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 quarterly period ended October 31, 1998
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission file number 0-15385
ONE PRICE CLOTHING STORES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 57-0779028
(State or other jurisdiction (I.R.S. Employer identification No.)
incorporation or organization)
Highway 290, Commerce Park
1875 East Main Street
Duncan, South Carolina 29334
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (864) 433-8888
-----------------
</TABLE>
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
The number of shares of the Registrant's Common Stock outstanding as of December
1, 1998 was 10,439,531.
<TABLE>
<S> <C>
INDEX
ONE PRICE CLOTHING STORES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - October 31, 1998, January 31, 1998 and November 1, 1997
Condensed consolidated statements of operations - Three-month
and nine-month periods ended October 31, 1998 and November 1,
1997
Condensed consolidated statements of cash flows - Nine-month
periods ended October 31, 1998 and November 1, 1997
Notes to unaudited condensed consolidated financial statements - October 31, 1998
Independent accountants' report on review of interim financial information
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
SIGNATURES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
CONDENSED CONSOLIDATED BALANCE SHEETS
One Price Clothing Stores, Inc. and Subsidiaries
<TABLE>
<S> <C> <C> <C>
October 31, January 31, November 1,
1998 1998 1997
------------------ ------------------ -----------------
(Unaudited) (1) (Unaudited)
Assets
CURRENT ASSETS
Cash and cash equivalents $ 2,500,000 $ 1,827,000 $ 2,436,000
Merchandise inventories 52,197,000 35,508,000 50,820,000
Federal and state income taxes receivable -- 4,637,000 2,578,000
Deferred income taxes -- -- 2,530,000
Other current assets 6,751,000 6,359,000 5,963,000
------------------ ------------------ -----------------
TOTAL CURRENT ASSETS 61,448,000 48,331,000 64,327,000
------------------ ------------------ -----------------
PROPERTY AND EQUIPMENT, at cost 60,700,000 60,752,000 61,009,000
Less accumulated depreciation 27,553,000 24,748,000 23,982,000
------------------ ------------------ -----------------
33,147,000 36,004,000 37,027,000
------------------ ------------------ -----------------
OTHER ASSETS 3,889,000 3,777,000 3,278,000
------------------ ------------------ -----------------
$ 98,484,000 $ 88,112,000 $ 104,632,000
================== ================== =================
Liabilities and Shareholders' Equity
CURRENT LIABILITIES
Accounts payable $ 28,975,000 $ 25,391,000 $ 30,438,000
Current portion of long-term debt and note payable 13,141,000 11,664,000 12,199,000
Sundry liabilities 8,798,000 7,025,000 7,351,000
------------------ ------------------ -----------------
TOTAL CURRENT LIABILITIES 50,914,000 44,080,000 49,988,000
------------------ ------------------ -----------------
LONG-TERM DEBT 7,795,000 7,915,000 7,927,000
------------------ ------------------ -----------------
DEFERRED INCOME TAXES AND OTHER
NONCURRENT LIABILITIES 2,895,000 3,095,000 3,701,000
------------------ ------------------ -----------------
SHAREHOLDERS' EQUITY
Preferred Stock, par value $0.01, --
authorized and unissued 500,000 shares
Common Stock, par value $0.01 --
authorized 35,000,000 shares, issued and
outstanding 10,439,531, 10,435,531 and
10,435,531 shares 104,000 104,000 104,000
Additional paid-in capital 11,465,000 11,453,000 11,453,000
Retained earnings 25,311,000 21,465,000 31,459,000
------------------ ------------------ -----------------
36,880,000 33,022,000 43,016,000
------------------ ------------------ -----------------
$ 98,484,000 $ 88,112,000 $ 104,632,000
================== ================== =================
</TABLE>
(1) Derived from audited financial statements.
See notes to unaudited condensed consolidated financial statements CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) One Price Clothing Stores Inc.
and Subsidiaries
<TABLE>
<S> <C> <C> <C> <C>
Three-Month Period Ended Nine-Month Period Ended
--------------------------------- -----------------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
-------------- --------------- --------------- ---------------
NET SALES $ 69,732,000 $ 63,845,000 $ 248,031,000 $ 228,878,000
Cost of goods sold, distribution and
buying costs 45,496,000 44,280,000 158,664,000 148,677,000
-------------- --------------- --------------- ----------------
GROSS MARGIN 24,236,000 19,565,000 89,367,000 80,201,000
-------------- --------------- --------------- ----------------
Selling, general and administrative
expenses 18,953,000 19,779,000 56,619,000 58,063,000
Store rent and related expenses 6,504,000 6,677,000 20,122,000 19,250,000
Depreciation and amortization expense 1,149,000 1,246,000 3,809,000 3,654,000
Interest expense 545,000 417,000 1,775,000 1,488,000
-------------- --------------- --------------- ----------------
27,151,000 28,119,000 82,325,000 82,455,000
Interest income 109,000 23,000 181,000 63,000
-------------- --------------- --------------- ----------------
NET EXPENSES 27,042,000 28,096,000 82,144,000 82,392,000
-------------- --------------- --------------- ----------------
(LOSS) INCOME BEFORE INCOME TAXES (2,806,000) (8,531,000) 7,223,000 (2,191,000)
(Benefit from) provision for income taxes (1,090,000) (3,370,000) 3,377,000 (865,000)
-------------- --------------- --------------- ----------------
NET (LOSS) INCOME $ (1,716,000) $ (5,161,000) $ 3,846,000 $ (1,326,000)
============== =============== =============== ================
Net (loss) income per common share -
Basic - Note B $ (0.16) $ (0.49) $ (0.37) $ (0.13)
============== =============== =============== ================
Net (loss) income per common share -
Diluted - Note B $ (0.16) $ (0.49) $ (0.37) $ (0.13)
============== =============== =============== ================
Weighted average number of common
shares outstanding - Basic - Note B 10,437,817 10,435,531 10,436,293 10,435,531
============== =============== =============== ================
Weighted average number of common
shares outstanding - Diluted - Note B 10,437,817 10,435,531 10,466,709 10,435,531
============== =============== =============== ================
</TABLE>
See notes to unaudited condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
One Price Clothing Stores, Inc. and Subsidiaries
<TABLE>
<S> <C> <C>
Nine-Month Period Ended
---------------------------------------
October 31, November 1,
1998 1997
----------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 3,846,000 $(1,326,000)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 3,809,000 3,654,000
Provision for supplemental post-retirement benefits 98,000 --
Decrease in other noncurrent assets 42,000 332,000
(Decrease) increase in other noncurrent liabilities (46,000) 479,000
Deferred income tax benefit -- (419,000)
Loss on disposal of property and equipment 396,000 595,000
Changes in operating assets and liabilities (7,009,000) 3,242,000
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,136,000 6,557,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,084,000) (4,628,000)
Purchases of other noncurrent assets (520,000) (406,000)
Decrease in amount due from related party 30,000 --
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (1,574,000) (5,034,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from (repayment of) revolving credit facility 1,468,000 (2,937,000)
Proceeds from long-term debt borrowings -- 9,572,000
Repayment of long-term debt (111,000) (7,942,000)
Debt financing costs incurred (42,000) (234,000)
Payment of capital lease obligation (168,000) (67,000)
Decrease in amount due to related parties (47,000) (36,000)
Proceeds from exercise of Common Stock options 11,000 --
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,111,000 (1,644,000)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 673,000 (121,000)
Cash and cash equivalents at beginning of period 1,827,000 2,557,000
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,500,000 $ 2,436,000
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,560,000 $ 1,189,000
Income taxes paid 361,000 894,000
Noncash financing activity - capital leases -- 153,000
</TABLE>
See notes to unaudited condensed consolidated financial statements
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
One Price Clothing Stores, Inc. and Subsidiaries
October 31, 1998
NOTE A - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements are unaudited and
include the accounts of One Price Clothing Stores, Inc. and its subsidiaries,
all of which are wholly-owned (the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
These financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and the
instructions of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
For interim reporting, the Company's gross profit is calculated on a current
quarterly basis by its inventory management system. Inventories are stated at
the lower of cost (using the first-in, first-out (FIFO) retail method) or
market.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. Due
to the seasonality of the Company's sales, operating results for the three-month
and nine-month periods ended October 31, 1998 are not necessarily indicative of
the results that may be expected for the year ending January 30, 1999. For
further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended January
31, 1998.
NOTE B - EARNINGS PER SHARE
Basic earnings per share are computed based upon the weighted average number of
common shares outstanding. Diluted earnings per share are computed based upon
the weighted average number of common and common equivalent shares outstanding.
Common equivalent shares consist solely of shares under option (30,416 common
equivalent shares for the nine-month period ended October 31, 1998 and
anti-dilutive in the other periods presented).
NOTE C - CREDIT FACILITIES
In May and June 1997 and February 1998, the Company amended its financing
arrangements with its primary lender. Considered together, the amendments
provide a three-year extension through March 2001 and continue to provide a
revolving credit facility of up to $37,500,000 (including a letter of credit
sub-facility of up to $25,000,000). Under the June 1997 amendment, the Company
was permitted to enter into a mortgage loan agreement with a commercial bank
(discussed further below) and the term loan portion of the agreement with the
primary lender was repaid. Under the May 1997 amendment, the term loan was
increased by approximately $1,450,000 to $7,500,000.
Borrowings under the credit agreement with the primary lender are collateralized
by all assets owned by the Company during the term of the agreement (other than
the land, building, fixtures and improvements collateralizing the mortgage loan
discussed below). The borrowings bear interest, at the Company's option (subject
to certain limitations in the agreement), at the Prime Rate plus 0.5% or the
Adjusted Eurodollar Rate, as defined, plus 2.5%. Maximum borrowings under the
revolving credit facility and utilization of the letter of credit facility are
based on a borrowing base formula determined with respect to eligible inventory
as defined in the agreement. Availability under the revolving credit facility
fluctuates in accordance with the Company's seasonal variations in inventory
levels. At October 31, 1998, the Company had approximately $10.3 million in
excess availability. The lending formula may be revised from time to time in
response to changes in the composition of the Company's inventory or other
business conditions.
The Company's amended revolving credit agreement contains certain covenants
which, among other things, restrict the ability of the Company to incur
indebtedness, or encumber or dispose of assets, and prohibit the Company from
repurchasing its Common Stock or paying dividends. The Company is required to
maintain a $5,000,000 minimum level of Working Capital and to maintain a minimum
Adjusted Net Worth (both as defined in the amended revolving credit agreement).
Effective January 30, 1998, such minimum net worth requirement was reduced from
$34,000,000 to $25,000,000. The Company was in compliance with these covenants
at October 31, 1998.
In May 1997, the Company entered into an agreement with a commercial bank to
provide a letter of credit facility of up to $3,000,000. In November 1998, the
agreement was amended to increase the letter of credit facility to provide up to
$3,500,000. Letters of credit issued under the agreement are collateralized by
inventories purchased using such letters of credit. In March 1998, the agreement
was amended to adjust the Company's minimum net worth requirement to the same
level as that required by the Company's primary lender under the revolving
credit agreement. In April 1998, the agreement was amended to extend the
expiration date of the facility to the earlier of June 1999 or termination of
the Company's revolving credit facility with its primary lender. The agreement,
as amended, contains certain restrictive covenants, which are substantially the
same as those in the Company's amended revolving credit facility discussed
above.
In June 1997, the Company repaid the term loan portion of its primary credit
facility and entered into a twenty-year mortgage agreement with a commercial
bank. The agreement provides for a mortgage of $8,125,000 secured by the
Company's real property located at its corporate offices including land,
buildings, fixtures and improvements. Commencing August 1, 1997, the mortgage
loan is payable in 240 consecutive equal monthly installments (including
interest at the rate of 9.125% per annum). Certain fees may be payable by the
Company if the mortgage loan is repaid prior to June 2014. The mortgage
agreement contains certain nonfinancial covenants with which the Company was in
compliance at October 31, 1998.
NOTE D - EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
The FASB issued SFAS 130, "Reporting Comprehensive Income," which requires
disclosure of comprehensive income within the basic financial statements for
those entities with items which qualify as components of comprehensive income
such as foreign currency transactions and unrealized gains or losses on
available-for-sale securities. Because the Company has no items which qualify as
components of comprehensive income, the Company's adoption of SFAS 130, required
for fiscal periods beginning after December 15, 1997, resulted in comprehensive
(loss) income equal to net (loss) income reported for the three-month and
nine-month periods ended October 31, 1998.
The FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information," effective for periods beginning after December 15, 1997.
This new standard requires disclosure of revenues, results of operations and
assets of each segment of a public enterprise which qualifies based on
quantifiable and decision-making criteria. The Company is in the process of
reviewing the effect, if any, that SFAS 131 will have on the Company's
consolidated financial statements and disclosures.
The FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," effective for periods beginning after June 15, 1999. This new
standard requires recognition of all derivatives, including certain derivative
instruments embedded in other contracts, as either assets or liabilities in the
statement of financial position and measurement of those instruments at fair
value. The Company is in the process of reviewing the effect, if any, that SFAS
133 will have on the Company's consolidated financial statements.
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Shareholders of
One Price Clothing Stores, Inc.
Duncan, South Carolina
We have reviewed the accompanying condensed consolidated balance sheets of One
Price Clothing Stores, Inc. and subsidiaries (the "Company") as of October 31,
1998 and November 1, 1997, and the related condensed consolidated statements of
operations for the three-month and nine-month periods then ended and the
condensed consolidated statements of cash flows for the nine-month periods then
ended. These financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of the Company as of January 31, 1998,
and the related consolidated statements of operations, shareholders' equity, and
cash flows for the year then ended (not presented herein); and in our report
dated March 20, 1998 (April 21, 1998 as to Note B), we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of January 31, 1998 is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Greenville, South Carolina
November 18, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Net sales for the quarter ended October 31, 1998 increased 9.2% to $69,732,000
compared to $63,845,000 for the quarter ended November 1, 1997. Net sales for
the nine-month period ended October 31, 1998 increased 8.4% to $248,031,000
compared to $228,878,000 for the same time period in 1997. Comparable store
sales for the third quarter of fiscal 1998 increased 12.1% compared to the same
quarter last year. Comparable store sales for the nine-month period ended
October 31, 1998 increased 7.1% compared to the same time period in 1997. We
consider stores that have been open 18 months or more to be comparable, and
there were 562 such stores at October 31, 1998. We believe that these sales
results are attributable to our fashionable merchandise mix in conjunction with
our renewed commitment to provide our customers with outstanding values.
During the third quarter of fiscal 1998, Hurricane Georges caused damage to many
of the Company's stores located in Puerto Rico and the U.S. Virgin Islands. The
hurricane temporarily closed 30 of these stores for a period of four days or
longer. As a result of the temporary closings, the Company's sales were
adversely affected. Excluding the effect of the temporary closings, comparable
store sales would have increased 12.6% and 7.2% for the three-month and
nine-month periods ending October 31, 1998, respectively. All of the affected
stores have since re-opened and are conducting business.
Pursuant to our previously announced restructuring plan, we closed 45
under-performing stores during the first nine months of fiscal 1998. In
addition, we relocated three stores and expanded two of our top-performing
stores while limiting new store openings to six through October 31, 1998. At
October 31, 1998, we operated 621 stores, 53 fewer than at quarter end last
year. The stores are located in 27 states, the District of Columbia, Puerto Rico
and the U.S. Virgin Islands.
Gross margin was 34.8% of net sales in the third quarter of fiscal 1998 compared
to 30.6% of net sales in the third quarter of fiscal 1997. For the first nine
months of fiscal 1998, gross margin was 36.0% of net sales versus 35.0% of net
sales for the same time period in 1997. In both periods, the increase in gross
margin as a percentage of net sales was primarily due to a significant reduction
in merchandise markdowns and efficiency improvements in the Company's
distribution center, and was partially offset by a lower initial markup due to
our renewed core pricing strategy and an increase in the provision for shrinkage
compared to the same time periods in 1997.
Selling, general and administrative ("SG&A") expenses were 27.2% of net sales
for the third quarter of fiscal 1998 compared to 31.0% of net sales in the third
quarter of fiscal 1997. SG&A expenses were 22.8% of net sales in the first nine
months of fiscal 1998 compared to 25.4% of net sales for the same time period
last year. These decreases in SG&A expenses as a percentage of net sales are
primarily due to the results of the cost reductions associated with store
closings and to effective cost strategies in the Company's stores and corporate
offices as part of our restructuring plan announced in January 1998.
Store rent and related expenses per average store increased 4% in the third
quarter of fiscal 1998 and 7% in the first nine months of fiscal 1998 compared
to the same periods last year. However, due to the significantly higher
year-over-year net sales in both periods of fiscal 1998, store rent and related
expenses expressed as a percentage of net sales decreased to 9.3% in the third
quarter of fiscal 1998 compared to 10.5% in the third quarter of fiscal 1997,
and decreased to 8.1% in the first nine months of fiscal 1998 compared to 8.4%
for the same time period in fiscal 1997. The increase in average store rents was
due to the Company's store expansion strategy of increasing the proportion of
larger, high volume stores, and thus entering more costly sites with higher
rent, and closing older, under-performing stores which had lower average rent
costs. We anticipate that this trend of increasing average store rents will
continue. Depreciation and amortization expense decreased to 1.6% of net sales
in the third quarter of fiscal 1998 compared to 2.0% in the third quarter of
fiscal 1997. Depreciation and amortization expense was 1.5% of net sales in the
first nine months of fiscal 1998 and 1.6% for the same time period last year.
The decreases in both periods of fiscal 1998 compared to fiscal 1997 are due to
the significant increase in year-over-year net sales.
Interest expense increased to 0.8% of net sales in the third quarter of fiscal
1998 compared to 0.7% of net sales in the third quarter of fiscal 1997 due to a
higher level of average borrowings than in the same period last year. Interest
expense was 0.7% of net sales for the first nine months of both fiscal 1998 and
fiscal 1997.
The effective income tax benefit rate for fiscal 1997 was 16.1%. Such benefit
rate was significantly below the "normal" effective benefit rate due to
valuation allowances being provided against certain deferred tax assets during
the fourth quarter of fiscal 1997.
We currently estimate that the Company's effective income tax rate will be
approximately 43% in fiscal 1998. However, the ultimate effective income tax
rate could be significantly lower if a sufficient level of annual pre-tax
profitability is achieved. Such pre-tax profitability could permit the reversal
of some of the valuation allowances provided against certain of the deferred tax
assets during fiscal 1997.
Outlook
Sales thus far in the fourth quarter of fiscal 1998 have continued ahead of
planned levels, and comparable store sales comparisons to the same period in
fiscal 1997 are also positive. We believe that the early improvements thus far
in fourth quarter sales compared to the same time period last year are primarily
due to the favorable customer reaction towards the current fall merchandise
assortment and the favorable sales trends in the retail apparel industry.
The Company's sales and operating results are seasonal. The Company's sales and
operating results have been the highest in the first quarter (February - April)
and second quarter (May - July) and lowest in the third quarter (August -
October) and fourth quarter (November - January). Continued favorable customer
reaction to the Company's merchandise assortment, and the continuation or not of
the favorable trends in the women's and children's retail apparel industry will
largely determine the profitability of the fourth quarter of fiscal 1998. During
the fourth quarter of fiscal 1998, the Company intends to continue to focus its
efforts on improving sales in the existing stores, while also attempting to
achieve its margin and cost-containment targets. We also have begun testing the
sale of menswear in approximately 30 stores and, if such test is positive, plan
to offer menswear in a greater number of stores beginning in the first half of
fiscal 1999. Although the Company's customer base is largely comprised of
value-conscious female customers, the Company believes that the addition of
menswear to our assortment could represent yet another choice in competitive
value such as gifts and kidswear.
As part of our strategy to focus on improving sales in existing stores, we have
limited the number of new store openings in fiscal 1998. In our previously
announced restructuring plan, we identified 75 under-performing stores that
would be closed during fiscal 1998. As of October 31, 1998, a substantial
portion of those under-performing stores had been closed, including those closed
during January 1998. Also, during the first nine months of fiscal 1998, we
closed 14 additional stores due to lack of performance or circumstances that had
not been identified prior to the announcement of the restructuring plan. We
currently expect to open approximately 30 stores in existing markets and close
approximately 15 under-performing stores during fiscal 1999.
Liquidity and Capital Resources
Although the Company generated net income for the first nine months of fiscal
1998 compared to a net loss in the same time period in fiscal 1997, net cash
provided by operating activities decreased in fiscal 1998, primarily due to the
increase in inventory levels during the first nine months of fiscal 1998. The
increase in the fiscal 1998 inventory levels was financed with the net cash
provided by operating activities and borrowings on the Company's revolving
credit facility. During the first nine months of fiscal 1998, net cash provided
by operating activities was used to purchase property, equipment and software.
During the first nine months of fiscal 1997, net cash provided by operating
activities was also used to purchase property, equipment and software and to
reduce the revolving credit facility.
Total merchandise inventories at the end of the third quarter of fiscal 1998
increased by 2.7% compared to the end of the third quarter of fiscal 1997,
despite operating 53 fewer stores than at quarter-end last year. The increase in
inventory levels was primarily a result of holiday and spring merchandise that
was in-transit to the Company's Distribution Center as of October 31, 1998. The
increase in merchandise in-transit was partially offset by a decrease in
in-store inventories, which was attributable to the increase in the
significantly higher year-over-year sales and inventory turnover rates for the
first nine months of fiscal 1998 compared to fiscal 1997. During the first nine
months of fiscal 1998, the Company reduced the amount of imported merchandise
from foreign sources. As a result, the level of outstanding documentary letters
of credit decreased to $4.7 million on October 31, 1998 compared to $8.6 million
on November 1, 1997. The Company's inventory levels at October 31, 1998 include
in-store fall merchandise as well as holiday and spring merchandise in-transit
to the Company's Distribution Center and were higher than at January 31, 1998
when inventory levels are typically lower. Management expects to continue to
pursue opportunistic domestic purchases of merchandise, but will purchase
merchandise from foreign sources when it is deemed in the best interests of the
Company.
Total accounts payable and amounts outstanding under the credit facilities,
including long-term portions thereof, decreased 1.3% at the end of the third
quarter of fiscal 1998 compared to the third quarter of fiscal 1997. The level
of accounts payable and amounts outstanding under the credit facilities are
subject to fluctuations because of the Company's seasonal operations,
opportunistic buying strategy, rate of capital expenditures and prevailing
business conditions.
During the first nine months of fiscal 1998, $1,084,000 was used to purchase
property and equipment compared to $4,628,000 in the first nine months of fiscal
1997. The decrease in amounts used to purchase property and equipment was due to
the Company's strategy to limit the number of new store openings in fiscal 1998.
The Company's credit facilities consist of a revolving credit facility to meet
the Company's short-term liquidity needs, a mortgage loan collateralized by the
Company's corporate offices and letter of credit facilities to accommodate the
Company's need to purchase merchandise from foreign sources. Collectively, the
Company's credit facilities contain certain financial and non-financial
covenants with which the Company was in compliance at October 31, 1998. A
summary of the Company's credit facilities follows. Please refer to Footnote C
of the unaudited financial statements contained within this Form 10-Q for a more
complete description of the Company's credit facilities.
The Company has a $37,500,000 revolving credit facility (including a $25,000,000
letter of credit sub-facility) with its primary lender through March 2001.
Borrowings under the agreement are collateralized by all assets owned by the
Company during the term of the agreement (other than the land, building,
fixtures and improvements collateralizing the mortgage loan discussed below).
Maximum borrowings under the revolving credit facility and utilization of the
letter of credit facility are based on a borrowing base formula determined with
respect to eligible inventory as defined in the agreement.
The Company has a twenty-year, $8,125,000 mortgage loan agreement with a
commercial bank payable in 240 consecutive equal monthly installments commencing
August 1, 1997. The agreement is secured by the Company's real property located
at its corporate offices including land, buildings, fixtures and improvements.
The Company has a $3,500,000 letter of credit facility with a commercial bank
through the earlier of June 1999 or termination of the revolving credit facility
with the Company's primary lender. Letters of credit issued under the agreement
are collateralized by inventories purchased using such letters of credit.
In fiscal 1998, the Company plans to spend approximately $2.5 million on capital
expenditures, most of which will be used to remodel, re-fixture, expand and
relocate existing stores. In fiscal 1999, the Company currently expects to spend
up to $5.0 million on capital expenditures, most of which will be used to open
new stores, remodel, re-fixture, expand and relocate existing stores, and invest
in information technology. The Company's liquidity requirements in the
foreseeable future will be met principally through cash provided by operations
and the use of its credit facilities. If deemed by management to be in the best
interests of the Company, additional long-term debt, capital leases, or other
permanent financing may be considered.
Year 2000 Issues
State of Readiness
The Company began identifying its major systems and software vendors susceptible
to Year 2000 issues during its preparedness evaluation in fiscal 1996. During
fiscal 1997, a formal steering committee was assembled from all areas within the
Company to ensure a smooth transition into the Year 2000. The Company has
separated its Year 2000 efforts into five phases ("the Year 2000 Plan"): (i)
awareness and identification of issues relating to the Year 2000; (ii) analysis
of the impact on and risk to the Company's software, hardware and the services
provided by the Company's vendors; (iii) performance of the work necessary to
change or upgrade programs and files including installation of software and/or
hardware; (iv) testing and certification of systems to assure compliance,
including disaster recovery testing; and (v) implementation of systems. Because
the Company uses a variety of internally-developed and third party software,
certain tasks of various phases of the Year 2000 Plan are being performed
simultaneously. The Company anticipates that all five phases will be complete
and its major systems will be Year 2000 compliant by the summer of 1999.
Like other companies, the Company relies upon third parties for its operations
including, but not limited to, suppliers of merchandise, software, telephone
service, electric power, water and financial services. As part of this program,
the Company has a formal vendor Year 2000 compliance program in place. The
Company has identified and assigned various levels of risk to third party
vendors associated with the Company. The Company has received responses from all
the vendors identified as most critical to its operations. Each has indicated
that it will be Year 2000 compliant in a timely manner. During the fourth
quarter of fiscal 1998, the Company will continue its vendor compliance efforts
focusing on the remaining vendors in order of their assigned levels of risk.
Costs
The Company is primarily using internal resources to identify, test, upgrade and
replace its Year 2000-sensitive systems. The Company's major systems, including
its merchandise management system, its point-of-sale system, its inventory and
general ledger system and its payroll system, have been due for upgrades in
order to maintain vendor support. Therefore, the Company would be devoting the
efforts of its internal resources to some or all of these projects through the
normal course of business even if the Year 2000 issues had not existed. The
Company also continues to replace any non-compliant software and hardware as
necessary. The cost of these incidental software and hardware replacements is
expected to be less than $25,000 in fiscal 1998 and less than $50,000 in fiscal
1999.
Risks and Contingency Planning
Management estimates that the Company will complete the Year 2000 Plan by the
summer of 1999 and will continue to monitor its systems through the remainder of
the year, but gives no assurance that unforeseen difficulties which could alter
the date of completion of the Year 2000 Plan will not occur while performing
upgrades, installations, testing and implementation. In addition, if the Year
2000 Plan is not successful in a timely manner, the Company's third party
vendors are not Year 2000 compliant in a timely manner, and/or if the Company's
supply of merchandise or ability to distribute its merchandise to its stores is
adversely affected, the Year 2000 issue may have a material impact on the
results of operations, financial condition and cash flows of the Company. In
addition, possible interruptions in services such as electric power and
telephone could occur in certain geographic areas, thereby temporarily closing
some of the Company's stores.
The Company intends to mitigate its Year 2000 risk by completing implementation
of the Year 2000 Plan by the summer of 1999, permitting time to monitor
compliance as well as to conduct disaster recovery tests. The Company intends to
mitigate its risk of temporarily closed stores due to possible interruptions in
services such as electric power and telephone through the use of business
interruption insurance, which it currently carries, and uses from time to time
to protect itself from temporary closings due to weather-related interruptions.
The Company plans to continue to develop its contingency plans during the
completion of the remaining phases of its Year 2000 Plan.
Effect of New Accounting Pronouncements
The FASB issued SFAS 130, "Reporting Comprehensive Income," which requires
disclosure of comprehensive income within the basic financial statements for
those entities with items which qualify as components of comprehensive income
such as foreign currency transactions and unrealized gains or losses on
available-for-sale securities. Because the Company has no items which qualify as
components of comprehensive income, the Company's adoption of SFAS 130, required
for fiscal periods beginning after December 15, 1997, resulted in comprehensive
(loss) income equal to net (loss) income reported for the three-month and
nine-month periods ended October 31, 1998.
The FASB issued SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information," effective for periods beginning after December 15, 1997.
This new standard requires disclosure of revenues; results of operations and
assets of each segment of a public enterprise, which qualifies, based on
quantifiable and decision-making criteria. The Company is in the process of
reviewing the effect, if any, that SFAS 131 will have on the Company's
consolidated financial statements.
The FASB issued SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities," effective for periods beginning after June 15, 1999. This new
standard requires recognition of all derivatives, including certain derivative
instruments embedded in other contracts, as either assets or liabilities in the
statement of financial position and measurement of those instruments at fair
value. The Company is in the process of reviewing the effect, if any, that SFAS
133 will have on the Company's consolidated financial statements and
disclosures.
Private Securities Litigation Reform Act of 1995
All statements contained in this document as to future expectations and
financial results, including, but not limited to, statements containing the
words "believes," "anticipates," "expects," and similar expressions, should be
considered forward-looking statements subject to the safe harbor created by the
Private Securities Litigation Reform Act of 1995. The Company cautions readers
of this Quarterly Report on Form 10-Q that a number of important factors could
cause the Company's actual results in fiscal 1998 and beyond to differ
materially from those expressed in such forward-looking statements. These
factors include, but are not limited to, the general economic conditions and
consumer demand; consumer preferences; weather patterns; competitive factors,
including pressure from store expansion, pricing and promotional activities of
competitors; the impact of excess retail capacity and the availability of
desirable store locations on suitable terms; whether or not the Company's
merchandising strategy to offer alternative categories of merchandise at
alternative price points will increase sales and operating results or increase
and attract new customers; whether or not offering for sale new categories of
merchandise including, but not limited to, menswear, will increase sales and
operating results; the availability, selection and purchasing of attractive
merchandise on favorable terms; credit availability, including adequate levels
of credit support provided to certain of the Company's vendors by factors and
insurance companies; import risks, including potential disruptions and duties,
tariffs and quotas on imported merchandise; regulatory matters, including
legislation affecting wage rates; whether or not the Company and/or its major
suppliers will ready their computer systems to be "Year 2000 Compliant" in a
timely manner; and other factors described in the Company's filings with the
Securities and Exchange Commission from time to time. The Company does not
undertake to publicly update or revise its forward-looking statements even if
experience or future changes make it clear that any projected results expressed
or implied therein will not be realized.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not applicable
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K:
(a) The following exhibits are included herein:
10(c) Amendment Number Three to the Continuing Commercial
Credit Agreement by and between Carolina First Bank as
Lender and the Registrant, One Price Clothing Stores,
Inc., One Price Clothing of Puerto Rico, Inc. and One
Price Clothing - U.S. Virgin Islands, Inc. as borrowers
dated November 5, 1998.
11 Computation of Per Share Earnings
15 Acknowledgement of Deloitte & Touche LLP, independent accountants
27 Financial Data Schedule (electronic filing only)
(b) The Company was not required to file any report on Form 8-K for the
three-month period ended October 31, 1998
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.
ONE PRICE CLOTHING STORES, INC. (Registrant)
Date: December 15, 1998 /s/ Larry I. Kelley
---------------------------------------------
Larry I. Kelley
President and Chief Executive
Officer (principal executive
officer, principal financial officer
and principal accounting officer)
EXHIBIT 10(c) - Amendment Number Three to the Continuing Commercial Credit
Agreement by and between Carolina First Bank as Lender and the Registrant, One
Price Clothing Stores, Inc., One Price of Puerto Rico, Inc. and One Price
Clothing - U.S. Virgin Islands, as borrowers dated November 5, 1998
AMENDMENT NUMBER 3
TO
CONTINUING COMMERCIAL CREDIT AGREEMENT
November 5, 1998
One Price Clothing Stores, Inc.
1875 East Main Street
Duncan, South Carolina 29334
One Price Clothing of Puerto Rico, Inc.
1875 East Main Street
Duncan, South Carolina 29334
One Price Clothing - U.S. Virgin Islands, Inc.
1875 East Main Street
Duncan, South Carolina 29334
Gentlemen:
Carolina First Bank ("Bank"), One Price Clothing Stores, Inc. ("One
Price"), One Price Clothing of Puerto Rico, Inc. ("One Price, P.R."), and One
Price Clothing - U.S. Virgin Islands, Inc. ("One Price V.I.", and together with
One Price and One Price, P.R., individually referred to as a "Borrower" and
collectively as "Borrowers") have entered into certain financing arrangements
pursuant to the Continuing Commercial Credit Agreement, dated May 16, 1997,
between Bank and Borrowers, as amended by Amendment Number 1, dated March 20,
1998, and Amendment Number 2, dated April 21, 1998 (the "Credit Agreement"). All
capitalized terms used herein and not herein defined shall have the meanings
given to them in the Credit Agreement.
Borrowers have requested that Bank increase the Maximum Credit of the
Credit Agreement from $3,000,000.00 to $3,500,000.00, and Bank is willing to
agree to this Amendment, subject to the terms and conditions set forth herein.
In consideration of the foregoing, the mutual agreements and covenants
contained herein and other good and valuable consideration, the parties hereto
agree as follows:
1. Section 1.6 of the Credit Agreement is hereby amended by
deleting the figure $3,000,000.00 appearing therein, and
substituting therefor, the figure $3,500,000.00".
2. Miscellaneous.
a. Entire Agreement; Ratification and Confirmation of
the Credit Agreement.
This Amendment contains the entire agreement of the
parties with respect to the specific subject matter
hereof and supersedes all prior or contemporaneous
term sheets, proposals, discussions, negotiations,
correspondence, commitments, and communications
between or among the parties concerning the subject
matter hereof. This Amendment may not be modified or
any provision waived, except in writing, signed by
the party against whom such modification or waiver is
thought to be enforced. Except as specifically
modified herein, and as specifically modified in
Amendment Number 1 and Amendment Number 2, the Credit
Agreement is hereby ratified, restated, and confirmed
by the parties hereto as of the effective date
hereof. To the extent of a conflict between the terms
of this Amendment and the Credit Agreement, the terms
of this Amendment shall control.
b. Governing Law.
This Amendment and the rights and the obligations
hereunder of each of the parties hereto shall be
governed by and interpreted and determined in
accordance with the internal laws of the state of
South Carolina, with regard to principals of
conflicts of law.
c. Binding Affect.
This Amendment shall be binding and enure to the
benefit to each of the parties hereto and their
respective successors and assigns.
d. Counterparts.
This Amendment may be executed in any number of
counterparts, but all of such counterparts shall
together constitute but one in the same agreement. In
making proof of this Amendment, it shall not be
necessary to produce or account for more than one
counterpart thereof signed by each of the parties
hereto.
By the signature hereto of each of their duly authorized officers, all
of the parties hereto mutually covenant and agree as set forth herein.
<TABLE>
<S> <C> <C>
Yours very truly,
Carolina First Bank
By: /s/ Charles D. Chamberlain
Charles D. Chamberlain,
Title: Executive Vice President
AGREED AND ACCEPTED:
One Price Clothing Stores, Inc.
By: /s/ C. Burt Duren
Title: Treasurer
One Price Clothing of Puerto Rico, Inc.
By: /s/ C. Burt Duren
Title: Treasurer
One Price Clothing - U.S. Virgin Islands, Inc.
By: /s/ C. Burt Duren
Title: Treasurer
</TABLE>
ONE PRICE CLOTHING STORES, INC. AND SUBSIDIARIES
Exhibit 11 - Computation of Per Share Earnings
<TABLE>
<S> <C> <C> <C> <C>
Three-Month Period Ended Nine-Month Period Ended
------------------------------------ --------------------------------
October 31, November 1, October 31, November 1,
1998 1997 1998 1997
--------------- ---------------- --------------- ---------------
BASIC (LOSS) INCOME PER COMMON SHARE
Weighted average number of common
shares outstanding 10,437,817 10,435,531 10,436,293 10,435,531
========== ========== ========== ==========
Net (loss) income $ (1,716,000) $ (5,161,000) $ 3,846,000 $ (1,326,000)
========== =========== =========== ==========
Basic net (loss) income per common share $ (0.16) $ (0.49) $ 0.37 $ (0.13)
=========== =========== =========== ==========
DILUTED (LOSS) INCOME PER COMMON SHARE
Weighted average number of common
shares outstanding 10,437,817 10,435,531 10,436,293 10,435,531
Net effect of dilutive stock options - based
on the treasury stock method using the
average market price -- -- 30,416 --
---------- --------- ---------- ----------
TOTAL 10,437,817 10,435,531 10,466,709 10,435,531
============= ============= ============= ===========
Net (loss) income $ (1,716,000) $ (5,161,000) $ 3,846,000 $ (1,326,000)
============ ============= ============ ============
Diluted net (loss) income per common share $ (0.16) $ (0.49) $ 0.37 $ (0.13)
=========== ============ =========== ===========
</TABLE>
ONE PRICE CLOTHING STORES, INC. AND SUBSIDIARIES
EXHIBIT 15 - ACKNOWLEDGEMENT OF DELOITTE & TOUCHE LLP, INDEPENDENT ACCOUNTANTS
One Price Clothing Stores, Inc. and Subsidiaries
Duncan, South Carolina
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim condensed
consolidated financial information of One Price Clothing Stores, Inc. and
subsidiaries for the three-month and nine-month periods ended October 31, 1998
and November 1, 1997, as indicated in our report dated November 18, 1998;
because we did not perform an audit, we expressed no opinion on that
information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended October 31, 1998, is
incorporated by reference in Registration Statements No. 33-20529, 33-31623,
33-48091 and 33-61803 on Form S-8 pertaining to the 1987 Stock Option Plan, the
1988 Stock Option Plan and 1991 Stock Option Plan, and the Director Stock Option
Plan, respectively, of One Price Clothing Stores, Inc.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Greenville, South Carolina
December 15, 1998
<TABLE> <S> <C>
<ARTICLE>5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> OCT-31-1998
<CASH> 2500
<SECURITIES> 0
<RECEIVABLES> 2762
<ALLOWANCES> 0
<INVENTORY> 52197
<CURRENT-ASSETS> 61448
<PP&E> 60700
<DEPRECIATION> 27553
<TOTAL-ASSETS> 98484
<CURRENT-LIABILITIES> 50914
<BONDS> 0
0
0
<COMMON> 104
<OTHER-SE> 36776
<TOTAL-LIABILITY-AND-EQUITY> 98484
<SALES> 248031
<TOTAL-REVENUES> 248031
<CGS> 158664
<TOTAL-COSTS> 158664
<OTHER-EXPENSES> 23931
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1775
<INCOME-PRETAX> 7223
<INCOME-TAX> 3377
<INCOME-CONTINUING> 3846
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3846
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
</TABLE>
