-----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, MJI2BpEWCPD0tEovp29wCTsdmzGWGHPK5kSCFoV65dMkxb/PDd8Wq8yUOH+HyLxg oxGPTacP9Tgs3rbYCOuAHQ== 0000927760-99-000012.txt : 19991018 0000927760-99-000012.hdr.sgml : 19991018 ACCESSION NUMBER: 0000927760-99-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990828 FILED AS OF DATE: 19991012 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: 99726074 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 October 12, 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 August 28, 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 October 6, 1999: 7,080,500 STROUDS, INC. INDEX Page No. -------- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS: Condensed Balance Sheets as of August 28, 1999 (Unaudited) and February 27, 1999 3 Condensed Statements of Operations for the Thirteen and Twenty-Six Weeks Ended August 28, 1999 and August 29, 1998 (Unaudited) 4 Condensed Statements of Cash Flows for the Twenty-Six Weeks Ended August 28, 1999 and August 29, 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 16 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17 SIGNATURES 18 Page 2 PART I. FINANCIAL INFORMATION - --------------------------------- ITEM 1. FINANCIAL STATEMENTS STROUDS, INC. CONDENSED BALANCE SHEETS AUGUST 28, FEBRUARY 27, (in thousands, except share data) 1999 1999 - --------------------------------- -------- -------- ASSETS (Unaudited) Current assets: Cash $ 1,001 $ 269 Accounts receivable 1,433 1,763 Inventory 56,330 60,632 Other 4,508 3,993 -------- -------- Total current assets 63,272 66,657 Property and equipment - at cost, net of accumulated depreciation and amortization 19,977 21,354 Excess of cost over net assets acquired, net of accumulated amortization 7,144 7,273 Other assets 974 959 -------- -------- Total assets $ 91,367 $ 96,243 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt $ 597 $ 624 Accounts payable 7,927 15,565 Accrued expenses 12,051 16,027 Restructuring and store closure reserves 2,388 3,829 -------- -------- Total current liabilities 22,963 36,045 Long-term debt 38,129 26,887 Other non-current liabilities 3,163 3,194 -------- -------- Total liabilities 64,255 66,126 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 August 28, 1999, 7,064,520; and February 27, 1999, 8,624,131 shares 1 1 Treasury stock at cost; August 28, 1999, 1,800,000 shares (1,890) -- Additional paid-in capital 39,182 39,146 Accumulated deficit (10,181) (9,030) -------- -------- Total stockholders' equity 27,112 30,117 -------- -------- Total liabilities and stockholders' equity $ 91,367 $ 96,243 ======== ======== See accompanying notes to condensed financial statements. Page 3 STROUDS, INC. CONDENSED STATEMENTS OF OPERATIONS (in thousands, except share data) (Unaudited)
13 WEEKS ENDED 26 WEEKS ENDED ---------------------- ---------------------- August 28, August 29, August 28, August 29, 1999 1998 1999 1998 --------- --------- --------- --------- Net sales $ 53,399 $ 54,190 $107,004 $109,205 Costs and expenses: Cost of sales, buying and occupancy 37,734 39,190 76,612 79,527 Selling and administrative expenses 14,854 14,578 30,044 29,085 Amortization of excess of cost over net assets acquired 64 64 129 129 --------- --------- --------- --------- 52,652 53,832 106,785 108,741 --------- --------- --------- --------- Operating income 747 358 219 464 Other income 151 65 181 125 Interest expense, net (867) (789) (1,551) (1,551) --------- --------- --------- --------- Net income (loss) $ 31 $ (366) $ (1,151) $ (962) ========= ========= ========= ========= Basic and Diluted: Net income (loss) per share $ 0.00 $ (0.04) $ (0.16) $ (0.11) ========= ========= ========= ========= Weighted average shares outstanding 7,055 8,593 7,395 8,586 ========= ========= ========= ========= See accompanying notes to condensed financial statements.
Page 4 STROUDS, INC. CONDENSED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) 26 WEEKS ENDED --------------------- AUGUST 28, AUGUST 29, 1999 1998 --------- --------- Cash flows from operating activities: Net loss $ (1,151) $ (962) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization of property and equipment 2,600 2,340 Amortization of excess of cost over net assets acquired 129 129 (Increase) decrease in assets: Accounts receivable 330 (326) Merchandise inventory 4,002 3,276 (Decrease) increase in accounts payable and accrued expenses (7,244) 959 Decrease in restructuring reserve (970) (4,566) Other (559) 306 --------- --------- Net cash provided by (used in) operating activities (2,863) 1,156 --------- --------- Cash flows from investing activities: Capital expenditures (1,684) (2,684) --------- --------- Net cash used in investing activities (1,684) (2,684) --------- --------- Cash flows from financing activities: Net borrowings under long-term debt 11,215 981 (Increase) decrease in overdraft (4,082) 808 Repurchase of stock (1,890) --- Other equity transactions 36 32 --------- --------- Net cash provided by financing activities 5,279 1,821 --------- --------- Net increase in cash 732 293 Cash at beginning of period 269 518 --------- --------- Cash at end of period $ 1,001 $ 811 ========= ========= Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 1,398 $ 1,596 ========= ========= 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 August 28, 1999 and the related Condensed Statements of Operations for the 13 and 26 weeks ended August 28, 1999 and August 29, 1998 and Condensed Statements of Cash Flows for the 26 weeks ended August 28, 1999 and August 29, 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/A. 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/A. The results of operations for the 13 and 26 weeks ended August 28, 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. Reclassifications Certain reclassifications have been made to the February 27, 1999 and August 29, 1998 amounts to conform to the August 28, 1999 presentation. Page 6 STROUDS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) (3) PROPERTY AND EQUIPMENT Property and equipment is summarized as follows: AUGUST 28, FEBRUARY 27, (in thousands) 1999 1999 - -------------- --------- --------- Furniture, fixtures and equipment $ 44,369 $ 44,351 Leasehold improvements 8,356 8,205 --------- --------- 52,725 52,556 Accumulated depreciation and amortization (32,748) (31,202) --------- --------- $ 19,977 $ 21,354 ========= ========= (4) RESTRUCTURING The Company initiated a comprehensive restructuring and cost reduction plan (the "Restructuring Plan"), resulting in pretax restructuring and asset impairment charges of $16,250,000 in fiscal 1996 ($3.2 million related to write-downs of merchandise inventory was included in cost of sales). The write-down of merchandise inventory was based on management's estimate of markdowns necessary to liquidate underperforming merchandise categories. In determining the restructuring charge for impairment, the Company evaluated the fair market value of the impaired assets based on historical experience of the liquidation value of such assets. The Restructuring Plan 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 with unexpired leases at dates of anticipated closure. 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 August 28, 1999, no changes have been made to the estimated Restructuring Plan costs and no additional charges were recorded to operations. During the first half of fiscal 1999, cash used related to the Restructuring Plan totaled $432,000, relating primarily to workforce reductions and consulting and advisory fees associated with the Company's restructuring and cost reduction efforts. The Company anticipates the closure of the final store, and therefore, its Restructuring Plan by the end of its third quarter. Page 7 STROUDS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) (4) RESTRUCTURING (Continued) The following table summarizes the original restructuring charge: (in thousands) - --------------------------------------- Occupancy, lease termination and other costs related to store closures $ 7,375 Asset write-down 4,015 Merchandise inventory reserves 3,200 Employee severance and related costs 1,660 --------- $ 16,250 ========= The asset write-downs have been recorded as a permanent reduction in the cost basis of the related assets. The merchandise inventory write-down has been recorded as a reserve against inventories and the employee severance has been recorded in accrued expenses in the accompanying balance sheet. The components of the changes in the occupancy and lease costs is as follows: (in thousands) - ----------------------------------------- 1996 Provision, March 1, 1997 $ 7,375 Fiscal 1997 payment and asset write-downs 2,176 --------- Reserve balance, February 28, 1998 5,199 Fiscal 1998 payment and asset write-downs 703 Adjustment ** (667) --------- Reserve balance, February 27, 1999 3,829 Fiscal 1999 payment and asset write-downs through August 28, 1999 268 Adjustment ** (1,173) --------- Reserve balance, August 28, 1999 $ 2,388 ========= ** The adjustments made to the reserve result from a periodic reassessment of the Company's position with respect to its outstanding retail store leases. The reductions in the reserve have been reflected in the statement of operations during the period in which the adjustments were recorded. Also, during fiscal 1998 and during the second quarter of fiscal 1999, the Company recorded increases to its merchandise inventory reserves related to the retail stores included in the Restructuring Plan of $780,000 and $1,353,000, respectively. These charges were recorded in cost of sales during the respective periods. Page 8 STROUDS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) (4) RESTRUCTURING (Continued) 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 =========== =========== ========= (5) LONG-TERM DEBT At August 28, 1999, the Company had outstanding borrowings of $37,352,000 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 August 28, 1999. Included in the Credit Facility is a $7,000,000 letter of credit sub-facility. As of August 28, 1999, the Company had outstanding letters of credit amounting to $1,758,000 for purchase commitments to foreign suppliers under this sub- facility. On September 11, 1998, the Company entered into an Interest Rate Swap Agreement (the "Agreement") with a financial institution. The Agreement was entered into for the purpose of converting a portion of its borrowing to a long-term fixed base rate of interest. The Company converted $10,000,000 to a weighted average fixed base interest rate of 6.0% plus 2.5% until this Agreement expires on March 1, 2001. The Company has accounted for this hybrid derivative instrument at fair value. As of August 28, 1999, the fair value of the agreement was $38,000 and is recorded as a component of other assets on the accompanying balance sheet. (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 net sales and earnings (losses) from operations. Interest income and expense is evaluated on an aggregate basis and not allocated to the Company's business segments. Page 9 STROUDS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) (6) SEGMENT INFORMATION (Continued) Segment information is summarized as follows: 13 WEEKS ENDED 26 WEEKS ENDED ----------------------- ----------------------- August 28, August 29, August 28, August 29, IN THOUSANDS 1999 1998 1999 1998 - ----------------------- ----------- ---------- ----------- ----------- Net sales: Superstores $ 44,437 $ 45,500 $ 89,126 $ 91,590 Outlet stores 8,962 8,690 17,878 17,615 ---------- ---------- ---------- ---------- $ 53,399 $ 54,190 $ 107,004 $ 109,205 ========== ========== ========== ========== Operating income: Superstores $ 690 $ 342 $ 101 $ 263 Outlet stores 57 16 118 201 ---------- ---------- ---------- ---------- $ 747 $ 358 $ 219 $ 464 ========== ========== ========== ========== August 28, February 27, IN THOUSANDS 1999 1998 - ------------------------------- ----------- ----------- Total assets: Superstores $ 62,201 $ 65,515 Outlet stores 7,611 7,330 Other (1) 21,555 23,398 ---------- ---------- $ 91,367 $ 96,243 ========== ========== - ----------------------------------------------------------------------------- (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 ended February 27, 1999 is referred to as fiscal 1998). Page 10 Restructuring The Company initiated a comprehensive restructuring and cost reduction plan (the "Restructuring Plan"), resulting in pretax restructuring and asset impairment charges of $16,250,000 in fiscal 1996 ($3.2 million related to write-downs of merchandise inventory was included in cost of sales). The write-down of merchandise inventory was based on management's estimate of markdowns necessary to liquidate underperforming merchandise categories. In determining the restructuring charge for impairment, the Company evaluated the fair market value of the impaired assets based on historical experience of the liquidation value of such assets. The Restructuring Plan 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 with unexpired leases at dates of anticipated closure. 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 August 28, 1999, no changes have been made to the estimated Restructuring Plan costs and no additional charges were recorded to operations. The Company anticipates the closure of the final store, and therefore, its Restructuring Plan by the end of its third quarter. RESULTS OF OPERATIONS 13 Weeks Ended August 28, 1999 Compared to the 13 Weeks Ended August 29, 1998 - ----------------------------------------------------------------------------- Net sales for the thirteen weeks ended August 28, 1999 decreased $0.8 million, or 1.5%, to $53.4 million versus $54.2 million in the same period last year. Comparable store sales decreased $0.5 million, or 1.1%, for the period. Sales from new stores and expanded or replacement stores increased by $1.1 million. Sales were reduced by $1.4 million due to 4 store closures. Net sales for superstores for the 13 weeks ended August 28, 1999 decreased $1.1 million, or 2.3%, to $44.4 million versus $45.5 million in the same period last year. Comparable superstore sales decreased $0.8 million, or 1.9%, for the period. Outlet store net sales for the 13 weeks ended August 28, 1999 increased $0.3 million, or 3.2%, to $9.0 million versus $8.7 million in the same period last year. Comparable outlet store sales increased $0.3 million, or 3.2%, for the period. Management believes that the decrease in superstore sales is attributable to the fact that there were no intense promotional sales for inventory liquidation this year as there were last year for the closure of two superstores and to eliminate underperforming merchandise categories as stated in the Company's Restructuring Plan. Approximately 18% of the comparable stores were affected by new competitive openings for the second quarter of 1999 compared to approximately 13% for the same period last year. Cost of sales, buying and occupancy for the 13 weeks ended August 28, 1999 were $37.7 million versus $39.2 million for the same period a year ago, a $1.5 million decrease. This dollar decrease was attributable, primarily, to the decline in sales volume versus last year. As a percent of net sales, cost of sales, buying and occupancy decreased to 70.7% from 72.3% for the same period Page 11 a year ago. The improved gross margin points were primarily due to a lower level of markdown volume versus the prior year when large markdowns were taken to liquidate inventory of two stores for closure and to eliminate underperforming merchandise categories as stated in the Company's Restructuring Plan. Selling and administrative expenses for the 13 weeks ended August 28, 1999 increased $0.3 million to $14.9 million versus $14.6 million for the same period in fiscal 1998 and increased as a percentage of net sales from 26.9% to 27.8%. The increase was primarily due to increased labor staffing and higher credit card fees due to increased consumer credit card usage. As a result of the factors noted above, the Company had operating income for the 13 weeks ended August 28, 1999 of $0.7 million versus $0.4 million for the same period a year ago, a $0.3 million increase. The operating income for superstores for the 13 weeks ended August 28, 1999 was $0.7 million versus $0.3 million for the same period a year ago. The operating income for the outlet stores for the 13 weeks ended August 28, 1999 was $0.1 million versus $0.0 million for the same period a year ago. The increases in operating profit for the segments were a result of the various factors discussed above. Interest expense, net, increased $0.1 million to $0.9 million for the 13 weeks ended August 28, 1999 versus $0.8 million for the same period in fiscal 1998. The increase was primarily the result of slightly higher average borrowings this year. The Company recorded no income tax expense associated with its income for the 13 week period ended August 28, 1999 or income tax benefit associated with its loss for the 13 week period ended August 29, 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. 26 Weeks Ended August 28, 1999 Compared to the 26 Weeks Ended August 29, 1998 - ----------------------------------------------------------------------------- Net sales for the 26 weeks ended August 28, 1999 decreased $2.2 million, or 2.0%, to $107.0 million versus $109.2 million in the same period last year. Comparable store sales decreased $0.8 million, or 0.7%, for the period. Sales from new stores and expanded or replacement stores increased by $2.4 million. Sales were reduced by $3.8 million due to 4 store closures. Net sales for superstores for the 26 weeks ended August 28, 1999 decreased $2.5 million, or 2.7%, to $89.1 million versus $91.6 million in the same period last year. Comparable superstore sales decreased $0.8 million, or 0.9%, for the period. Outlet store net sales for the 26 weeks ended August 28, 1999 increased $0.3 million, or 1.5%, to $17.9 million versus $17.6 million in the same period last year. Comparable outlet store sales remained the same for the 26 weeks ended August 28, 1999 as for the period ended August 29, 1998. Management believes that the decrease in superstore sales is attributable to the fact that there were no intense promotional sales for inventory liquidation this year as there were last year for the closure of two superstores and to eliminate underperforming merchandise categories as stated in the Company's Restructuring Plan. The increase in outlet store sales was due to one more store at the end of August 28, 1999 over the same period last year. Page 12 Cost of sales, buying and occupancy for the 26 weeks ended August 28, 1999 were $76.6 million versus $79.5 million for the same period a year ago, a $2.9 million decrease. This dollar decrease was attributable, primarily, to the decline in sales volume versus last year. As a percent of net sales, cost of sales, buying and occupancy decreased to 71.6% from 72.8% 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 when large markdowns were taken to liquidate inventory of two stores for closure and to eliminate underperforming merchandise categories as stated in the Company's Restructuring Plan. Selling and administrative expenses for the 26 weeks ended August 28, 1999 increased $0.9 million to $30.0 million versus $29.1 million for the same period in fiscal 1998 and increased as a percentage of net sales from 26.6% to 28.1%. The increase was primarily due to increased labor staffing and higher credit card fees due to increased consumer credit card usage. The Company had operating income for the 26 weeks ended August 28, 1999 of $0.2 million versus $0.5 million for the same period a year ago, a $0.3 million decrease, as a result of the factors noted above. The operating income for superstores for the 26 weeks ended August 28, 1999 was $0.1 million versus $0.3 million for the same period a year ago. The operating income for the outlet stores for the 26 weeks ended August 28, 1999 was $0.1 million versus $0.2 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, remained the same at $1.6 million for the 26 weeks ended August 28, 1999 and August 29, 1998. The Company recorded no income tax benefit associated with its losses for the 26 week periods ended August 28, 1999 and August 29, 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 August 28, 1999, the Company's working capital was $40.3 million, while advances from its Credit Facility were $37.4 million. The Company had $7.4 million available for borrowings under its Credit Facility as determined by the Company's eligible "borrowing base" at August 28, 1999. Cash used in operating activities for the 26 weeks ended August 28, 1999 was $2.9 million. During the 26 week period ended August 28, 1999, accounts payable and accrued expenses decreased $7.2 million. In the first half 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 $0.4 million. Net cash used in investing activities for the 26 weeks ended August 28, 1999 was $1.7 million. These funds were primarily used for capital expenditures for improvements to the Company's management information systems development, 1 new superstore in southern California and existing store refurbishments. Page 13 Cash provided by financing activities for the 26 weeks ended August 28, 1999 was $5.3 million. The Company had net borrowings of $11.2 million primarily 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 $3.3 million and will be related primarily to new store development, existing store expansions and refurbishments and improvements to its management information systems. Management believes that funds generated from operations, its Credit Facility and use of trade credit will be sufficient to satisfy the Company's working capital requirements and commitments for capital expenditures through 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 software will be implemented in October 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 were tested to assure Y2K compatibility in the second quarter of fiscal 1999. The Company has successfully completed an integrated test of all critical internal systems in September 1999. Based upon this Page 14 simulation, all business areas confirmed readiness to transact business through the Year 2000 transition. However, if the modifications to the Company's computer systems should fail in the last hours, 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. By September 1999, the majority of the Company's key vendors' electronic data interchange systems have been converted to be Y2K compliant. Testing of the final few vendors for compliance will be completed by December 1999. 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. 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/A for the Fiscal Year Ended February 27, 1999. Page 15 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 (8.3% and 7.6% at August 28, 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. All of the Company's net sales 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 16 PART II. OTHER INFORMATION - ----------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Company's Annual Meeting of Stockholders held on June 30, 1999, the following individuals were elected to the Board of Directors: Votes For Votes Against --------- ------------- Charles R. Chinni 5,303,450 585,722 Wilfred C. Stroud 5,303,493 585,679 Larry R. Bemis 5,303,493 585,679 Dale D. Achabal 5,303,224 585,948 Marco F. Weiss 5,296,812 592,360 Richard F. Clayton 5,303,493 585,679 Marshall S. Geller 5,303,493 585,679 The following proposal was approved at the Company's Annual Meeting: Votes For Votes Against Votes Abstain --------- ------------- ------------- Ratify the appointment of KPMG LLP as the Company's independent public accountants for the fiscal year ending on February 26, 2000. 5,303,388 5,905 544,679 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits: The following exhibits are filed as part of, or incorporated by reference into, this report. Exhibit No. Description - ----------- ----------- 10 Fourth Amendment to the Amended and Restated 1994 Equity Participation Plan dated June 30, 1999. 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 August 28, 1999. Page 17 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: October 6, 1999 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 18 EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED BALANCE SHEETS AND STATEMENTS OF OPERATIONS FROM THE COMPANY'S FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS 6-MOS FEB-26-2000 FEB-26-2000 MAY-30-1999 FEB-28-1999 AUG-28-1999 AUG-28-1999 1,001 1,001 0 0 1,433 1,433 0 0 56,330 56,330 63,272 63,272 52,725 52,725 32,748 32,748 91,367 91,367 22,963 22,963 0 0 0 0 0 0 1 1 27,111 27,111 91,367 91,367 53,399 107,004 53,399 107,004 37,734 76,612 37,734 76,612 14,918 30,173 0 0 867 1,551 31 (1,151) 0 0 31 (1,151) 0 0 0 0 0 0 31 (1,151) 0.00 (0.16) 0.00 (0.16)
EX-10 3 FOURTH AMENDMENT TO THE AMENDED AND RESTATED 1994 EQUITY PARTICIPATION PLAN OF STROUDS, INC. This Fourth Amendment to the Amended and Restated 1994 Equity Participation Plan of Strouds, Inc. is adopted as of June 30, 1999 by the Board of Directors (the "Board') of Strouds, Inc., a Delaware corporation (the "Company"). RECITALS WHEREAS, the Company maintains the Amended and Restated 1994 Equity Participation Plan of the Company, effective as of September 1, 1994, (hereinafter the "Plan"); and WHEREAS, pursuant to Section 10.2 of the Plan, the Board may amend the Plan from time to time; NOW THEREFORE, BE IT RESOLVED, that the Plan be amended as follows, effective June 30, 1999: 1. Section 3.4(d) shall be amended and restated in its entirety as follows: (d) During the term of the Plan, each person who is an Independent Director as of the date of the initial public offering of Common Stock automatically shall be granted an option to purchase ten thousand (10,000) shares of Common Stock (subject to adjustment as provided in Section 10.3) on the date of such initial public offering. When a person is initially elected to the Board following the date of the initial public offering of Common Stock and is then an Independent Director, each such new Independent Director automatically shall (i) be granted an Option to purchase ten thousand (10,000) shares of Common Stock (subject to adjustment as provided in Section 10.3) on the date of his or her election to the Board, and (ii) an Option to purchase 10,000 shares of Common Stock (subject to adjustment as provided in Section 10.3) on the date of each annual meeting of stockholders after such initial election at which the Independent Director is re-elected to the Board. Members of the Board who are Employees who subsequently retire from the Company and remain on the Board will not receive an Option grant pursuant to Section 3.4(d) (i) of the preceding sentence, but to the extent that they are otherwise eligible, will receive, after retirement from the Company, Options as described in clause (ii) of the preceding sentence. All of the foregoing Option grants authorized by this Section 3.4(d) are subject to stockholder approval of the Plan. 2. Section 10.2 shall be amended by deleting the third sentence of the paragraph. I hereby certify that the foregoing Fourth Amendment to the Plan was duly adopted by the Board of Directors of Strouds, Inc. on June 30, 1999. By /s/Linda McNamara ----------------- Linda McNamara ASSISTANT SECRETARY -----END PRIVACY-ENHANCED MESSAGE-----