-----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, WnwGJWAcQ6U5zr1zMjDwsFOjzcq7EJd1iX/ovSiV6k8GPLvXteRFN86KrHjmOGtr MIwse8dyG6PYd2r+4MYnFA== 0000927760-99-000010.txt : 19990714 0000927760-99-000010.hdr.sgml : 19990714 ACCESSION NUMBER: 0000927760-99-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990529 FILED AS OF DATE: 19990713 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-Q SEC ACT: SEC FILE NUMBER: 000-24904 FILM NUMBER: 99663155 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-Q 1 As filed with the Securities and Exchange Commission on July 13, 1999 _____________________________________________________________________________ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------- FORM 10-Q ------------------- [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the period ended May 29, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 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 No.) 780 SOUTH NOGALES STREET CITY OF INDUSTRY, CA 91748 (Address of principle executive offices) (626) 912-2866 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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 ---- ---- Number of shares of common stock outstanding at July 6, 1999: 7,036,981 STROUDS, INC. INDEX Page No. -------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS: Condensed Balance Sheets as of May 29, 1999 (Unaudited) and February 27, 1999 3 Condensed Statements of Operations for the Thirteen Weeks Ended May 29, 1999 and May 30, 1998 (Unaudited) 4 Condensed Statements of Cash Flows for the Thirteen Weeks Ended May 29, 1999 and May 30, 1998 (Unaudited) 5 Notes to Condensed Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 15 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16 SIGNATURES 17 Page 2 PART I. FINANCIAL INFORMATION - --------------------------------- ITEM 1. FINANCIAL STATEMENTS STROUDS, INC. CONDENSED BALANCE SHEETS MAY 29, FEBRUARY 27, (in thousands, except share data) 1999 1999 - --------------------------------- -------- -------- ASSETS (Unaudited) Current assets: Cash $ 592 $ 269 Accounts receivable 2,162 1,763 Inventory 67,281 60,832 Other 1,382 3,993 -------- -------- Total current assets 71,417 66,857 Property and equipment - at cost, net of accumulated depreciation and amortization 20,738 21,354 Excess of cost over net assets acquired, net of accumulated amortization 7,208 7,273 Other assets 927 959 -------- -------- Total assets $100,290 $ 96,443 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 588 $ 624 Accounts payable 18,568 15,565 Accrued expenses 12,138 15,726 Restructuring reserves 4,283 4,330 -------- -------- Total current liabilities 35,577 36,245 Long-term debt 34,468 26,887 Other non-current liabilities 3,200 3,194 -------- -------- Total liabilities 73,245 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 May 29, 1999, 7,036,981; and February 27, 1999, 8,624,131 shares 1 1 Treasury stock at cost; May 29, 1999, 1,800,000 shares (1,890) -- Additional paid-in capital 39,146 39,146 Accumulated deficit (10,212) (9,030) -------- -------- Total stockholders' equity 27,045 30,117 -------- -------- Total liabilities and stockholders' equity $100,290 $ 96,443 ======== ======== See accompanying notes to condensed financial statements. Page 3 STROUDS, INC. CONDENSED STATEMENTS OF OPERATIONS (in thousands, except per share data) (Unaudited) 13 WEEKS ENDED ---------------------- MAY 29, MAY 30, 1999 1998 --------- --------- Net sales $ 53,605 $ 55,015 Costs and expenses: Cost of sales, buying and occupancy 38,878 40,337 Selling and administrative expenses 15,190 14,507 Amortization of excess of cost over net assets acquired 65 65 --------- --------- 54,133 54,909 --------- --------- Operating (loss) income (528) 106 Other income 30 60 Interest expense, net (684) (762) --------- --------- Net loss $ (1,182) $ (596) ========= ========= Basic and Diluted: Net loss per share $ (0.15) $ (0.07) ========= ========= Weighted average shares outstanding 7,735 8,579 ========= ========= See accompanying notes to condensed financial statements. Page 4 STROUDS, INC. CONDENSED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) 13 WEEKS ENDED ---------------------- MAY 29, MAY 30, 1999 1998 --------- --------- Cash flows from operating activities: Net loss $ (1,182) $ (596) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization of property and equipment 1,285 1,178 Amortization of excess of cost over net assets acquired 65 65 (Increase) decrease in: Accounts receivable (399) (1,413) Inventory (6,449) 892 Increase (decrease) in: Accounts payable and accrued expenses (739) 1,394 Restructuring reserve (47) (1,709) Other 2,649 311 --------- --------- Net cash (used in) provided by operating activities (4,817) 122 --------- --------- Cash flows from investing activities: Capital expenditures (669) (1,317) --------- --------- Net cash used in investing activities (669) (1,317) --------- --------- Cash flows from financing activities: Net borrowings under long-term debt 7,545 78 Increase in overdraft 154 1,669 Repurchase of stock (1,890) --- --------- --------- Net cash provided by financing activities 5,809 1,747 --------- --------- Net increase in cash 323 552 Cash at beginning of period 269 518 --------- --------- Cash at end of period $ 592 $ 1,070 ========= ========= Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 587 $ 592 ========= ========= See accompanying notes to condensed financial statements. Page 5 STROUDS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) (1) INTERIM FINANCIAL STATEMENTS The accompanying Condensed Balance Sheet as of May 29, 1999 and the related Condensed Statements of Operations and Condensed Statements of Cash Flows for the 13 weeks ended May 29, 1999 and May 30, 1998 are unaudited. The unaudited operating results reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. Information pertaining to the year ended February 27, 1999 is derived from the audited financial statements included in the Company's 1998 Annual Report on Form 10-K. This information should be read in conjunction with the financial statements and notes thereto, together with management's discussion and analysis of financial condition and results of operations, contained in the Company's 1998 Annual Report filed with the Securities and Exchange Commission on Form 10-K. The results of operations for the 13 weeks ended May 29, 1999 may not be indicative of the results to be expected for the entire fiscal year. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Income Taxes The provision for income taxes is based upon the estimated effective tax rate for the entire fiscal year. The effective rate is subject to ongoing review and evaluation by management. Segment Information Effective March 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes standards for public business enterprises to report information about operating segments in annual financial statements and selected information in the notes thereto. The Company operates in two business segments, superstores and outlet stores. See note 6. Fair Value of Financial Instruments SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," requires disclosure of the fair value of certain 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. Page 6 STROUDS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued) Reclassifications Certain reclassifications have been made to the May 30, 1998 amounts to conform to the May 29, 1999 presentation. (3) PROPERTY AND EQUIPMENT Property and equipment is summarized as follows: May 29, February 27, (in thousands) 1999 1999 - -------------- --------- --------- Furniture, fixtures and equipment $ 44,897 $ 44,352 Leasehold improvements 8,328 8,204 --------- --------- 53,225 52,556 Accumulated depreciation and amortization (32,487) (31,202) --------- --------- $ 20,738 $ 21,354 ========= ========= (4) RESTRUCTURING The Company initiated a comprehensive restructuring and cost reduction plan (the "Restructuring Plan"), resulting in pretax charges of $16,250,000 in fiscal 1996. The Restructuring Plan is 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 in which the lease had not expired. As of February 27, 1999, the Company had closed 7 stores related to its restructuring efforts. In June 1999, the Company closed 1 store in the Washington, D.C. market. The Company plans to close 1 more store related to its Restructuring Plan. As of May 29, 1999, no changes have been made to the estimated Restructuring Plan costs and no additional charges were recorded to operations. During the first quarter of fiscal 1999, cash used related to the Restructuring Plan totaled $47,000, relating primarily to workforce reductions and consulting and advisory fees associated with the Company's restructuring and cost reduction efforts. Page 7 STROUDS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) (4) RESTRUCTURING (Continued) The following table summarizes the Restructuring Plan charges and payments or asset write-downs:
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 payment and asset write- downs 2,176 1,444 1,262 4,882 -------- -------- -------- -------- Reserve balance, February 28, 1998 5,199 5,771 398 11,368 Fiscal 1998 payment and asset write- downs 703 6,238 97 7,038 Reclassifications (667) 667 -- -- -------- -------- -------- -------- Reserve balance, February 27, 1999 3,829 200 301 4,330 Fiscal 1999 payment and asset write- downs through May 29, 1999 -- -- 47 47 -------- -------- -------- -------- Reserve balance, May 29, 1999 $ 3,829 $ 200 $ 254 $ 4,283 ======== ======== ======== ========
The total revenue and operating losses related to the 9 stores identified in the Restructuring Plan is summarized as follows: February 27, February 28, March 1, (in thousands) 1999 1998 1997 - -------------- ----------- ----------- --------- Revenues $ 9,283 $12,995 $15,232 =========== =========== ========= Operating Loss $ 3,038 $ 4,658 $ 5,026 Page 8 STROUDS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) (5) LONG-TERM DEBT At May 29, 1999, the Company had outstanding borrowings of $33,600,000 under its $50,000,000 revolving credit agreement (the "Credit Facility"). 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 May 29, 1999. Included in the Credit Facility is a $7,000,000 letter of credit sub-facility. As of May 29, 1999, the Company had outstanding letters of credit amounting to $763,000 for purchase commitments to foreign suppliers under this sub- facility. (6) 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 (losses) from operations. Interest income and expense is evaluated on an aggregate basis and not allocated to the Company's business segments. Segment information is summarized as follows: May 29, May 30, IN THOUSANDS 1999 1998 - ------------------------------- ----------- ----------- Net revenue: Superstores $ 44,690 $ 46,090 Outlet stores 8,915 8,925 ---------- ---------- $ 53,605 $ 55,015 ========== ========== Operating income (loss): Superstores $ (545) $ (37) Outlet stores 17 143 ---------- ---------- $ (528) $ 106 ========== ========== Page 9 STROUDS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) (6) SEGMENT INFORMATION (Continued) Segment information is summarized as follows: May 29, February 27, IN THOUSANDS 1999 1998 - ------------------------------- ----------- ----------- Total assets: Superstores $ 71,895 $ 65,715 Outlet stores 8,137 7,330 Other (1) 20,258 23,398 ---------- ---------- $ 100,290 $ 96,443 ========== ========== - ----------------------------------------------------------------------------- (1) Other includes corporate and distribution center property, equipment and assets which are not attributed to a business segment. ITEM 2. 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 in recent periods, and management believes will 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 27, 1999 is referred to as fiscal 1998). Restructuring The Company initiated a comprehensive restructuring and cost reduction plan (the "Restructuring Plan"), resulting in pretax charges of $16.3 million in fiscal 1996. The Restructuring Plan is 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 in which the lease had not expired. As of February 27, 1999, the Company had closed 7 stores related to its restructuring efforts. Page 10 In June 1999, the Company closed 1 store in the Washington, D.C. market. The Company plans to close 1 more store related to its Restructuring Plan. As of May 29, 1999, no additional changes have been made to the estimated Restructuring Plan costs and no charges were recorded to operations. RESULTS OF OPERATIONS 13 Weeks Ended May 29, 1999 Compared to the 13 Weeks Ended May 30, 1998 - ----------------------------------------------------------------------- Net sales for the thirteen weeks ended May 29, 1999 decreased $1.4 million, or 2.6%, to $53.6 million versus $55.0 million in the same period last year. Comparable store sales decreased $0.2 million, or 0.4%, for the period. Sales from new stores and expanded or replacement stores increased by $1.2 million. Sales were reduced by $2.4 million due to 2 store closures. Net sales for superstores for the thirteen weeks ended May 29, 1999 decreased $1.4 million, or 3.0%, to $44.7 million versus $46.1 million in the same period last year. Comparable superstore sales were flat for the period. Outlet store net sales for the thirteen weeks ended May 29, 1999 and May 30, 1998 were $8.9 million. Comparable outlet store sales decreased $0.2 million, or 2.8%, for the period. Management believes that the decrease in superstore sales is attributable to operating 2 less superstores, 47 superstores at May 29, 1999 versus 49 superstores at May 30, 1998. Approximately 10% of the comparable stores were affected by new competitive openings for the first quarter of 1999 compared to approximately 17% for the same period last year. Cost of sales, buying and occupancy for the 13 weeks ended May 29, 1999 were $38.9 million versus $40.3 million for the same period a year ago, a $1.4 million decrease. This dollar decrease was attributable, primarily, to the decline in sales volume resulting from operating fewer stores versus last year. As a percent of net sales, cost of sales, buying and occupancy decreased to 72.6% from 73.3% for the same period a year ago. The improved gross margin points were primarily due to a lower level of markdown volume versus the prior year and the favorable impact of lower distribution costs. Selling and administrative expenses for the 13 weeks ended May 29, 1999 increased $0.7 million to $15.2 million versus $14.5 million for the same period in fiscal 1998 and increased as a percentage of net sales from 26.4% to 28.4%. The increase was primarily due to increased labor staffing, higher credit card fees due to increased consumer credit card usage and the installation of a new display program in the stores. As a result of the factors noted above, the Company had an operating loss for the 13 weeks ended May 29, 1999 of $0.5 million versus an operating income of $0.1 million for the same period a year ago, a $0.6 million decrease. Page 11 The operating loss for superstores for the 13 weeks ended May 29, 1999 was $0.5 million versus no operating income for the same period a year ago. There was no operating income for the outlet stores for the 13 weeks ended May 29, 1999 versus an operating income of $0.1 million for the same period a year ago. The decreases in operating profit for the segments were a result of the various factors discussed above. Interest expense net, decreased $0.1 million to $0.7 million for the 13 weeks ended May 29, 1999 versus $0.8 million for the same period in fiscal 1998. The decrease was primarily the result of lower average borrowings and the related cost of borrowing this year. The Company recorded no income tax benefit associated with its losses for the 13 week periods ended May 29, 1999 and May 30, 1998 due to the uncertainty of the Company's future taxable earnings. The estimated effective tax 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 essentially with internally generated funds and its credit facilities. At May 29, 1999, the Company's working capital was $35.8 million, while advances from its Credit Facility were $33.6 million. The Company had $12.4 million available for borrowings under its Credit Facility as determined by the Company's eligible "borrowing base" at May 29, 1999. Cash used in operating activities for the 13 weeks ended May 29, 1999 was $4.8 million. During the 13 week period ended May 29, 1999, inventory increased $6.4 million. In the first quarter of fiscal 1999, the Company conducted going out of business sales at 2 locations, 1 store closed in May 1999 and 1 store closed in June 1999. Cash used in restructuring payments was $0.1 million. Net cash used in investing activities for the 13 weeks ended May 29, 1999 was $0.7 million. These funds were primarily used for capital expenditures for improvements to the Company's management information systems development and existing store refurbishments. Cash provided by financing activities for the 13 weeks ended May 29, 1999 was $5.8 million. The Company had net borrowings of $7.5 million primarily to fund expansion, to meet working capital needs and to repurchase 1,800,000 shares of its outstanding Common Stock in a private transaction for total consideration of $1.9 million. The Company's capital expenditures for the remainder of fiscal 1999 are currently expected to be approximately $4.3 million and will be related primarily to new store development, existing store expansions and refurbishments and improvements to its management information systems. Page 12 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 the end of fiscal 1999. YEAR 2000 The Company has conducted a comprehensive review of its computer systems to identify those systems that could be affected by the "Year 2000" (or "Y2K") issue and has developed an implementation plan to resolve the issue. The Year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. The Year 2000 issue is believed to affect virtually all companies and organizations, including the Company. Any of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. The Company is reliant on computer-based technology and utilizes a variety of proprietary and third-party applications. The Company's retail functions, such as merchandise procurement and distribution, inventory control and point-of-sale transactions, generally use third-party applications, with proprietary additions to fit unique business requirements. Failure in these key areas could impact the Company's ability to transact business in an efficient manner. The Company is also dependent on a number of key vendors using similar technology for ongoing timely and consistent delivery of merchandise to support retail operations. A significant disruption in the flow of key items into stores could also negatively impact results. To a much lesser degree, the Company also relies on certain "imbedded processor" systems for communications, security and other basic process control functions, the complete failure of which could also impact operations. In fiscal 1998, the Company spent approximately $1.4 million for the purpose of installing new merchandise, distribution and financial software. This major effort included complete replacement of the previously used mainframe computer systems and modified third-party software with Y2K-certified hardware and software in fiscal 1998 as well as upgrading all in-store point-of-sale computer systems to be Y2K-compliant. These efforts have been substantially completed with installation and testing of the mainframe systems for merchandising, accounting, distribution and inventory control prior to the end of fiscal 1998. The in-store system upgrades have been completed and were installed in every retail store in the first quarter of fiscal 1999. The Company anticipates spending approximately $0.2 million in fiscal 1999 for additional upgrades to these systems. A compliant third-party provider for payroll has been tested and is awaiting implementation in September 1999. Voice communications have been upgraded to compatible systems in the first quarter of fiscal 1999. Data communications, credit card and check processing and non-critical software packages are currently being completed to assure Y2K compatibility by the third quarter of fiscal 1999. Based upon the compliance levels of the critical software and hardware currently installed or being installed, the Company expects to be fully compliant well in advance of the Page 13 potential for business impact from the Y2K transition. Nonetheless, a formal reassessment based upon integrated simulation of all Company systems will be undertaken in the second quarter of fiscal 1999 to verify readiness. If the modifications and conversions to the Company's computer systems are not completed in a timely manner, the Year 2000 problem may have a material impact on the operations of the Company. Such material impacts could require the Company to manually record sales, issue purchases orders to suppliers, pay invoices from vendors and maintain its books and records for a period of time. Y2K compliance of the Company's key vendors has been assessed through individual surveys completed in fiscal 1998, and will be tested in the first quarter of fiscal 1999 with electronic data interchange transmission of Y2K-specific order and financial information. An assessment of potential problem relationships will be reviewed in the second quarter of fiscal 1999 for further follow-up activity. The Company expects to deal with any remaining "at-risk" systems or supplier issues and develop appropriate contingency plans in the third quarter of fiscal 1999. These contingency plans may include such actions as making alternate supplier arrangements, rescheduling deliveries, or utilizing alternate methods of operation during this critical period. Notwithstanding that the Company has been proceeding diligently with the implementation of its own compliance program, including aspects thereof directed to ascertaining Year 2000 compliance by third-parties, there can be no assurance that the Company's operations will not experience disruptions due to the failure of third parties (including software, data processing, and other vendors) with which the Company has commercial relationships to become fully Year 2000 compliant in a timely manner. In the worst case, the Company may experience extensive delays in merchandise shipments from suppliers and therefore experience high levels of out-of-stock goods in its stores. Such out-of stock scenarios could have a material impact on sales and related profits for an unspecified period of time and accordingly, cause an adverse change in the Company's stock price to occur. SEASONALITY AND QUARTERLY RESULTS 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 fiscal quarters from period to period. Page 14 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 February 27, 1999. ITEM 3. 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 2.50% per annum (8.0% and 7.4% at May 29, 1999, 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 15 PART II. OTHER INFORMATION - ----------------------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: The exhibits on the accompanying Index to Exhibits are filed as part of, or incorporated by reference into, this report. Exhibit No. Description - ----------- ----------- 27 Financial Data Schedule b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company during the quarter ended May 29, 1999. Page 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated: July 8, 1998 STROUDS, INC. (Registrant) /s/ Charles Chinni --------------------- Charles Chinni President and Chief Executive Officer (Principal Executive Officer) /s/ Gary A. Van Wagner ------------------------ Gary A. Van Wagner Corporate Controller (Principal Accounting Officer) Page 17 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED BALANCE SHEETS AND STATEMENTS OF OPERATIONS FOUND ON PAGES 3 AND 4 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS FEB-26-2000 FEB-28-1999 MAY-29-1999 592 0 2,162 0 67,281 71,417 53,225 32,487 100,290 35,577 0 0 0 1 27,044 100,290 53,605 53,605 38,878 38,878 15,255 0 684 (1,182) 0 (1,182) 0 0 0 (1,182) (0.15) (0.15)
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