------- --------- $ 25,108 $ 18,206 ========= =========
4. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES On February 28, 1997, the Board of Directors approved a comprehensive restructuring plan (the Restructuring Plan ) which resulted in a pretax charge of $16,250,000. The Restructuring Plan is designed to improve the operating performance of the Company through the closure or disposition of up to 16 underperforming stores and implementing cost reduction measures, including workforce reductions, to more closely align the Company s cost structure with future expected revenues. The Company recorded a pretax charge of $1,800,000 for the impairment of certain operating assets. The principal factors leading up to the charge were current and future operating losses on individual operating assets, whereby the carrying value of certain operating assets exceeded the current estimate of future cash flows from the related asset. The restructuring and asset impairment charges consist of the following:
March 1, (IN THOUSANDS) 1997 --------------------------------------------------------- -------- Occupancy, lease termination and lease subsidy costs associated with the closure or disposition of stores $ 7,400 Asset write-down; merchandise inventory, leasehold improvements, furniture and fixtures and equipment 7,215 Employee severance and other related costs 1,635 -------- Total restructuring 16,250 Asset impairment charges related to the adoption of SFAS 121 1,800 -------- Total restructuring and asset impairment $ 18,050 ========
Page 20 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. ACCRUED EXPENSES Accrued expenses consist of the following:
March 1, March 2, (IN THOUSANDS) 1997 1996 -------------------------------- -------- -------- Compensation and related expense $ 2,380 $ 2,026 Sales tax 1,667 1,298 Other 5,372 5,650 --------- --------- $ 9,419 $ 8,974 ========= =========
6. LONG-TERM DEBT Long-term debt is summarized as follows:
March 1, March 2, (IN THOUSANDS) 1997 1996 ------------------------------------------------ -------- -------- Revolving promissory note payable to a financial institution, secured by inventory and the proceeds therefrom. Interest is payable at the bank s prime rate or LIBOR plus 0.375% and 2.250%, respectively (8.625% and 7.630% at March 1, 1997, respectively). The borrowing limit is $40,000,000 not to exceed 60% of eligible inventory except, borrowings may be increased to 65% of eligible inventory for a period of 105 consecutive days commencing on January 1 each year. The revolving promissory note expires on January 13, 2000 but may be extended for successive one year terms at the stated expiration date provided the Company is in compliance with all of its covenants $ 29,887 $ --- Revolving promissory note payable to financial institution, repaid during the year ended March 1, 1997 --- 12,400 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 beginning September 1, 1996 2,760 --- Capital lease obligations payable in varying monthly installments through the end of fiscal 1997, with interest rates ranging from 8.0% to 11.5%. Leases are secured by the underlying equipment 46 283 -------- -------- Total debt 32,693 12,683 Less current maturities (561) (237) -------- -------- Total long-term debt $ 32,132 $ 12,446 ======== ========
Page 21 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. LONG-TERM DEBT (CONTINUED) Scheduled maturities for total debt outstanding at March 1, 1997 are as follows:
(IN THOUSANDS) Notes payable Capital leases Total ------------- ------------- -------------- ------- Fiscal year: 1997 $ 515 $ 46 $ 561 1998 567 --- 567 1999 30,511 --- 30,511 2000 686 --- 686 2001 368 --- 368 ------- ------- ------- $32,647 $ 46 $32,693 ======= ======= =======
The Company s revolving promissory note (the Credit Facility ) contains various restrictions on the payment of cash dividends, incurrence of additional indebtedness, acquisitions, capital expenditures, investments and disposition of assets. The covenants also require the Company to meet certain net income levels, as defined, determined at the end of each fiscal quarter on a fiscal year-to-date basis. As of March 1, 1997, the Company was in breach of its net income covenant. The provider of the Credit Facility has waived that requirement as of March 1, 1997. Included in the Credit Facility is a $6.0 million letter of credit sub- facility. At March 1, 1997, the Company had letters of credit amounting to $364,000 outstanding for purchases from foreign vendors under this sub- facility. On March 6, 1996, the Company entered into an International Swap Dealers Association Master Agreement (the Agreement ) with the provider of its previous borrowing facility and, who is affiliated with the current provider of the Company s Credit Facility. The Agreement was entered into for the purpose of converting a portion of its borrowings to a long-term fixed base rate of interest. On April 5, 1996 and November 26, 1996, the Company converted $10 million and $10 million, respectively, to a weighted average fixed base interest rate of 7.00% plus 2.25% until this Agreement expires on April 6, 1999. On May 29, 1997, the Company and the provider of its Credit Facility agreed to amend certain terms and conditions of the Credit Facility. Under the amended terms and conditions, the Company's covenants will be reset to be reflective of the Company's anticipated earnings, capital expenditures and cash flow over the remaining term of the Credit Facility. Borrowings may not exceed 65% of eligible inventory through August 31, 1998 and 60% thereafter except, borrowings may be increased to 65% for 120 consecutive days commencing April 1, 1999. Interest will be payable at the provider's prime rate plus 1.125% or LIBOR plus 3.25%. Commencing with the fiscal year beginning March 1, 1998, the Company can lower its interest rate spread up to a maximum of 1.00% provided it achieves certain specified earnings targets measured on a Page 22 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. LONG-TERM DEBT (CONTINUED) quarterly year-to-date basis. In addition, the Company has also agreed to provide all of its unencumbered fixed assets as additional security to the Credit Facility. 7. LEASE COMMITMENTS At March 1, 1997, 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 $20,806,000, $16,313,000 and $13,484,000 (inclusive of percentage rentals of $3,000, $24,000 and $101,000) for fiscal 1996, 1995 and 1994, respectively. The Company has operating leases for equipment. These leases are for three to five year periods, and certain leases contain renewal options. The rental expense amounted to $710,000, $565,000 and $814,000 for fiscal 1996, 1995 and 1994 respectively. Minimum rental commitments under all operating leases are as follows:
(IN THOUSANDS) -------------- Fiscal year: 1997 $ 19,425 1998 18,924 1999 17,601 2000 15,906 2001 13,323 Thereafter 57,052 --------- $ 142,231 =========
Page 23 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. INCOME TAXES The components of income tax expense (benefit) are as follows:
March 1, March 2, February 25, (IN THOUSANDS) 1997 1996 1995 -------------- -------- ------- -------- Current: Federal $(2,488) $ 1,107 $ 2,068 State --- 388 596 ------- ------- ------- Total current income tax expense (benefit) (2,488) 1,495 2,664 ------- ------- ------- Deferred: Federal --- 247 (106) State --- 6 (61) ------- ------- ------- Total deferred income tax expense (benefit) --- 253 (167) ------- ------- ------- Net income tax expense (benefit) $(2,488) $ 1,748 $2,497 ======= ======= =======
A summary of the deferred tax assets (liabilities) is as follows:
March 1, March 2, (IN THOUSANDS) 1997 1996 ------------------- -------- -------- Deferred tax assets: Inventory $ 484 $ 90 Cash versus accrual basis 9,467 826 State taxes --- 136 ------- ------- 9,951 1,052 Valuation allowance (8,275) --- ------- ------- Total deferred tax assets 1,676 1,052 Deferred tax liabilities: Property and equipment (624) (147) Capital equipment held on lease (5) (2) ------- ------- Total deferred tax liabilities (629) (149) ------- ------- Net deferred tax assets $ 1,047 $ 903 ======= =======
Page 24 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. INCOME TAXES (CONTINUED) The reconciliation of the Federal statutory rate and the effective tax rate is as follows:
March 1, March 2, February 25, 1997 1996 1995 -------- -------- ------------ Federal statutory rate 35.0% 35.0% 35.0% Use of net operating loss carryback 10.2% --- --- State tax, net of Federal tax benefit --- 6.1 6.1 Exercise of non-qualified stock options --- (3.7) --- Amortization of excess of cost over net assets acquired 0.4 2.4 2.0 Net operating loss valuation allowance (33.8) --- --- Officers life insurance --- 0.1 0.1 Other (1.6) 0.6 2.1 ------- ------- ------- 10.2% 40.5% 45.3% ======= ======= =======
The income tax receivable at March 1, 1997 represents the expected tax refund from the carryback of the current year tax loss to prior years. 9. STOCKHOLDERS EQUITY On November 17, 1995, the Board of Directors declared a dividend of one preferred stock purchase right (the Rights ) for each share of common stock, $0.0001 per share (the Common Shares ), of the Company 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 on 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 Shares 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 Shares 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 15% or more of the Page 25 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 9. STOCKHOLDERS EQUITY (CONTINUED) Common Shares), 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 15% or more of the Common Shares. No event during fiscal 1996 made the Rights exercisable. In October 1994, Strouds completed an initial public offering of 3,200,000 shares of Common Stock. Of the $36,184,000 net proceeds of this offering, $14,752,000 was used to repay in full a 12% promissory note due August 30, 1996 held by BT Capital, a major stockholder of the Company, $12,669,000 was used to repay the Company s revolving promissory note, $3,000,000 was used to repay the 10% interest promissory notes due August 30, 1996 payable to stockholders of the Company, and $1,000,000 was used to redeem in full all 10,000 outstanding shares of the Company s Series A Redeemable Preferred Stock at a redemption price equal to the liquidation preference of $100 per share, plus aggregate accrued but unpaid dividends of $32,000. On July 26, 1994, the Company effected a 43-for-1 stock split by an amendment to its certificate of incorporation which had been approved by the Board of Directors and the Stockholders. The amendment also changed par value from $0.01 per share to $0.0001, and increased authorized common stock from 200,000 shares to 25,000,000 shares. All references in the financial statements to numbers of shares and related prices, per share amounts and option plan data have been restated to reflect the split. The Company has issued 1,025,077 warrants to purchase shares of common stock related to a prior year s financing arrangement. The warrants are exercisable at any time at the exercise price of $0.0002 per share. Such warrants to purchase 788,147 shares of common stock were exercised during fiscal 1994. As of March 1, 1997, warrants to purchase 212,850 shares of common stock were outstanding. 10. 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 Plan covers substantially all full-time employees and provides for Company matching of employee contributions, at the discretion of the Board of Directors, up to 3% of each employee s salary. Matching contributions totaled $141,000, $149,000 and $83,000 for fiscal 1996, 1995 and 1994, respectively. On May 19, 1994, the Company s Board of Directors adopted the 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 850,000 shares of Common Stock upon exercise of Page 26 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. EMPLOYEE BENEFITS (CONTINUED) options, stock appreciation rights, and other awards, or as restricted or deferred stock awards. Under this plan, 155,766 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. There were 60,875 options outstanding at March 1, 1997 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. Information with respect to the Company's option plans is summarized as follows:
March 1, March 2, February 25, 1997 1996 1995 ---------------- ------------------- ------------ Weighted- Weighted- average average exercise exercise Shares price Shares price Shares ------ -------- ------ -------- ------ Outstanding at beginning of year 627,759 $7.54 652,362 $6.66 355,050 Granted 172,300 4.95 343,868 6.42 311,850 Exercised --- -- (171,407) 3.20 (10,238) Cancelled (44,950) 5.71 (197,064) 6.42 (4,300) ------- ----- ------- ----- ------- Outstanding at end of year 755,109 $7.06 627,759 $7.54 652,362 ======= ===== ======= ===== ======= Exercisable at end of year 261,878 183,455 291,217 ======= ======= ======= Weighted-average fair value of options granted during the year $3.13 $4.02 ===== =====
Page 27 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. EMPLOYEE BENEFITS (CONTINUED) The following table summarizes information about the stock options outstanding at March 1, 1997:
Options Outstanding Options Exercisable ---------------------------------- --------------------- Weighted- Weighted- Weighted- Number average average Number average Range of outstanding contractual exercise exercisable exercise exercise prices at 03/01/97 life price at 03/01/97 price ---------------- ----------- ----------- -------- ----------- -------- $ 3.13 to $ 4.75 180,000 8.90 $ 4.23 88,726 $ 4.25 $ 5.31 to $ 5.75 154,875 7.11 $ 5.39 35,875 $ 5.62 $ 7.38 to $ 8.38 238,984 7.64 $ 7.99 62.777 $ 8.06 $ 9.77 to $ 9.77 161,250 7.24 $ 9.77 64,500 $ 9.77 $12.50 to $12.50 20,000 7.63 $12.50 10,000 $12.50 ---------------- ----------- ----------- -------- ----------- -------- $ 3.13 to $12.50 755,109 7.75 $ 7.06 261,878 $ 7.03 ================ =========== =========== ======== =========== ========
Additionally, 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 1996, the Company issued 23,753 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 1996 and 1995 plans been determined consistent with SFAS No. 123, the Company's net income and net income per share for 1996 and 1995 would approximate the proforma amounts below:
March 1, March 2, (IN THOUSANDS, EXCEPT PER SHARE DATA) 1997 1996 ------------------------------------- --------- --------- Net (loss) income As reported $ (21,968) $ 2,570 Net (loss) income Proforma $ (22,403) $ 2,277 Net (loss) income per share As reported $ (2.58) $ 0.30 Net (loss) income per share Proforma $ (2.63) $ 0.26
Page 28 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. EMPLOYEE BENEFITS (CONTINUED) The effects of applying SFAS No. 123 in this pro-forma disclosure are not necessarily indicative of future amounts. 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:
Weighted-average assumptions March 1, 1997 March 2, 1996 ---------------------------- ------------- ------------- Risk-free interest rate 6.0% 5.8% Expected volatility 45% 45% Expected dividend yield 0% 0% Expected life (years) 9 9
11. RELATED PARTY TRANSACTIONS Wilfred C. Stroud, Chairman of the Board and President of the Company, and his spouse are beneficial owners of 45% of the stock of Reflections Fine Bedding Attire, Inc. ( Reflections ). Wayne P. Selness, former President and Chief Executive Officer of the Company, and his spouse are beneficial owners of 10% of the stock of Reflections. On June 1, 1993, an entity unaffiliated with Reflections or Strouds, acquired substantially all of the assets and business of Reflections. As part of the foregoing acquisition, Mr. Stroud entered into a Non- Competition and Consulting Agreement, dated June 1, 1993, with the purchaser of the Reflections business. Pursuant to such agreement, Mr. Stroud is entitled to receive an amount based on a percentage of the Reflections business gross sales, up to a maximum total payment of $825,000. During the contract year ended May 31, 1996, the Reflections business sales totaled $4,170,000, of which $1,341,000 were sales to the Company. Mr. Stroud received a payment of $103,000 from the Reflections business with respect to that year. Page 29 STROUDS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) 12. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The results of operations for fiscal 1996 and 1995 were as follows:
First Second Third Fourth (IN THOUSANDS, EXCEPT PER SHARE DATA) Quarter Quarter Quarter Quarter - ------------------------------------- ------- ------- ------- ------- FISCAL 1996: Net sales $46,436 $49,516 $54,984 $58,842 Gross profit 13,676 14,105 15,923 15,449 Operating loss 1,138 35 1,813 20,132 Net loss 678 337 1,578 19,375 Net loss per share 0.08 0.04 0.18 2.28 FISCAL 1995: Net sales $42,973 $42,889 $48,666 $55,788 Gross profit 13,469 12,958 15,212 17,500 Operating income 598 403 1,167 2,536 Net income 275 161 669 1,465 Net income per share 0.03 0.02 0.08 0.17
Page 30 INDEPENDENT AUDITORS REPORT The Board of Directors Strouds, Inc.: We have audited the accompanying balance sheets of Strouds, Inc. as of March 1, 1997 and March 2, 1996 and the related statements of operations, stockholders equity and cash flows for each of the years in the three-year period ended March 1, 1997. 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 March 1, 1997 and March 2, 1996 and the results of its operations and its cash flows for each of the years in the three-year period ended March 1, 1997 in conformity with generally accepted accounting principles. As discussed in note 2 to the financial statements, effective March 3, 1996, Strouds, Inc. adopted the provisions of Statements of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. /s/ KPMG Peat Marwick LLP Los Angeles, California April 9, 1997, except for the last paragraph of note 6, which is as of May 29, 1997. Page 31 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/Wilfred C. Stroud -------------------- Wilfred C. Stroud Director, Chairman of the Board and President Dated: June 4, 1997 Page 32 -----END PRIVACY-ENHANCED MESSAGE-----