SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the quarterly period ended March 4, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-8252
FREDERICK'S OF HOLLYWOOD, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-2666265
(State or other jurisdiction of (IRS Employers Identification No.)
incorporation or organization)
6608 Hollywood Boulevard
Los Angeles, California 90028
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (213) 466-5151
Former name, former address and former fiscal year, if change since last
report: Not Applicable.
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 _____.
Indicate the number of shares outstanding for each of the registrant's
classes of Common stock, as of the latest practicable date. 2,955,309
shares of Class A Capital Stock ($1 par value) and 5,903,118 shares of
Class B Capital Stock ($1 par value) at March 23, 1995.
FREDERICK'S OF HOLLYWOOD, INC. AND SUBSIDIARIES
INDEX
Page No.
Title Page 1
Index 2
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated condensed balance sheets-
March 4, 1995 and September 3, 1994 3
Consolidated condensed statements of
income - Three and six months ended
March 4, 1995 and February 26, 1994 4
Consolidated condensed statements of
cash flows - Six months ended
March 4, 1995 and February 26, 1994 5
Notes to consolidated condensed
financial statements 6-8
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations 9-12
PART II - OTHER INFORMATION 13
SIGNATURES 14
FREDERICK'S OF HOLLYWOOD, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED) (IN THOUSANDS)
<TABLE>
ASSETS
March 4, September 3,
1995 1994
<S> <C> <C>
Current assets:
Cash and equivalents $ 13,427 $ 10,556
Accounts receivable 522 528
Income taxes receivable -- 881
Merchandise inventories 17,101 18,097
Deferred income taxes 953 1,630
Prepaid expenses 4,434 3,795
Total current assets 36,437 35,487
Property and equipment, net 18,584 19,892
Other assets 39 38
$ 55,060 $ 55,417
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,290 $ 11,225
Current portion:
Capital lease obligations 285 434
ESOP loan guarantee 234 240
Accrued payroll 478 619
Accrued insurance 755 755
Provision for store closing 1,063 2,791
Income taxes payable 498 --
Other accrued expenses 390 354
Total current liabilities 12,993 16,418
Capital lease obligations 143 267
ESOP loan guarantee 720 720
Deferred rent 611 511
Deferred income taxes 3,088 3,088
Stockholders' equity:
Capital stock $1 par value 8,858 8,858
Additional paid-in capital 751 785
Unearned ESOP shares (830) (960)
Retained earnings 28,726 25,730
Total stockholders' equity 37,505 34,413
$ 55,060 $ 55,417
</TABLE>
See accompanying notes to the consolidated financial statements.
FREDERICK'S OF HOLLYWOOD, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(In thousands, except per share data - UNAUDITED)
<TABLE>
Three Months Ended Six Months Ended
March 4, February March 4, February
1995 26,1994 1995 26, 1994
<S> <C> <C> <C> <C>
Net sales $41,427 38,962 $77,475 70,456
Cost of goods sold,
buying and occupancy costs 23,574 21,467 44,083 39,395
Gross profit 17,853 17,495 33,392 31,061
Selling, general and
administrative expenses 14,217 13,714 28,027 26,837
Operating profit 3,636 3,781 5,365 4,224
Other income and
(expense), net 98 (166) 126 (293)
Earnings before income taxes 3,734 3,615 5,491 3,931
Income taxes 1,550 1,500 2,279 1,631
Earnings before cumulative
effect of a change in
accounting principle 2,184 2,115 3,212 2,300
Cumulative effect of a change in
accounting principle -- -- -- 120
Net earnings $ 2,184 2,115 $ 3,212 2,420
Earnings per share before
cumulative effect of a change
in accounting principle
Primary -
Class A & Class B $ .25 .24 $ .37 .26
Fully diluted -
Class A & Class B .25 .24 .37 .26
Per share cumulative effect
of change in accounting
principle:
Primary -
Class A & Class B $ -- -- $ -- .01
Fully diluted -
Class A & Class B -- -- -- .01
Earnings per share
Primary -
Class A & Class B $ .25 .24 $ .37 .27
Fully diluted -
Class A & Class B .25 .24 .37 .27
Weighted average shares
outstanding
Primary - Class A & Class B 8,631 8,880 8,631 8,890
Fully diluted -
Class A & Class B 8,637 8,880 8,637 8,889
Cash dividend per share -
Class A & Class B $ -- -- $ .025 .025
</TABLE>
See accompanying notes to the consolidated financial statements.
FREDERICK'S OF HOLLYWOOD, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED) (IN THOUSANDS)
<TABLE>
Six Months Ended
March 4, February
1995 26, 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings $ 3,212 $ 2,420
Adjustments to reconcile net income to
net cash provided by operating activities:
Cumulative effect of change in
accounting principle -- (120)
Provision of store closings (1,728) --
Depreciation and amortization 2,058 2,052
ESOP compensation 97 --
Loss on sale of fixed assets 629 132
Changes in assets and liabilities
Accounts receivable 6 (140)
Income tax receivable 881 --
Merchandise inventories 996 415
Prepaid expenses (639) (298)
Other assets (1) 1
Accounts payable and accrued expenses (2,040) (605)
Deferred rent 100 104
Deferred income taxes 677 --
Income tax payable 498 1,075
NET CASH PROVIDED BY OPERATING ACTIVITIES 4,746 5,036
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets 10 1
Capital expenditures (1,389) (1,502)
NET CASH USED FOR INVESTING ACTIVITIES (1,379) (1,501)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capital lease obligations (273) (246)
Payment of dividends (216) (221)
Payment of dividends on unearned ESOP shares (6) --
Proceeds from exercise of stock options -- 94
Stock split (1) (5)
NET CASH USED FOR FINANCING ACTIVITIES (496) (378)
Net increase in cash and cash equivalents 2,871 3,157
Cash and cash equivalents at beginning
of year 10,556 7,136
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 13,427 $ 10,293
Supplemental cash flow disclosures:
Interest paid $ 31 $ 58
Income taxes paid $ 672 $ 557
</TABLE>
See accompanying notes to the consolidated financial statements.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
TWENTY-SIX WEEKS ENDED
March 4, 1995 and February 26, 1994
NOTE 1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying unaudited
consolidated condensed financial statements contain all
adjustments, consisting of only normal recurring adjustments,
necessary to present fairly the financial position as of March 4,
1995 and September 3, 1994, and the results of operations and
cash flows for the six months ended March 4, 1995 and February
26, 1994.
These financial statements should be read in conjunction with the
Company's 1994 annual report on Form 10-K.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
In February 1992, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes. Statement 109 required a change from the
deferred method accounting for income taxes of APB Opinion 11 to
the asset and liability method of accounting for income taxes.
Under the asset and liability method of Statement 109, deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the
enactment date.
Effective August 29, 1993, the Company adopted Statement 109 and
has reported the cumulative effect of that change in the method
of accounting for income taxes in the 1994 consolidated statement
of operations.
Pursuant to the deferred method under APB Opinion 11, which was
applied in 1993 and prior years, deferred income taxes are
recognized for income and expense items that are reported in
different years for financial reporting purposes and income tax
purposes using the tax rate applicable for the years of the
calculation. Under the deferred method, deferred taxes are not
adjusted for subsequent changes in tax rates.
NOTE 3. EARNINGS PER SHARE
Earnings per share calculations are based on the weighted average
number of shares of both Class A and Class B capital stock
outstanding during each period plus capital stock equivalents.
Capital stock equivalents reflect the assumed exercise of
dilutive employees' stock options less the number of treasury
shares assumed to be purchased from the proceeds using the
average market price or, for fully diluted earnings per share,
the greater of the average market price or period end market
price of the Company's common stock. ESOP shares that have not
been committed to be released are not considered outstanding (See
Note 5).
<TABLE>
Three Months Ended Six Months Ended
(In thousands March 4, Feb. 26, March 4, Feb. 26,
except per share data) 1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net earnings $2,184 2,115 3,212 2,420
Common and common
equivalent shares:
Weighted average
Primary 8,858 8,059 8,858 8,854
Fully diluted 8,858 8,059 8,858 8,854
Dilutive effect of
stock options
Primary -- 21 -- 36
Fully diluted 6 21 6 35
Unallocated ESOP shares (227) -- (227) --
Weighted average used to
calculate earnings per share
Primary 8,631 8,880 8,631 8,890
Fully diluted 8,637 8,880 8,637 8,889
Earnings per share before
cumulative effect of a change
in accounting principle
Primary .25 .24 .37 .26
Fully diluted .25 .24 .37 .26
Per share cumulative effect of
change in accounting
principle
Primar -- -- -- .01
Fully diluted -- -- -- .01
Earnings per common
and equivalent share
Primary .25 .24 .37 .27
Fully diluted .25 .24 .37 .27
</TABLE>
NOTE 4. PROVISION FOR STORE CLOSING
In the fourth quarter of Fiscal 1994, the Company recorded a
provision for closing twelve stores and the write down of certain
display fixtures of $3,442,000. The provision reflects
anticipated costs associated with lease buyouts of $1,703,000,
the non-recoverable investment in property, equipment and
inventory of $1,651,000, and other expenses directly related to
the store closings of $88,000. During the six months ended March
4, 1995, $1,728,000 was charged to the provision.
NOTE 5. EMPLOYEE STOCK OWNERSHIP PLAN
Effective September 4, 1994, the Company adopted Statement of Position
(SOP) 93-6 (Employers' Accounting for Employee Stock Ownership Plans).
Under SOP 93-6 the debt of the ESOP is recorded as debt of the Company
and the shares pledged as collateral are reported as unearned ESOP
shares in the statement of financial position. As shares are released
from collateral, the company reports compensation expense equal to the
current market price of the shares, and the shares become outstanding
for earnings-per-share computations. Dividends on allocated ESOP shares
are recorded as a reduction of retained earnings; dividends on
unallocated ESOP shares are recorded as a reduction of debt and the ESOP
loan guarantee. ESOP compensation expense was $97,000 for the six
months ended March 4, 1995. The ESOP shares as of March 4, 1995 were as
follows:
Allocated shares 130,000
Shares released for allocation 31,000
Unreleased shares 196,000
Total ESOP shares 357,000
Fair value of unreleased
shares as of March 4, 1995 $687,000
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The most significant changes in the Company's balance sheet from
September 3, 1994, the end of the preceding fiscal year, to March
4, 1995 are as follows:
Cash and cash equivalents increased $2,871,000 to $13,427,000
at March 4, 1995 from $10,556,000 at September 3, 1994.
The Company had working capital of $23,444,000 at March 4,
1995 and net cash provided by operating activities of
$4,746,000 for the six months ended March 4, 1995.
The decrease in income taxes receivable from $881,000 at
September 3, 1994 to zero at March 4, 1995 is due to the
receivable being applied to the Company's current year's taxes
due.
Inventory decreased $996,000 to $17,101,000 from $18,097,000.
Inventory levels generally decrease after the holiday and
Valentine's Day selling periods. The Company continues to
closely monitor its inventories and believes its inventory
position is substantially on plan relative to the anticipated
sales.
Prepaid expenses increased $639,000. The increase is mainly
attributed to the timing differences of catalog mailings.
The accounts payable decrease of $1,935,000 is mainly
attributable to the offsetting factors of increased customer
deposits ($639,000), increased sales tax payable ($91,000),
and decreased trade payables ($2,557,000). These fluctuations
are caused by the timing of the required accounting entries as
they relate to two different points in time; the end of the
fiscal year, and the end of the second quarter; as well as the
difference caused by the timing of the required accruals and
the corresponding payments.
Accrued payroll decreased $141,000. This fluctuation
(decrease) is attributable to the difference in the length of
time between the end of the pay period (accrual of estimated
payroll) and the payment of that payroll as it relates to two
different points in time; the end of the fiscal year and the
end of the second quarter.
The increase in other accrued expenses was $36,000. The
difference is caused by the timing of the required accruals
and the corresponding payments.
RESULTS OF OPERATIONS
The following table summarizes the Company's net sales and
operating profit by business segment for the three and six month
periods ending March 4, 1995 and February 26, 1994:
<TABLE>
Net Sales
Three Months Six Months
(In Thousands) 1995 1994 1995 1994
<S> <C> <C> <C> <C>
Retail Stores $24,492 $23,517 $43,215 $39,590
Mail Order 16,935 15,445 34,260 30,866
Total $41,427 $38,962 $77,475 $70,456
******************************************************************
Operating Profit
1995 1994 1995 1994
Retail Stores $2,972 $3,406 $2,664 $2,189
Mail Order 664 375 2,701 2,035
Total $3,636 $3,781 $5,365 $4,224
</TABLE>
The results of the interim period are not necessarily indicative
of results for the entire year.
Net sales increased $2,465,000 (6.3%) for the three months and
$7,019,000 (10.0%) for the six months ended March 4, 1995 as compared
with the prior year. The factors contributing to the increase in each
segment were as follows:
Retail store sales volume increased $975,000 (4.1%) and
$3,625,000 (9.2%) for the three and six months ended March 4,
1995 as compared with the similar periods last year.
Comparable store sales volume increased 5.8% and 8.2% for the
three and six months ended March 4, 1995. Two stores were
opened and eight were closed during the quarter for a total of
202 stores in 39 states.
The increase in retail store sales volume is due to the
response to our value pricing program, implemented late in
fiscal 1994. Despite the overall increase in retail store
sales, the operating profits for the second quarter were
negatively impacted by a decrease in sales volume of
approximately $600,000 in our Valentine's Day men's business
due to the planned discontinuation of men's mainstream
merchandise.
Mail Order sales volume increased $1,490,000 (9.6%) and
$3,394,000 (11.0%) for the three and six months ended March 4,
1995 as compared with the similar periods last year. The gain
is attributable to an increase in the number of catalogs
distributed as well as an increase in catalog productivity.
Gross profit amounted to $17,853,000 (43.1% of sales) and
$33,392,000 (43.1% of sales) for the three and six months ended
March 4, 1995. This compared with $17,495,000 (44.9% of sales)
and $31,061,000 (44.1% of sales) for the same periods in the
prior year. The decrease in gross profit percentage is mainly
attributable to retail store markdowns associated with our new
value pricing program which was more than offset by increased
sales. The increase in gross profit dollars for both the three
and six months is attributable to increased sales.
Selling, general and administrative expenses increased $503,000
(3.7%) and $1,190,000 (4.4%) for the three and six months ended
March 4, 1995. The increases are primarily attributable to
increased payroll, advertising, and catalog toll-free line costs.
While overall operating profit dollars increased, the operating
profit dollars and percentage decreased for our retail store
network during the second quarter. The decrease in operating
profit dollars is mainly attributable to the loss of the men's
mainstream business mentioned above. The decrease in operating
percentage is primarily a result of increased markdowns mentioned
above.
The increases in paper and postage costs did not have a material
impact on the Company during the first six months of fiscal 1995
due to expense reduction efforts and increased productivity per
catalog. The company continues to monitor its paper and postage
costs and does not expect the increases to have a material
adverse effect on the balance of fiscal 1995.
The change for both the three and six months in other income
(expense) from an expense to an income was caused by increased
interest income in the second quarter and $110,000 deductible on
the Company's earthquake insurance being recorded in the second
quarter of last year.
The Company's business is seasonal in nature with the Holiday
Season and Valentine's Day (which both fall within the second
quarter) historically accounting for the largest percentage of
sales volume. In the Company's three most recent fiscal years,
the second quarter accounted for approximately 30% of the
Company's annual sales.
Income taxes are provided on the basis of estimated federal and
state taxes for each year. The rate used for the six months
ended March 4, 1995 and February 26, 1994 was 41.5%.
Net earnings increased $69,000 and $792,000 for the three and six
months ended March 4, 1995 as compared with the similar periods
of the previous year. The increase can be attributed to the
reasons enumerated above.
PART II - OTHER INFORMATION
Items 1 - 3
Items 1 - 3 are omitted because they are not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on
February 2, 1995.
At the annual meeting the following Directors were elected for fiscal
1995:
Votes For Votes Withheld
George W. Townson 2,398,314 36,744
William J. Barrett 2,398,454 36,604
Morton R. Field 2,394,689 40,369
Richard O. Starbird 2,395,815 39,243
Hugh V. Hunter 2,396,756 38,302
Sylvan Lefcoe 2,394,028 41,030
Merle A. Johnston 2,390,317 44,714
At the Annual Meeting, the shareholders ratified the Company's selection
of KPMG Peat Marwick as the independent certified public accountant for
fiscal 1995 by an affirmative vote of 2,400,415 with 23,260 shares
voting against and 11,383 shares abstaining. In addition, the
stockholders approved the Company's Incentive Compensation Plan for
Executive Officers by an affirmative vote of 2,198,872 with 115,499
shares voting against and 120,687 shares abstaining.
Only shares of Class A Capital Stock are entitled to vote. Class B
Capital Stock does not have voting rights.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27. Financial Data Schedule
(b) No reports on Form 8-K were filed for this quarter.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
FREDERICK'S OF HOLLYWOOD, INC.
(Registrant)
Date: April 11, 1995 By: George W. Townson
George W. Townson
Chairman of the Board, President
and Chief Executive Officer
Date: April 11, 1995 By: John B. Hatfield
John B. Hatfield
Executive Vice President,
Secretary, Treasurer,
Chief Financial, Accounting
and Administrative Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-02-1995
<PERIOD-END> MAR-04-1995
<CASH> 13,427
<SECURITIES> 0
<RECEIVABLES> 522
<ALLOWANCES> 0
<INVENTORY> 17,101
<CURRENT-ASSETS> 36,437
<PP&E> 34,252
<DEPRECIATION> 15,668
<TOTAL-ASSETS> 55,060
<CURRENT-LIABILITIES> 12,993
<BONDS> 863
<COMMON> 8,858
0
0
<OTHER-SE> 28,647
<TOTAL-LIABILITY-AND-EQUITY> 55,060
<SALES> 77,475
<TOTAL-REVENUES> 77,475
<CGS> 44,083
<TOTAL-COSTS> 44,083
<OTHER-EXPENSES> 27,839
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62
<INCOME-PRETAX> 5,491
<INCOME-TAX> 2,279
<INCOME-CONTINUING> 3,212
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,212
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
</TABLE>
