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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One) ---------------------------
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 1, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
COMMISSION FILE NO. 0-19972
BRAUN'S FASHIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06 - 1195422
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2400 XENIUM LANE NORTH, PLYMOUTH, MINNESOTA 55441
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (612) 551-5000
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share
12% Senior Notes due 2005
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
Indicate by check mark whether the registrant (1) has filed all reports
required 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
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Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES X NO
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As of May 15, 1997, 4,432,588 shares of common stock were outstanding and
the aggregate market value of the common stock held by non-affiliates of the
Registrant on that date was approximately $33,012,204 based upon the last
reported sale price of the common stock at that date by The NASDAQ Stock Market.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held July 16, 1997 (the "Proxy Statement") are incorporated
by reference into Part III.
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BRAUN'S FASHIONS CORPORATION
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I PAGE
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Item 1. Business................................................................................1
Item 2. Properties..............................................................................6
Item 3. Legal Proceedings.......................................................................8
Item 4. Submission of Matters to a Vote of Security Holders.....................................8
Item 4a. Executive Officers of the Registrant....................................................9
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters..............10
Item 6. Selected Consolidated Financial Data...................................................11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................................12
Item 8. Consolidated Financial Statements......................................................17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...33
PART III
Item 10. Directors and Executive Officers of the Registrant.....................................33
Item 11. Executive Compensation.................................................................33
Item 12. Security Ownership of Certain Beneficial Owners and Management.........................33
Item 13. Certain Relationships and Related Transactions.........................................34
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................34
Signatures.............................................................................37
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PART I
ITEM 1.
BUSINESS
GENERAL
Braun's Fashions Corporation ("BFC"), is a Minneapolis-based regional
retailer of women's specialty apparel which operates through its wholly owned
subsidiary, Braun's Fashions, Inc. ("BFI") (collectively referred to as
"Braun's" or the "Company"). As of May 15, 1997, the Company operated a chain
of 172 stores in 20 states in the Midwest and Pacific Northwest. Most stores
are mall based, average 3,400 square feet and are located in mid-sized markets.
Braun's target customer is a 35 to 55 year old working woman who purchases
coordinated assortments that can be worn for both work and leisure activities.
Braun's offers this target customer moderately priced sportswear, dresses and
accessories ("a multiple wardrobe") and differentiates itself from other fashion
retailers through novelty/distinct pattern offerings.
FORWARD LOOKING INFORMATION
Information contained in this Form 10-K contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, which can be identified by the use of forward-looking terminology such
as "may", "will", "expect", "plan", "anticipate", "estimate" or "continue" or
the negative thereof or other variations thereon or comparable terminology.
There are certain important factors that could cause results to differ
materially from those anticipated by some of these forward-looking statements.
Investors are cautioned that all forward-looking statements involve risks and
uncertainty. The factors, among others, that could cause actual results to
differ materially include: consumers' spending and debt levels; the Company's
ability to execute its business plan; the acceptance of the Company's
merchandising strategies by its target customers; the ability of the Company to
anticipate marketing trends and consumer needs; continuity of a relationship
with or purchases from major vendors, particularly those from whom the Company
imports merchandise; competitive pressures on sales and pricing; increases in
other costs which cannot be recovered through improved pricing of merchandise;
and the adverse effect of weather conditions from time to time on consumers'
ability or desire to purchase new clothing.
INDUSTRY DEVELOPMENTS AND CHAPTER 11 FILING
During the past 3 years, significant industry and consumer attitude changes
have taken place which have greatly impacted the women's apparel industry.
Management believes the following factors have contributed to the changing
retail environment: (i) the convergence by department stores, mass
merchandisers and discount operations on the moderate priced women's apparel
category; (ii) the consumer's discretionary income devoted to apparel has
declined with disposable income more likely to be allocated to the purchase of
durable goods; (iii) the casualization of the workplace has caused a shift from
dressy to more sportswear oriented purchases; and (iv) the working woman has
less time, between business and family commitments, to shop.
These changes and conditions have made the women's apparel industry
extremely challenging. Retailers seeking market share in this highly
competitive environment have escalated promotional efforts, putting tremendous
pressure on gross margins.
As a result of the extremely competitive environment and in response to the
deteriorating liquidity position brought on by losses at approximately 50 of its
store locations and to facilitate restructuring of its obligations, the Company
filed for protection from its creditors under Chapter 11 of the United States
Bankruptcy Code on July 2, 1996. Under the protection of Chapter 11, the
Company managed its affairs and operated its business as a debtor-in-possession
while developing a plan of reorganization. The Company filed its Plan of
Reorganization on July 18, 1996, the First Amended Plan of Reorganization on
August 29, 1996, and the Second Amended Plan of Reorganization on October 22,
1996 (the "Plan"), along with its Disclosure Statement. On October 22, 1996, the
Bankruptcy Court approved the Disclosure Statement as containing adequate
information and established November 18, 1996, as the deadline for voting on the
Plan. The Plan was approved by 99.6% of the voting shareholders and by a
majority of each class of the creditors that voted. On November 22, 1996, the
Bankruptcy Court confirmed the Plan, which became effective on December 3, 1996.
1
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The following table summarizes the classification of the claims and
interests under the Plan and the treatment of such claims and interests under
the Plan:
Class Description of Treatment
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1. Secured Claims Each holder of an allowed claim
received either (i) return of
collateral in full satisfaction of
such secured claim; (ii) payment in
cash in an amount equivalent to the
lesser of (a) the value of the
collateral or (b) the full amount
of the secured claim; (iii)
treatment of such secured claim in
accordance with Section 1124(2) of
the Bankruptcy Code; or (iv) such
other treatment as was agreed to in
writing by such holder of the
secured claim and the Company.
2. Priority Non-Tax Claims Each holder of an allowed claim
received the amount of such
holder's allowed claim in one cash
payment.
3. Public Debt and Public Debt Each holder received, in respect of
Guaranty Claims each $1,000 principal amount of
such public debt claim, (i) 48
shares of common stock in BFC and
(ii) $800 in original principal
amount of new notes bearing
interest at 12% per annum ("New
Notes"). This distribution also
served to satisfy the public debt
guaranty claim.
4. General Unsecured Claims Each eligible claim holder
received, at the election of the
Company, cash equal to the allowed
amount of such claim.
5. Bank and Bank Guaranty Claims The holders of allowed claims
received a total of (i) 138,284
shares of common stock in BFC and
(ii) $2,313,000 in original
principal amount of New Notes.
This distribution also served to
satisfy the Bank Guaranty Claim.
6. Trade Claims Each eligible claim holder received
cash in an amount equal to the
allowed amount of such claim.
7. Lease Rejection Claims Per the acceptance of the Plan by
these claim holders, each holder
received cash in an amount equal to
25% of the allowed amount of such
claim.
8. Gift Certificate Claims The Company honored and will
continue to honor gift certificate
claims in the ordinary course of
business in accordance with the
Company's general practice.
9. Holders of Braun's Fashions Each holder of an allowed interest
Corporation Common Stock retained such interest, subject to
the dilutive and other effects of
the Plan.
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Administrative claims and priority tax claims were not classified under the
Plan. In accordance with terms under the Plan, each holder of an allowed claim
for an administrative expense or priority tax claim received, at the option of
the Company, the amount of such holder's allowed claim in one cash payment.
As a result of its bankruptcy filing, the Company recorded $7.8 million of
reorganization expenses in fiscal 1997 in the following categories: professional
fees - $2.6 million; loss on disposal of fixed assets - $2.5 million; lease
rejection claims - $1.0 million; inventory impairment - $0.6 million; severance
pay - $0.2 million; and other bankruptcy related expenses - $0.9 million.
Braun's emerged from Chapter 11, upon confirmation of its Plan, only 5
months after filing. The Plan was approved by 99.6% of the shareholders and
by a majority of each class of creditors that voted. After emergence from
Chapter 11 the Company has benefited from actions implemented during the
reorganization, including: rejecting 50 unprofitable store leases which in
the previous year generated operating losses of $2.3 million; re-negotiating
more favorable lease terms for an additional 46 stores; negotiating a $10
million working capital line of credit with a new lender; downsizing the
distribution center by 35,000 square feet; strengthening the organization by
hiring highly qualified individuals in the key areas of store operations and
merchandise planning and distribution, and eliminating corporate and field
staff associated with the discontinuance of the junior division (Gigi stores)
and the reduced number of stores.
BUSINESS STRATEGY
The Company's business strategy is to provide its target customer with high
quality, value-priced, coordinated ensembles that are interchangeable between
work and leisure activities; to differentiate itself from its competitors
through its focused merchandising approach, including an emphasis on private
label merchandise manufactured exclusively for the Company; to continue to
enhance efficiencies in purchasing, distribution and management information
systems; to effectively manage its merchandise inventories to maximize sales and
gross profit; and to maintain updated, attractive store facilities.
The key elements of the Company's strategy are as follows:
- Address the changing needs of its target customer
- Focus its merchandising approach
- Utilize information systems to drive decision making and maintain
tight inventory control
- Maintain updated and attractive stores and commence controlled
expansion program
ADDRESS THE CHANGING NEEDS OF ITS TARGET CUSTOMER. The Company conducts
ongoing market research to track and analyze the changing needs of its customers
in its clearly identified market niche. Braun's target customer is the 35-to-55
year old woman with an annual family income of $35,000 to $75,000 who is
value-conscious yet desires a fashionable wardrobe of "lifestyle" clothing that
can be worn for both work and leisure activities. The Company's objective is to
be recognized as offering fashionable merchandise at attractive prices.
FOCUS ITS MERCHANDISING APPROACH. Braun's merchandising approach is
value-driven and provides customers with a focused, coordinated selection of
quality private label and brand name apparel in three basic assortments:
lifestyle, special attitude, and active wear. The "lifestyle" assortment, which
is the predominant group, includes versatile clothing that may be worn for work
as well as casual events. The "special attitude" assortment consists of dresses
and dressy sportswear that are used primarily for special occasions. The
"active wear" assortment consists of clothing worn for leisure activities and
includes denim, fleece and shorts. Braun's stores use an integrated
merchandising approach in which all merchandise is geared to the customer's
lifestyle requirements and is presented in color stories which are changed
seasonally.
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Braun's lines of merchandise include five principal segments: sportswear,
sweaters, dresses, accessories, jackets and blazers. During fiscal 1997, the
Company's merchandise emphasis was consistent with fiscal 1996 where the
merchandise emphasis was on sportswear and sweaters. The following table sets
forth the approximate percentage of net sales attributable to each merchandise
group for the past three fiscal years:
PERCENTAGE OF NET SALES
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1997 1996 1995
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MERCHANDISE GROUP
Sportswear 59.5% 60.2% 61.4%
Sweaters 21.5 17.5 14.3
Dresses 10.9 14.7 14.7
Accessories 5.3 5.3 6.4
Coats, jackets and blazers 2.8 2.3 3.2
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Total 100.0% 100.0% 100.0%
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The Company has developed a variety of strategies and programs to
distinguish itself from its competitors and build customer loyalty. Major
elements of its merchandising strategy include:
STRONG VISUAL MERCHANDISE PRESENTATION. The Company's stores rely heavily
on attracting mall traffic through stimulating visual presentation. Braun's
uses carefully designed front-of-store displays to draw customers into the
store. The visual program emphasizes attractive windows and store-entrance
areas, as well as graphics and other collateral materials that "romance" the
clothing. Merchandise is planned and assorted by consistent color stories
throughout the store which present a color or seasonal theme.
PRIVATE LABEL CLOTHING. The use of private label clothing produced
exclusively for Braun's creates a unique store identity and establishes a
competitive "point of difference", while resulting in higher-than-average gross
profit margins. For its private label clothing, the Company primarily uses its
proprietary brand name, "CHRISTOPHER & BANKS". The Company estimates that
sales of Braun's private label clothing comprised approximately 68% of its sales
in fiscal 1997, an increase from 60% in fiscal 1996. The Company anticipates
that private label clothing will account for approximately the same percent of
its sales in fiscal 1998. The Company's merchandising staff works closely with
its vendors in selecting and developing designs for the Company's private label
merchandise.
DIRECT IMPORT PROGRAM. During fiscal 1997, the Company increased its
purchases of direct imports to 50% of its total purchases, up from 40% in the
previous year. The Company anticipates that direct imports, as a percent of
total purchases, will be approximately 50% in fiscal 1998. Management believes
that direct imports allow the Company to obtain high quality merchandise at a
lower cost. This in turn gives the Company the flexibility to be more
promotional and establish a merchandising point-of-difference from its
competitors.
KEY VENDOR RELATIONSHIPS. The Company's ongoing relationships with key
vendors has enabled it to: (i) expand its private label offerings in order to
project a merchandising point of difference; (ii) carry out a timely product
testing and reorder program designed to maximize sales; and (iii) offer the
customer "opportunistic" purchases through planned promotional programs.
LOYALTY BUILDING PROGRAMS. Braun's has frequent shopper and preferred
customer programs which the Company believes encourage repeat sales and customer
loyalty. Features include: a frequent shopper program where customers, after
reaching certain cumulative purchase levels, are awarded a coupon redeemable
toward future purchases; and a preferred customer program which offers
additional customer benefits including invitations to private sales,
informational phone calls and notices on upcoming sales. The customer
automatically becomes a preferred customer after receiving the first frequent
shopper award coupon. As of March 1, 1997, there were approximately 390,000
frequent customers and 70,000 preferred customers.
In August 1995, the Company introduced a Braun's credit card for the
purpose of increasing sales, strengthening customer loyalty and facilitating
more frequent communication with core customers. The program's results to date
have exceeded the Company's expectations and as of March 1, 1997, there were
approximately 120,000 cardholders. The Braun's card is offered through a third
party finance company with no recourse or credit risk to Braun's.
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QUALITY ASSURANCE. The Company uses a variety of quality control measures
prior to and at warehouse receipt including color, fabric and construction
analysis and sizing verification, to ensure that all merchandise meets the
Company's quality standards.
UTILIZE INFORMATION SYSTEMS TO DRIVE DECISION MAKING AND MAINTAIN TIGHT
INVENTORY CONTROL. The Company has an integrated on-line management information
system. This information system, which includes point-of-sale registers in all
stores, provides support for merchandising, inventory management, marketing, and
financial and management reporting. The on-line access to information allows
management to monitor sales trends by style, vendor and merchandising
classification. The Company's updated POS registers expedite consumer checkout
and provide for an efficient flow of information to and from the stores.
The Company manages its merchandise inventories to generate maximum sales
and gross margins. It utilizes a computerized planning and allocation system to
consistently deliver appropriate merchandise assortments to its stores. The
Company utilizes a cost effective program to deliver merchandise on a daily
basis from the Company's distribution center to all stores. As a result of these
programs, inventories can be maintained at their most efficient level throughout
the year which ensures a consistent flow of fresh merchandise to the stores.
During the Chapter 11 proceeding, the Company liquidated old inventory and
significantly improved its inventory "freshness". Since emerging from Chapter
11, the Company has continued to use promotional markdowns and special sales to
promote improved inventory turnover and maintain fresh inventories. Inventory
turnover increased from 2.6 turns in fiscal 1996 to 3.2 turns in fiscal 1997.
Management believes its tightened inventory control has contributed
significantly to its increased gross margins and operating income.
MAINTAIN UPDATED AND ATTRACTIVE STORES AND COMMENCE CONTROLLED EXPANSION
PROGRAM. The Company continually updates store design and layout. The Company
believes that the present prototype highlights visual merchandise presentation
and improves the customer's shopping experience through enhanced decor,
fixturing and store layout. The Company typically effects a major or a minor
remodeling of a store following renewal of the store's lease. However, during
the interim, improvements such as carpet replacement, painting and similar
improvements are made as needed. The Company completed a total of five major
store remodelings in fiscal 1997, seven in fiscal 1996, and seven in fiscal
1995. The Company plans to complete ten major store remodelings in fiscal 1998.
The Company plans to pursue a strategy of controlled expansion. Twelve to
fifteen new stores are planned for fiscal 1998. New stores will be opened in
regional malls in states where the Company already has a market presence.
STORE OPERATIONS
The Company operates its stores in a manner that encourages operational
management participation in planning, execution and evaluation of the Company's
business and operational policies at all functional levels. Each store has a
manager who executes Company policy and is responsible for day-to-day operations
of the store. Store managers complete a management training program and are
eligible for Company incentive awards based upon store sales volume and expense
control. The Company has a training department devoted to the ongoing training
of its store personnel.
PURCHASING/SOURCES OF SUPPLY
Direct imports accounted for approximately 50% of total purchases in fiscal
1997. The Company purchased nearly all of its merchandise from approximately
200 vendors in fiscal 1997. In fiscal 1997, the Company's ten largest vendors
represented approximately 49% of the Company's purchases. Further, purchases
from the Company's largest overseas supplier accounted for 17% of total
purchases in fiscal 1997 compared to 14% in fiscal 1996. The Company believes it
has a good working relationship with this vendor as well as its other vendors.
Management also believes that other suppliers are available should there be a
disruption in supply from this vendor or its other current vendors. The
Company's main suppliers are established, quality apparel manufacturers who have
worked with the Company over many years and are familiar with the Company's
marketing and merchandising approach. The Company believes its relationships
with its key vendors are good. The Company intends to continue to directly
import approximately 50% of its merchandise purchases during fiscal 1998. Direct
imports enable the Company to purchase quality merchandise at significantly
reduced costs and allow the Company to offer its customers a distinct styling
and value point of difference.
The Company's purchasing staff negotiates price, contract terms and
allowances in an effort to give customers good value. The Company's
merchandising staff also develops programs suited to the strength of each
individual supplier. This involves a range of purchasing arrangements and
covers the spectrum from buying vendor merchandise to designing merchandise with
the vendor's assistance.
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ADVERTISING AND PROMOTION
The Company believes that most of its locations depend on mall traffic. To
attract customers into its stores, the Company emphasizes front-of-store
displays, entryway fixturing and in-store visual presentation. The merchandise
presentation is further enhanced by the use of photographic visual merchandising
images including signs and graphics. Additionally, the Company uses direct mail
in connection with the frequent shopper and preferred customer programs. The
Company also uses newspaper and radio media advertising in targeted markets to
promote special sales events.
SEASONALITY
The Company's sales show seasonal variation as sales in the third and
fourth quarters, which include the Christmas season, generally have been higher
than sales in the first and second quarters. Sales generated during the
Christmas season have a significant impact on the Company's annual results of
operations.
COMPETITION
The women's retail apparel business is highly competitive. The Company
believes that the principal bases upon which it competes are merchandise
selection, price, fashion, quality, store location, store environment and
service. The Company competes with a broad range of national and regional
retail chains that sell similar merchandise, including department stores,
specialty stores and discount stores. The increased focus of department stores,
mass merchandisers and discount operators on this moderate priced segment have
made this industry increasingly competitive in recent years. Many of these
competitors are larger and have greater financial resources than the Company.
The Company believes that its focused merchandise selection and presentation,
competitive prices, product quality, loyalty building programs and customer
service enable the Company to compete effectively.
EMPLOYEES
At May 15, 1997, the Company had approximately 450 full-time and
approximately 1,000 part-time employees. The number of part-time employees
increases during peak selling periods. None of the Company's employees are
represented by a labor union or is subject to a collective bargaining agreement.
The Company has never experienced a work stoppage and considers its relationship
with its employees to be satisfactory.
TRADEMARKS AND SERVICE MARKS
The Company is the owner of the federally registered trademark and
service mark "BRAUNS" with respect to articles of apparel and "CHRISTOPHER &
BANKS", which is its predominant private label. The Company also has common
law rights in other trademarks and service marks which it considers to be of
lesser importance. The Company believes its primary marks are important to
its business and are recognized in the women's retail apparel industry.
Accordingly, the Company intends to maintain its marks and the related
registrations. The Company is not aware of any pending claims of infringement
or other challenges to the Company's right to use its marks in the United
States.
ITEM 2.
PROPERTIES
STORE LOCATIONS
The Company's stores are located predominantly in regional shopping malls
in mid-sized cities and suburban areas, which offer high-traffic by potential
walk-in customers, easy access and perimeter parking. The typical Braun's store
is in a visible and accessible location in an enclosed regional mall that has
numerous specialty stores and two or more general merchandise chains or
department stores as anchor tenants. Fewer than 10% of the Company's stores are
located in strip shopping centers. The Company attempts to locate its stores
strategically within the mall or shopping center to attract walk-in customers
through stimulating visual displays. At May 15, 1997, Braun's stores averaged
approximately 3,400 gross square feet.
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At May 15, 1997, the Company operated 172 Brauns stores in the following states:
Number Number
State of stores State of stores
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Minnesota.................44 Utah.........................5
Iowa......................26 Idaho........................4
Wisconsin.................24 Colorado.....................3
Michigan..................12 Missouri.....................3
Illinois...................8 Oklahoma.....................3
Nebraska...................7 Arkansas.....................2
North Dakota...............7 Ohio.........................2
Kansas.....................6 Wyoming......................2
Montana....................6 Indiana......................1
South Dakota...............6 Washington...................1
STORE LEASES All of the Company's stores are leased. Management believes
that the current commercial real estate market, combined with the Company's
relationship with nationally-recognized developers, established operating
history and status as a middle-market retailer, makes the Company an
attractive tenant when negotiating terms with shopping center developers or
owners.
Lease terms typically are for 10 years and may contain a renewal option.
Leases generally provide for a fixed minimum rental and a percentage of sales
above a specified level. This percentage override is typically 5%. The
following table, which covers all of the stores operated by the Company at May
15, 1997, indicates the number of leases expiring during the fiscal year
indicated and the number of such leases with renewal options.
Number of Number with
FISCAL YEAR Leases Expiring Renewal Options
----------- --------------- ---------------
1998................ 20 4
1999................ 21 6
2000................ 11 3
2001................ 9 3
2002................ 17 4
2003 - 2007......... 91 13
2008 - 2012......... 3 0
The Company currently plans to negotiate new leases in most of the
locations which do not have renewal options.
HEADQUARTERS FACILITY
The Company occupies a 210,000 square foot headquarters and merchandise
distribution center facility located in Plymouth, Minnesota. The Company leases
this facility under an agreement which expires on June 14, 2005. Under the
agreement, the Company will pay rent of approximately $688,000 per year through
June 14, 1999, and $746,000 per year from June 15, 1999, until the end of the
lease term.
The Company subleases 80,000 square feet of warehouse space in its
distribution center to a third party. On January 31, 1997 its sublease
agreement expired. Under the agreement, the Company received minimum rent of
$278,040 per year. The subtenant was also required to reimburse the Company for
property taxes, utilities and other operating costs of the subleased portion of
the facility. As of May 15, 1997, this space is available for rent. However,
the Company is currently pursuing a subtenant to sublease this space with terms
similar to the expired sublease.
In June 1994, the Company also entered into a sublease agreement to lease
its previous office and warehouse facility. This lease was rejected effective
September 30, 1996 during the course of the Company's Chapter 11
reorganization. During fiscal 1997, the Company received rent payments of
$28,125 per month from the subtenant and submitted rent payments of $30,667
per month to the landlord.
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ITEM 3.
LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company held its annual meeting on December 11, 1996, in Minneapolis,
Minnesota. The Company solicited proxies and filed definitive proxy
statements with the Commission pursuant to Regulation 14A. The matters
voted upon at the meeting and the votes cast were as follows:
Item No. 1 Election of Class 2 Directors to serve a three year term
Votes
For Withhold
----- --------
Larry C. Barenbaum 3,425,422 150,880
Donald D. Beeler 3,425,422 150,880
Class 3 Directors whose terms continue until the 1997 annual meeting of
shareholders are Herbert D. Froemming and James J. Fuld, Jr. Class 1
Directors whose terms continue until the 1998 annual meeting of
shareholders are Nicholas H. Cook and Marc C. Ostrow.
Item No. 2 Proposal to increase the number of shares of Common Stock
reserved for issuance under the Company's 1987 Stock Incentive Plan from
510,000 to 710,000 shares.
Votes
--------------------------------------------------------------
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
2,174,844 333,046 5,650 1,062,762
Item No. 3 Proposal to ratify the appointment of Price Waterhouse LLP as
the Company's independent auditor for the Company's current fiscal year.
Votes
--------------------------------------------------------------
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
3,554,702 19,100 2,500 0
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ITEM 4a.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the executive
officers of the Company as of May 15, 1997.
NAME AGE POSITIONS AND OFFICES
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Nicholas H. Cook 56 Chairman of the Board, Chief Executive
Officer and Director
Herbert D. Froemming 60 President, Chief Operating Officer,
Treasurer, Secretary and Director
William J. Prange 43 Senior Vice President and General
Merchandising Manager
Ralph Neal 50 Vice President of Operations
Joseph Pennington 51 Vice President of Merchandise Planning
and Distribution
Jon Fortney 50 Vice President of Real Estate and
Construction
NICHOLAS H. COOK has served the Company in various capacities since 1977.
Mr. Cook has been Chairman of the Board since January 1992, Chief Executive
Officer since December 1990 and a director since October 1987. From December
1990 to June 1994, he also served as the Company's President. From February
1987 to December 1990, Mr. Cook was a Vice President.
HERBERT D. FROEMMING has served the Company as President and Chief
Operating Officer since June 1994. Mr. Froemming has been Secretary since
December 1990, and Treasurer since January 1989. From January 1989 until May
1994, Mr. Froemming served as the Company's Chief Financial Officer, and from
March 1992 to June 1994 Mr. Froemming was a Senior Vice President. He has been
a director of the Company since May 1990. From June 1984 until January 1989,
Mr. Froemming was self-employed and was affiliated with Sullivan Associates,
Inc. as a turnaround consultant for financially troubled companies. From
September 1978 to June 1984, he was Senior Vice President of Gamble Skogmo,
Inc., a merchandising and financial services conglomerate, and Wickes Companies,
Inc. which acquired Gamble Skogmo in 1980.
WILLIAM J. PRANGE has served as Senior Vice President and General
Merchandising Manager since April 1995. From April 1994 through March 1995
Mr. Prange was Vice President and General Merchandising Manager. From 1989 to
1994 he was President and General Merchandise Manager of id Stores. From 1987
to 1989 he was Vice President and General Merchandise Manager of id stores.
From 1985 to 1987, Mr. Prange was Vice President and General Merchandise
Manager of Prange Department Stores.
RALPH C. NEAL has served as Vice President of Operations since September
1996. From 1989 to 1996 Mr. Neal was Vice President of Operations for the id
stores. From 1986 to 1989 Mr. Neal was a Senior Vice President of Brooks
Fashions. From 1982 to 1986 Mr. Neal was Vice President of Operations for the
id stores. Prior to 1982 Mr. Neal served in various managerial capacities for
other women's apparel retailers.
JOSEPH PENNINGTON has served as Vice President of Merchandise Planning
and Distribution and Management Information Systems since February 1997. From
April 1996 through January 1997 Mr. Pennington was self-employed, providing
consulting services to retail companies including Braun's Fashions. Mr.
Pennington was President and Chief Executive Officer of American Specialty
Stores (dba the id) from June 1994 through March 1996. From October 1993
through May 1994 Mr. Pennington was Senior Vice President of Merchandise and
Operations for the id, and from January 1990 through October 1993 Mr. Pennington
was Vice President of Operations. From 1976 through 1989 Mr. Pennington held
various positions with Foxmoor Stores, including Vice President of Planning from
1984 through 1989.
JON R. FORTNEY has served the Company in various capacities since 1979.
Mr. Fortney has been Vice President of Real Estate and Construction since
March 1996. From October 1993 to February 1996 Mr. Fortney was Vice
President of M.I.S. and Distribution. He was Vice President of Distribution
and Merchandise Planning from November 1989 to October 1993, a Regional
Supervisor of Stores from March 1986 to November 1989, a District Supervisor
from February 1980 to March 1986, and a Store Manager from September 1979 to
February 1980.
9
<PAGE>
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock has traded on The NASDAQ Stock Market under the
symbol "BFCI" since March 31, 1992. Prior to that date there was no public
market for the Company's common stock.
The quarterly high and low closing bid quotations of the Company's common
stock for fiscal 1997 and fiscal 1996 are presented in Note 9 of the
Consolidated Financial Statements and are included herein. The quotations
represent inter-dealer quotations without retail mark-up, mark-down or
commission, and do not necessarily represent actual transactions.
The number of holders of record of the Company's common stock as of May 15,
1997 was 95. Based upon information received from the record holders, the
Company believes there are more than 1,500 beneficial owners. The last reported
sales price of the Company's common stock on May 15, 1997 was 8 7/8 .
The Company has never paid dividends on its common stock. The Company
presently intends to retain all future earnings, if any, for the operation of
its business and does not expect to pay cash dividends on its common stock in
the foreseeable future. Currently, dividends are restricted by the terms of (i)
the Company's revolving credit facility and (ii) the indenture under which the
12% Senior Notes (the "New Notes") were issued. See Item 7 of this Form 10-K.
The Company may also enter into bank or other lending agreements in the future
that contain similar restrictions on payment of dividends or other
distributions. Any future determination as to the payment of dividends on common
stock will depend upon future earnings, results of operations, capital
requirements, compliance with financial covenants, the financial condition of
the Company and any other factors the Board of Directors may consider.
In connection with the Company's Chapter 11 proceedings and in accordance
with the Plan, on January 2, 1997, the Company issued an aggregate of 617,516
shares of common stock in BFC and $10,300,200 principal face amount of New Notes
to holders of certain claims. See "Industry Developments and Chapter 11 Filing"
under Item 1 and "Liquidity and Capital Resources" under Item 7 of this Form
10-K. By issuing these securities the Company discharged $13,201,075 of claims
pursuant to the Plan. In connection with the distribution of securities, the
Company relied upon the exemption provided under Section 3(a)(7) of the
Securities Act of 1933 as amended.
10
<PAGE>
ITEM 6.
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data have been derived from the audited
consolidated financial statements of the Company and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and related
notes appearing elsewhere herein.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------------------
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS AND SELECTED OPERATING DATA)
MARCH 1, MARCH 2, FEB. 25, FEB. 26, FEB. 27,
1997(1) 1996 1995 1994 1993
INCOME STATEMENT DATA: -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales...................................... $ 95,946 $ 97,296 $ 93,961 $ 89,050 $ 81,302
Cost of sales(2)............................... 65,445 70,386 68,108 62,395 56,407
------- -------- -------- -------- --------
Gross profit................................... 30,501 26,910 25,853 26,655 24,895
Selling, general and
administrative expenses..................... 22,854 24,897 22,565 20,962 18,379
Depreciation and amortization.................. 2,649 3,154 2,690 2,351 2,053
------- -------- -------- -------- --------
Operating income (loss)........................ 4,998 (1,141) 598 3,342 4,463
Interest, net.................................. 684 1,388 993 502 210
------- -------- --------- -------- --------
Income (loss) before income taxes
and reorganization expense.................. 4,314 (2,529) (395) 2,840 4,253
Reorganization expense......................... 7,830 -- -- -- --
------- -------- -------- -------- --------
Income (loss) before income taxes.............. (3,516) (2,529) (395) 2,840 4,253
Income tax provision (benefit)(3).............. (2,895) 929 (150) 1,079 1,616
------- -------- -------- -------- --------
Net income (loss) before cumulative effect
of change in accounting principle........... $ (621) $ (3,458) $ (245) $ 1,761 $ 2,637
------- -------- -------- -------- --------
------- -------- -------- -------- --------
Cumulative effect of change in
accounting principle
(adoption of SFAS No. 109).................. -- -- -- 1,100 --
------- -------- -------- -------- --------
Net income (loss)............................. $ (621) $ (3,458) $ (245) $ 2,861 $ 2,637
------- -------- -------- -------- --------
------- -------- -------- -------- --------
Net income (loss) per share before
cumulative effect of change in
accounting principle........................ $ (0.15) $ (0.91) $ (0.06) $ 0.45 $ 0.72
Cumulative effect of change in
accounting principle........................ -- -- -- 0.28 --
------- -------- -------- -------- --------
Net income (loss) per
common share................................ $ (0.15) $ (0.91) $ (0.06) $ 0.73 $ 0.72
------- -------- -------- -------- --------
------- -------- -------- -------- --------
Weighted average number of shares
outstanding ................................ 4,029 3,792 3,785 3,910 3,665
SELECTED OPERATING DATA:
Same store sales increase (decrease)(4)........ 10% (3)% (9)% (5)% 3%
Stores at end of period........................ 170 221 224 188 161
Net sales per gross square foot (4)............ $ 148 $ 129 $ 128 $ 141 $ 142
FISCAL YEAR ENDED
-------------------------------------------------------
(DOLLARS IN THOUSANDS)
MARCH 1, MARCH 2, FEB. 25, FEB. 26, FEB. 27,
1997 1996(5) 1995 1994 1993
------- -------- -------- ------- ------
BALANCE SHEET DATA (AT END OF PERIOD)
Working capital................................ $ 14,746 $ 248 $ 10,900 $ 13,204 $ 7,109
Total assets................................... 34,637 32,304 36,179 37,187 24,964
Long-term debt................................. 10,374 952 11,170 10,000 2,200
Stockholders' equity........................... 15,573 13,662 17,118 17,329 14,458
</TABLE>
- ------------------------
(1) From July 2, 1996 until December 3, 1996, the Company operated its business
as a debtor-in-possession under Chapter 11 of the United States Bankruptcy
Code. The Company emerged from bankruptcy upon the confirmation of its
Plan of Reorganization.
(2) Cost of sales includes cost of merchandise and buying expenses and store
and distribution center occupancy costs, but excludes all depreciation and
amortization.
(3) In fiscal 1996, the Company recorded a valuation allowance of $1.8 million,
or $.47 per share, equal to the full amount of its deferred tax assets, due
to the uncertainty of realizing the value of these assets in future years.
In fiscal 1997, the Company reversed the valuation allowance as recent
operating performance has made the future realization of these assets more
likely than not.
(4) Based on net sales for stores open longer than 12 months. In fiscal 1997
excludes stores closed as part of the Company's Chapter 11 reorganization.
(5) $10.4 million of long-term debt potentially subject to acceleration was
reclassified to current liabilities.
11
<PAGE>
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
During the fiscal years ended February 25, 1995, and March 2, 1996, the
Company experienced a decline in same store sales of 9 percent and 3 percent,
respectively. In fiscal 1997 same store sales in the 170 continuing stores
(excluding stores closed as part of the Company's Chapter 11 reorganization)
increased 10% while margins improved significantly. Management believes that
the increase in sales and gross margins were primarily the result of its new
merchandising strategies. Specifically, the Company has increased its emphasis
on the more profitable categories of its merchandise mix and increased its
concentration of direct import merchandise. Management has also tightened its
inventory control and effectively used promotional markdowns to improve
inventory turnover while maintaining a "fresh" mix of inventory.
RESULTS OF OPERATIONS
The following table sets forth operating statement data expressed as a
percentage of net sales for the last three fiscal years and should be read in
conjunction with "Selected Consolidated Financial Data."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
MARCH 1, MARCH 2, FEB. 25,
1997 1996 1995
---------- ---------- -----------
<S> <C> <C> <C>
Net sales.......................................... 100.0% 100.0% 100.0%
Cost of sales...................................... 68.2 72.4 72.5
---------- ---------- -----------
Gross profit....................................... 31.8 27.6 27.5
Selling, general and administrative expenses....... 23.8 25.6 24.0
Depreciation and amortization...................... 2.8 3.2 2.9
---------- ---------- -----------
Operating income (loss)............................ 5.2 (1.2) 0.6
Interest, net...................................... 0.7 1.4 1.0
---------- ---------- -----------
Income (loss) before income taxes
and reorganization expense...................... 4.5 (2.6) (0.4)
Reorganization expense............................. 8.2 -- --
---------- ---------- -----------
Loss before income taxes........................... (3.7) (2.6) (0.4)
Income tax provision (benefit)(1).................. (3.1) 0.9 (0.1)
---------- ---------- -----------
Net loss........................................... (0.6)% (3.5)% (0.3)%
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
------------------------------
(1) In fiscal 1996, the Company recorded a valuation allowance of $1.8 million,
or $.47 per share, equal to the full amount of its deferred tax assets, due
to the uncertainty of realizing the value of these assets in future years.
In fiscal 1997, the Company reversed the valuation allowance as recent
operating performance has made the future realization of these assets more
likely than not.
FISCAL 1997 COMPARED TO FISCAL 1996
NET SALES. Net sales for the fiscal year ended March 1, 1997, a fifty-two
week year, were $96.0 million, a decrease of 1% from sales of $97.3 million in
fiscal 1996, a fifty-three week year. The decrease in sales is attributed to the
closing of approximately 50 unprofitable stores during the year and one less
week of sales reported in fiscal 1997. The effect of these factors was
substantially offset by a 10% same store sales increase in the Company's 170
continuing stores.
GROSS PROFIT. Gross profit (which is net sales less cost of merchandise and
buying and occupancy expenses) increased from $26.9 million in fiscal 1996 to
$30.5 million in fiscal 1997. The increase in gross profit as a percent of
sales was due to the Company purchasing merchandise with a lower cost through
the Company's strategy of expanded direct import purchases. Gross margins were
also favorably impacted by lower occupancy costs due to closing approximately 50
unprofitable stores during the year and negotiating reduced rents at a number of
continuing stores.
12
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased to $22.9 million or 23.8% of net sales from
$24.9 million or 25.6% of net sales in fiscal 1996. This decrease resulted
primarily from the Company operating approximately 50 fewer stores during the
fiscal year. The decrease as a percentage of sales resulted primarily from
achieving a 10 percent same store sales increase in the Company's 170 continuing
stores.
OPERATING INCOME (LOSS). As a result of the foregoing, operating income
for fiscal 1997 was $5.0 million or 5.2% of net sales as compared to an
operating loss of $1.1 million or 1.2% of net sales in fiscal 1996.
INTEREST, NET. Net interest decreased from $1.4 million in fiscal 1996 to
$0.7 million in fiscal 1997. This decrease was primarily due to the Company not
being required to pay interest on its prepetition debt while it operated as a
debtor-in-possession during its Chapter 11 proceedings. Further, as a result of
the Company's improved cash flow, no advances were made on the line of credit
during the second half of the year and increased income from investments was
generated. If the Company had been required to pay interest on its prepetition
debt during its bankruptcy proceedings, interest expense, net of interest
income, would have totaled approximately $1.2 million.
REORGANIZATION EXPENSE. The Company recorded approximately $7.8 million of
reorganization expense during fiscal 1997. This reorganization expense included
$2.6 million of professional fees and services; a $2.5 million loss on disposal
of fixed assets; $1.0 million of lease rejection claims; $0.6 million related
to inventory impairment; $0.2 million of severance pay; and $0.9 million in
other bankruptcy related expenses.
INCOME TAXES. Income tax benefit in fiscal 1997 was $2.9 million compared
to income tax expense of $0.9 million in fiscal 1996. In fiscal 1996, the
Company recorded a valuation allowance of $1.8 million, or $.47 per share, equal
to the full amount of its deferred tax assets due to the uncertainty of
realizing the value of these assets in future years. In fiscal 1997, the
Company reversed the valuation allowance as recent operating performance has
made the future realization of these assets more likely than not.
NET LOSS. The net loss for fiscal 1997 was $0.6 million or 0.6% of net
sales as compared to a net loss of $3.5 million or 3.5% of net sales in fiscal
1996.
FISCAL 1996 COMPARED TO FISCAL 1995
NET SALES. Net sales for the fiscal year ended March 2, 1996, a fifty-three
week year, were $97.3 million, an increase of 4 percent from $94.0 million in
fiscal 1995, a fifty-two week year. The increase in sales was due primarily to
operating more stores on average during the 12 month period than the prior year
and an extra week in fiscal 1996 offset by a 3% decline in same store sales. Net
sales were adversely affected by a continued sluggish women's retail apparel
environment and an unusually cool spring and severe weather beginning
mid-December and continuing through much of January and February.
GROSS PROFIT. Gross profit, which is net sales less cost of merchandise and
buying and occupancy expenses, increased to $26.9 million for fiscal 1996 from
$25.9 million for fiscal 1995. The gross profit percent remained flat due to
ongoing promotional pricing efforts required to compete with other women's
apparel retailers and maintain inventories at planned levels offset by a lower
merchandise cost as a result of the Company's strategy of expanded direct import
purchases.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $24.9 million or 25.6% of net sales for
fiscal 1996 from $22.6 million or 24.0% of net sales for fiscal 1995. The
increase as a percent of net sales was primarily the result of lower than
expected sales combined with operating more stores on average during the 12
month period than the prior year.
OPERATING INCOME (LOSS). The operating loss for fiscal 1996 was $1.1
million or 1.2% of net sales compared to operating income of $598,468 or 0.6% of
net sales in fiscal 1995.
INTEREST, NET. Net interest increased to $1.4 million for fiscal 1996 from
$993,491 for fiscal 1995. The increase in interest expense was the result of
higher average borrowings and interest expense related to the Company's
point-of-sale registers under a capital lease.
INCOME TAXES. Income tax expense in fiscal 1996 was $929,121 compared to
an income tax benefit of $150,043 in fiscal 1995. In fiscal 1996 the Company
recorded a valuation allowance of $1.8 million, or $.47 per share, equal to the
full amount of its deferred tax assets, due to the uncertainty of realizing the
value of these assets in future years.
NET LOSS. The net loss for fiscal 1996 was $1.7 million or $.44 per share
prior to establishing the above mentioned valuation allowance and was $3.5
million or $.91 per share after recording the valuation allowance. This
compares to a net loss for the prior year of $244,980 or $.06 per share.
13
<PAGE>
PERFORMANCE OF 170 CONTINUING STORES
The closing of stores in connection with the Company's Chapter 11
bankruptcy filing has enabled management to concentrate its efforts on the 170
continuing stores that the Company believes provide the greatest potential for
ongoing profitability. The following table sets forth the results of operations
for these 170 continuing stores for the periods indicated. Certain financial
information for these stores is expressed in dollars and as a percentage of net
sales.
<TABLE>
<CAPTION>
170 CONTINUING STORES
----------------------------------------------------------------
FISCAL YEAR ENDED FISCAL YEAR ENDED
MARCH 1, 1997 MARCH 2, 1996
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $87,161,224 100.0% $79,463,237 100.0%
Cost of sales, merchandise, buying and occupancy 57,378,543 65.8 55,678,116 70.1
------------ -------- ----------- ----------
Gross profit 29,782,681 34.2 23,785,121 29.9
Selling, general and administrative expenses 20,767,301 23.8 20,305,078 25.6
Depreciation and amortization 2,360,128 2.8 2,227,811 2.7
------------ -------- ----------- ----------
Operating income $ 6,655,252 7.6% $ 1,252,232 1.6%
------------ -------- ----------- ----------
------------ -------- ----------- ----------
</TABLE>
For the fiscal year ended March 1, 1997, gross profit in the 170 continuing
stores increased by $6.0 million and from 29.9% of net sales in fiscal 1996 to
34.2% of net sales in fiscal 1997. Management's focus on the 170 continuing
stores, following the decision to close approximately 50 underperforming stores,
helped generate improved sales performance in the continuing stores,
particularly in the third and fourth quarters when same store sales increased
15% and 18%, respectively. Higher gross margins were realized primarily due to
an increased concentration of direct imports; the Company's emphasis on the more
profitable categories of its merchandise mix; and lower occupancy costs. Due to
higher gross profit and reductions made in selling, general and administrative
expenses during fiscal 1997 operating income for the year increased by $5.4
million from the prior year.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal on-going needs for liquidity are to finance the
purchase of merchandise inventories and other working capital requirements.
Merchandise purchases vary on a seasonal basis, peaking in the fall. As a
result, the Company's cash requirements historically reach their peak in October
and November. Conversely, cash balances reach their peak in January, after the
holiday season is completed.
Net cash generated by operating activities totaled $7.7 million for the
fiscal year as compared to $2.3 million in the prior year. This is the result
of (i) increased sales from liquidating inventory at stores that were closed
during the year; (ii) increased same store sales of 10% in the 170 continuing
stores; (iii) planned reduction in merchandise at year-end; and (iv) reductions
in selling, general and administrative expenses due primarily to closing
approximately 50 unprofitable stores. Cash was used to finance $1.0 million of
capital expenditures for the completion of the major remodeling of five stores
and other miscellaneous capital expenditures. In fiscal 1998, the Company
expects to spend up to $5.5 million on capital expenditures opening 12 to 15 new
stores and completing approximately 10 major remodels. Management expects its
cash on hand combined with cash flow from operations to be sufficient to meet
its capital expenditure and working capital requirements and its other needs for
liquidity during the upcoming year.
While the Company was restructuring its operations, the Company had a $10
million debtor-in-possession Revolving Credit and Security Agreement (the
"DIP Facility") with Norwest Bank Minnesota, National Association, subject to a
borrowing base calculation. The Company had the ability to request revolving
credit loans and the issuance of letters of credit under the DIP Facility. The
DIP Facility terminated on December 3, 1996, the effective date of the Plan.
As part of the Plan, the Company entered into a borrowing agreement with
Norwest Bank Minnesota, National Association (the "Norwest Revolver") expiring
April 1, 1999. The Norwest Revolver provides the Company with revolving credit
loans and letters of credit up to $10 million, subject to a borrowing base
formula tied to inventory levels.
Loans under the Norwest Revolver bear interest at Norwest's base rate plus
3/4%. The interest is payable monthly in arrears. After June 1997, the Norwest
Revolver provides for a potential decrease in the interest rate, depending on
the financial performance of the Company (as described in the Norwest Revolver).
The Norwest Revolver carries commitment fees of 1/4% of the difference between
$5 million and the average amount outstanding under the facility (including
letters of credit). If the average amount outstanding under the facility
(including letters of credit) is between $5 million and $7.5 million, the
commitment fee shall be based on the difference between $7.5 million and the
average amount outstanding under the facility (including letters of credit) and
if the average amount outstanding (including letters of credit) is in excess of
$7.5 million, the commitment fee is on the difference between $10 million and
the average amount outstanding under the facility (including letters of credit).
This facility is secured by substantially all of the Company's assets. The
borrowing base at May 15, 1997, was $6.6 million. As of May 15, 1997, the
Company had no borrowings and outstanding letters of credit in the amount of
$1.9 million under the Norwest Revolver. Accordingly, the availability of
revolving credit loans under the Norwest Revolver was $4.7 million at that date.
The Norwest Revolver contains certain restrictive covenants, including a
limitation on capital expenditures, restrictions on incurring additional
indebtedness, limitations on certain types of investments and prohibitions on
paying dividends, as well as the maintenance of certain financial ratios.
Further, as part of the Plan, the Company issued $10,300,200 of public debt
in the form of 12% Senior Notes (the "New Notes") due January 2005. The New
Notes were issued, pursuant to an Indenture dated as of December 2, 1996, to (i)
the holders of the 9% Senior Notes due January 2001 where each holder received,
for each $1,000 principal face amount, (a) 48 shares of common stock in BFC and
(b) New Notes in original principal face amount of $800 and (ii) the Company's
prepetition banks who received a total of (a) 138,284 shares of common stock in
BFC and (b) $2,313,000 in original principal face amount of the New Notes.
Principal repayments are scheduled to begin January 1, 1998, and will occur
annually at the first of every calendar year. The mandatory redemption
percentage of the original principal face amount of New Notes is as follows:
1998 - 6.6%; 1999 - 7.2%; 2000 - 7.8%; 2001 - 8.5%; 2002 - 9.3%; 2003 - 10.1%;
2004 - 11.0%; 2005 - maturity.
15
<PAGE>
The principal amount of the New Notes bears interest at the rate of 12% per
annum from and after December 17, 1996. Interest at the rate of 9% per annum on
the outstanding principal amount is to be paid monthly beginning on January 31,
1997, and on the last day of each calendar month thereafter until all amounts
due and owing on the New Notes and under the Indenture have been paid in full.
Interest at the rate of 3% per annum on the outstanding principal amount shall
accrue monthly and shall, upon accrual, be treated as principal for all
purposes, including without limitation, the calculation of all interest payments
due thereafter, and shall be payable in full on January 1, 2005.
The New Notes are general unsecured senior obligations of the Company. The
Indenture for the New Notes contains certain covenants which, among other
things, limit the ability of the Company to incur liens, incur additional
indebtedness, and restrict the Company's ability to declare dividends.
In April 1997, the Company purchased $800,000 principal face amount of its
New Notes at a 20% discount from par. This purchase will satisfy the Company's
total January 1, 1998 redemption requirement and a portion of its January 1,
1999 requirement as well.
The Company is unaware of any environmental liability that would have a
material adverse effect on the financial position or the results of operations
of the Company.
NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128, "Earnings Per Share". SFAS No. 128 specifies new standards designed
to improve the earnings per share ("EPS") information provided in financial
statements by simplifying the existing computational guidelines, revising the
disclosure requirements and increasing the comparability of EPS data on an
international basis. Some of the changes made to simplify the EPS computations
include: (a) eliminating the presentation of primary EPS and replacing it with
basic EPS, with the principal difference being that the common stock equivalents
are not considered in computing basic EPS, (b) eliminating the modified treasury
stock method and the three percent materiality provision and (c) revising the
contingent share provisions and the supplemental EPS data requirements. SFAS
No. 128 also makes a number of changes to existing disclosure requirements.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. The Company has not yet
determined the impact of the implementation of SFAS No. 128.
QUARTERLY RESULTS AND SEASONALITY
The Company's sales show seasonal variation as sales in the third and
fourth quarters, which include the Christmas season, generally have been higher
than sales in the first and second quarters. Sales generated during the
Christmas season have a significant impact on the Company's annual results of
operations. Quarterly results may fluctuate significantly depending on a number
of factors including adverse weather conditions, shifts in the timing of certain
holidays and customer response to the Company's seasonal merchandise mix.
The Company's unaudited quarterly operating results for each quarter of
fiscal 1997 and 1996 are presented in Note 9 of the Consolidated Financial
Statements.
INFLATION
The Company does not believe that inflation has had a material effect on
the results of operations during the past three fiscal years.
16
<PAGE>
ITEM 8.
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PAGE
----
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . 17
Financial Statements:
Report of Independent Accountants . . . . . . . . . . . . . . . . . . 18
Consolidated Balance Sheet at March 1, 1997 and March 2, 1996 . . . . 19
Consolidated Statement of Operations for the three years ended
March 1, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Consolidated Statement of Stockholders' Equity for the three years
ended March 1, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . 21
Consolidated Statement of Cash Flows for the three years ended
March 1, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . 23
17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Braun's Fashions Corporation
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Braun's Fashions Corporation and its subsidiary at March 1, 1997 and
March 2, 1996, and the results of their operations and their cash flows for each
of the three years in the period ended March 1, 1997 in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Minneapolis, Minnesota
April 2, 1997
18
<PAGE>
BRAUN'S FASHIONS CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS MARCH 1, MARCH 2,
------ 1997 1996
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $ 10,913,716 $ 1,543,131
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . 532,331 614,228
Merchandise inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 9,253,896 12,858,439
Income tax refund receivable. . . . . . . . . . . . . . . . . . . . . . . 870,498 844,189
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169,668 996,115
Current deferred tax asset. . . . . . . . . . . . . . . . . . . . . . . . 799,952 --
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . 22,540,061 16,856,102
Equipment and improvements:
Leasehold improvements. . . . . . . . . . . . . . . . . . . . . . . . . . 10,761,611 15,901,009
Furniture and fixtures. . . . . . . . . . . . . . . . . . . . . . . . . . 7,301,931 9,582,395
Other equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,315,656 3,012,806
Construction in progress. . . . . . . . . . . . . . . . . . . . . . . . . 169,987 620,786
------------ ------------
21,549,185 29,116,996
Less accumulated depreciation and amortization. . . . . . . . . . . . . . 10,763,888 14,251,035
------------ ------------
Net equipment and improvements . . . . . . . . . . . . . . . . . . . . 10,785,297 14,865,961
Other assets:
Long-term deferred tax asset. . . . . . . . . . . . . . . . . . . . . . . 1,198,151 --
Deferred financing costs, net . . . . . . . . . . . . . . . . . . . . . . -- 449,218
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113,630 132,287
------------ ------------
Total other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 1,311,781 581,505
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,637,139 $ 32,303,568
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,433,652 $ 2,183,362
Checks issued, not yet presented for payment. . . . . . . . . . . . . . . -- 1,335,088
Accrued salaries, wages and related expenses. . . . . . . . . . . . . . . 1,222,203 1,225,314
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,229,640 1,261,994
Current maturities of long-term debt and capital lease obligation . . . . 908,957 217,867
Long-term obligations subject to acceleration . . . . . . . . . . . . . . -- 10,384,000
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . 7,794,452 16,607,625
Long-term obligations:
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,373,662 951,860
Accrued rent obligation . . . . . . . . . . . . . . . . . . . . . . . . . 896,253 1,081,701
------------ ------------
Total long-term obligations. . . . . . . . . . . . . . . . . . . . . . 11,269,915 2,033,561
Stockholders' equity:
Preferred stock - $0.01 par value, 1,000,000 shares authorized,
none outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Common stock - $0.01 par value, 9,000,000 shares authorized,
4,432,588 and 3,793,312 shares issued and outstanding in 1997
and 1996, respectively . . . . . . . . . . . . . . . . . . . . . . . . 44,326 37,933
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . 27,604,043 25,079,052
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,075,597) (11,454,603)
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . 15,572,772 13,662,382
------------ ------------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . $ 34,637,139 $ 32,303,568
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
BRAUN'S FASHIONS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------
MARCH 1, MARCH 2, FEBRUARY 25,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . $ 95,946,046 $ 97,295,978 $ 93,960,788
Cost of sales:
Merchandise, buying and occupancy
(exclusive of depreciation and
amortization shown below) . . . . . . . . . . . . . . . . 65,445,103 70,385,844 68,107,674
------------ ------------ ------------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . 30,500,943 26,910,134 25,853,114
Selling, general and administrative. . . . . . . . . . . . . 22,854,266 24,897,287 22,564,920
Depreciation and amortization. . . . . . . . . . . . . . . . 2,648,563 3,154,266 2,689,726
------------ ------------ ------------
Operating income (loss) . . . . . . . . . . . . . . . . . 4,998,114 (1,141,419) 598,468
Interest, net. . . . . . . . . . . . . . . . . . . . . . . . 684,330 1,387,623 993,491
------------ ------------ ------------
Income (loss) before reorganization expense
and income taxes . . . . . . . . . . . . . . . . . . . . 4,313,784 (2,529,042) (395,023)
Reorganization expense . . . . . . . . . . . . . . . . . . . 7,829,924 -- --
------------ ------------ ------------
Loss before income taxes . . . . . . . . . . . . . . . . . . (3,516,140) (2,529,042) (395,023)
Income tax provision (benefit) . . . . . . . . . . . . . . . (2,895,146) 929,121 (150,043)
------------ ------------ ------------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . $ (620,994) $ (3,458,163) $ (244,980)
------------ ------------ ------------
------------ ------------ ------------
Net loss per common share. . . . . . . . . . . . . . . . . . $ (0.15) $ (0.91) $ (0.06)
------------ ------------ ------------
------------ ------------ ------------
Average number of common shares and common
equivalent shares outstanding . . . . . . . . . . . . . . 4,029,041 3,791,612 3,785,132
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE>
BRAUN'S FASHIONS CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------ ADDITIONAL
NUMBER PAID-IN ACCUMULATED
OF SHARES AMOUNT CAPITAL DEFICIT
---------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at February 26, 1994 . . . . . . . . . . . . . 3,774,832 $ 37,748 $ 25,042,657 $ (7,751,460)
Stock issued on exercise of options. . . . . . . . . . 16,440 165 33,465 --
Net loss . . . . . . . . . . . . . . . . . . . . . . . -- -- -- (244,980)
------------ ------------ ------------ ------------
Balance at February 25, 1995 . . . . . . . . . . . . . 3,791,272 37,913 25,076,122 (7,996,440)
Stock issued on exercise of options. . . . . . . . . . 2,040 20 2,930 --
Net loss . . . . . . . . . . . . . . . . . . . . . . . -- -- -- (3,458,163)
------------ ------------ ------------ ------------
Balance at March 2, 1996 . . . . . . . . . . . . . . . 3,793,312 37,933 25,079,052 (11,454,603)
Stock issued pursuant to plan of reorganization. . . . 617,516 6,175 2,475,006 --
Stock issued on exercise of options. . . . . . . . . . 21,760 218 49,985 --
Net loss . . . . . . . . . . . . . . . . . . . . . . . -- -- -- (620,994)
------------ ------------ ------------ ------------
Balance at March 1, 1997 . . . . . . . . . . . . . . . 4,432,588 $ 44,326 $ 27,604,043 $(12,075,597)
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
BRAUN'S FASHIONS CORPORATION
CONSOLIDATED STATEMENT OF CASHFLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------
MARCH 1, MARCH 2, FEBRUARY 25,
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (620,994) $ (3,458,163) $ (244,980)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 2,678,963 3,245,466 2,780,924
(Increase) decrease in deferred income tax assets . . . . . . . . . . . . . (1,998,103) 1,743,957 (118,538)
Loss on disposal of property and equipment. . . . . . . . . . . . . . . . . 2,469,940 23,278 17,079
Increase (decrease) in accrued rent obligation. . . . . . . . . . . . . . . (185,448) 81,480 94,710
Changes in operating assets and liabilities:
(Increase) decrease in merchandise inventory,
prepaid expenses, receivables and other. . . . . . . . . . . . . . . . . 4,456,747 1,329,032 (757,640)
Increase (decrease) in accounts payable and
accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 879,737 (676,199) (2,156,829)
Increase (decrease) in income taxes payable . . . . . . . . . . . . . . . -- -- (114,152)
------------ ------------ ------------
Net cash provided by (used in) operating activities . . . . . . . . . . . . 7,680,842 2,288,851 (499,426)
Cash flows from investing activities:
Purchase of equipment and improvements. . . . . . . . . . . . . . . . . . . (1,042,622) (1,553,026) (4,630,062)
Proceeds from sale of fixtures and furniture. . . . . . . . . . . . . . . . 53,270 -- --
------------ ------------ ------------
Net cash used in investing activities. . . . . . . . . . . . . . . . . . (989,352) (1,553,026) (4,630,062)
Cash flows from financing activities:
Net borrowings (payments) on line of credit . . . . . . . . . . . . . . . . -- 400,000 --
Principal payments on debt agreements . . . . . . . . . . . . . . . . . . . (250,060) (225,741) --
Borrowings under debt agreements. . . . . . . . . . . . . . . . . . . . . . 2,878,952 -- --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,203 2,950 33,630
------------ ------------ ------------
Net cash provided by financing activities. . . . . . . . . . . . . . . . 2,679,095 177,209 33,630
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . 9,370,585 913,034 (5,095,858)
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . 1,543,131 630,097 5,725,955
------------ ------------ ------------
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . $ 10,913,716 $ 1,543,131 $ 630,097
------------ ------------ ------------
------------ ------------ ------------
Supplemental cash flow information:
Interest paid during the year . . . . . . . . . . . . . . . . . . . . . . . $ 644,198 $ 1,388,060 $ 989,218
Income taxes paid (refunded) during the year. . . . . . . . . . . . . . . . $ (903,958) $ (79,300) $ 505,036
Debt for equity exchange. . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,900,000 $ -- $ --
Write-off of deferred financing costs . . . . . . . . . . . . . . . . . . . $ 418,818 $ -- $ --
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Braun's Fashions Corporation (BFC), through its wholly-owned subsidiary,
Braun's Fashions, Inc. (BFI) (collectively referred to as the "Company"),
operates retail specialty stores selling women's clothing and related
accessories. The Company operated 170, 221 and 224 stores at the end of fiscal
1997, 1996, and 1995, respectively.
FISCAL YEAR AND BASIS OF PRESENTATION
The Company's fiscal year ends on the Saturday nearest February 28. The
fiscal years ending March 1, 1997 and February 25, 1995 consisted of 52 weeks
each. The fiscal year ending March 2, 1996 consisted of 53 weeks. The
consolidated financial statements include the accounts of the Company's wholly-
owned subsidiary, BFI. All significant intercompany accounts have been
eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash on hand and on deposit, and
investments purchased with an original maturity of three months or less.
MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out retail inventory method.
INVENTORY MARKDOWNS
Permanent markdowns are recorded to reflect expected adjustments to retail
prices in accordance with the retail inventory method. Markdowns are recorded
monthly on the basis of an evaluation of inventory by merchandising management.
In the Company's judgement, all markdowns necessary to record inventory at the
lower of cost or market under the retail inventory method have been provided for
all periods presented.
EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are stated at cost. Equipment is depreciated
over its estimated useful life and improvements are amortized over the term of
the related leases. Repairs and maintenance which do not extend an asset's
useful life are expensed as incurred. When assets are retired or otherwise
disposed of, the cost and related accumulated depreciation or amortization are
removed from the accounts, and any resulting gain or loss is reflected in income
for that period. The Company evaluates its long-lived assets in accordance with
the provisions of SFAS No. 121, "Accounting for Impairment of Long-Lived Assets
and Long-Lived Assets to Be Disposed of". This Statement requires that long-
lived assets and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. As of March 1, 1997, the Company has
determined that no adjustment to the financial statements is necessary under
SFAS No. 121.
RENT EXPENSE
Many of the Company's lease agreements for retail space include escalation
clauses in minimum base rent. The Company recognizes minimum base rent expense
for the lease term in equal amounts over the lease term.
ADVERTISING
The Company expenses advertising costs as incurred. Advertising costs for
the fiscal years ending 1997, 1996 and 1995 were $793,000, $1,167,000 and
$1,029,000, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, receivables and
payables for which current carrying amounts approximate fair market value.
Additionally, interest rates on outstanding debt are at rates which approximate
market rates for debt with similar terms and maturities.
23
<PAGE>
BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK BASED EMPLOYEE COMPENSATION
The Company has elected to recognize compensation cost for its stock based
compensation plans in accordance with Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees". Generally, no compensation
expense is recognized for stock options with exercise prices equal to the market
value of the underlying shares of stock at the date of grant. In fiscal 1997,
the Company adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based
Compensation".
INCOME TAXES
Income taxes are provided following the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS No. 109),"Accounting for Income
Taxes."Under the provisions of SFAS No. 109, deferred tax assets and liabilities
result from the expected future tax consequences of differences between the
carrying value and the tax basis of assets and liabilities.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per share is computed based on the weighted average
number of shares of common stock and common stock equivalents outstanding during
the period assuming the exercise of the warrants and dilutive effect of the
stock options.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that may affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during a reporting
period. As a result, actual results could differ because of the use of these
estimates and assumptions.
NOTE 2 -- CHAPTER 11 REORGANIZATION
On July 2, 1996, the Company filed in the United States Bankruptcy Court in
the District of Delaware a petition for reorganization under Chapter 11 of Title
11 of the United States Bankruptcy Code, case number 96-1030(HSB). Under the
protection of Chapter 11, the Company managed its affairs and operated its
business as a debtor-in-possession while developing a plan of reorganization.
The Company filed its Plan of Reorganization on July 18, 1996, the First Amended
Plan of Reorganization on August 29, 1996, and the Second Amended Plan of
Reorganization on October 22, 1996 (the "Plan"), along with its Disclosure
Statement. On October 22, 1996, the Bankruptcy Court approved the Disclosure
Statement as containing adequate information and established November 18, 1996,
as the deadline for voting on the Plan. The Plan was approved by 99.6% of the
voting shareholders and by a majority of each class of the creditors that voted.
On November 22, 1996, the Bankruptcy Court confirmed the Plan, which became
effective on December 3, 1996.
As of the effective date, December 3, 1996, the Company had 3,796,512
shares of common stock issued and outstanding. Under the terms of the Plan, the
Company issued 617,516 shares of common stock on or about January 2, 1997 to the
exchange agent for the unsecured creditors in BFC Class 3 (Public Debt Claims)
and BFI Class 3 (Bank Claims) in respect to their filed and allowed claims and
interests. The Company also issued approximately $10.3 million in aggregate
principal amount of 12% Senior Notes (the "New Notes") to these classes of
creditors pursuant to the Plan. The common stock and New Notes were issued to
these creditors in exchange for outstanding debt of $13,201,075 previously held
by these creditors. The fair value of the common stock and New Notes
approximated the carrying value of the outstanding obligations, and accordingly,
no gain or loss was recorded on the exchange.
24
<PAGE>
BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- CHAPTER 11 REORGANIZATION (CONTINUED)
As of March 1, 1997 the Company had satisfied substantially all claims
under the Plan. Management believes it has accrued reasonable estimates for
remaining claims and unbilled professional fees. Accrued liabilities in the
balance sheet reflect approximately $635,000 related to these outstanding claims
and unbilled professional fees.
The Company incurred the following expenses during fiscal 1997 in
connection with its Chapter 11 reorganization proceedings:
Professional fees and services $2,610,000
Loss on disposal of property, fixtures and equipment 2,453,000
Lease rejection claims 1,042,000
Inventory impairment 570,000
Severance 210,000
Other 945,000
----------
Total $7,830,000
----------
----------
NOTE 3 -- LONG-TERM DEBT
As part of the Plan, the Company issued $10,300,200 of public debt in the
form of 12% Senior Notes (the "New Notes") due January 2005. The New Notes were
issued, pursuant to an Indenture dated as of December 2, 1996, to (i) the
holders of the 9% Senior Notes due January 2001 where each holder received, for
each $1,000 principal face amount, (a) 48 shares of common stock in BFC and (b)
New Notes in original principal amount of $800 and (ii) the Company's
prepetition banks who received a total of (a) 138,284 shares of common stock in
BFC and (b) $2,313,000 in original principal face amount of the New Notes.
The principal amount of the New Notes bears interest at the rate of 12% per
annum from and after December 17, 1996. Interest at the rate of 9% per annum on
the outstanding principal amount is to be paid monthly beginning on January 31,
1997, and on the last day of each calendar month thereafter until all amounts
due and owing on the New Notes and under the Indenture have been paid in full.
Interest at the rate of 3% per annum on the outstanding principal amount shall
accrue monthly and shall, upon accrual, be treated as principal for all
purposes, including without limitation, the calculation of all interest payments
due thereafter, and shall be payable in full on January 1, 2005.
The New Notes are general unsecured senior obligations of the Company. The
Indenture for the New Notes contains certain covenants which, among other
things, limit the ability of the Company to incur liens, incur additional
indebtedness, and restrict the Company's ability to declare dividends.
As part of the Plan, the Company entered into a borrowing agreement with
Norwest Bank Minnesota, National Association (the "Norwest Revolver"), expiring
April 1, 1999. The Norwest Revolver provides the Company with revolving credit
loans and letters of credit up to $10 million, subject to a borrowing base
formula tied to inventory levels.
25
<PAGE>
BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- LONG-TERM DEBT (CONTINUED)
Loans under the Norwest Revolver bear interest at Norwest's base rate plus
3/4%. The interest is payable monthly in arrears. After June 1997, the Norwest
Revolver provides for a potential decrease in the interest rate, depending on
the financial performance of the Company (as described in the Norwest Revolver).
The Norwest Revolver carries commitment fees of 1/4% of the difference between
$5 million and the average amount outstanding under the facility (including
letters of credit). If the average amount outstanding under the facility
(including letters of credit) is between $5 million and $7.5 million, the
commitment fee shall be based on the difference between $7.5 million and the
average amount outstanding under the facility (including letters of credit) and
if the average amount outstanding (including of letters of credit) is in excess
of $7.5 million, the commitment fee is on the difference between $10 million and
the average amount outstanding under the facility (including letters of credit).
This facility is secured by substantially all of the Company's assets. The
borrowing base at March 1, 1997, was $5.8 million. As of March 1, 1997, the
Company had no borrowings and outstanding letters of credit in the amount of
$1.5 million under the Norwest Revolver. Accordingly, the availability of
revolving credit loans under the Nowest Revolver was $4.3 million at that date.
The Norwest Revolver contains certain restrictive covenants, including
limitations on capital expenditures, restrictions on incurring additional
indebtedness, limitations on certain types of investments, prohibitions on
paying dividends, as well as the maintenance of certain financial ratios.
Outstanding debt consists of the following:
<TABLE>
<CAPTION>
MARCH 1, MARCH 2,
1997 1996
------------ ------------
<S> <C> <C>
12% Senior Notes . . . . . . . . . . . . . . . . . . . . . . $ 10,362,952 $ --
9% Senior Notes. . . . . . . . . . . . . . . . . . . . . . . -- 9,984,000
Obligation under capital lease . . . . . . . . . . . . . . . 919,667 1,169,727
Borrowing on revolving credit facility . . . . . . . . . . . -- 400,000
------------ ------------
11,282,619 11,553,727
Less:
Current maturities of capital lease obligation. . . . . 229,179 217,867
Current maturities of 12% Senior Notes. . . . . . . . . 679,778 --
Long-term obligations subject to acceleration . . . . . -- 10,384,000
------------ ------------
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . $ 10,373,662 $ 951,860
------------ ------------
------------ ------------
</TABLE>
Principal repayments on the 12% Senior Notes are scheduled to begin
January 1, 1998, and will occur annually, at the first of every calendar
year. Minimum principal payments, including interest added to principal
which is due in 2005, are as follows: 1998 - $679,778, 1999 - $741,907, 2000
- - $803,902, 2001 -$875,752, 2002 - $958,207, 2003 - $1,040,074, 2004 -
$1,133,443 and 2005 -$6,136,277.
The Company was not required to pay interest on its prepetition debt during
its Chapter 11 Bankruptcy proceedings. If the Company had been required to pay
interest on its prepetititon debt, contractual interest expense net of interest
income for the year ended March 1, 1997, would have totaled approximately $1.2
million.
26
<PAGE>
BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- STOCK OPTION PLANS AND WARRANTS
In December 1996, the Company's shareholders approved an increase in the
number of shares of common stock reserved for issuance under the 1987 Stock
Incentive Plan from 510,000 to 710,000 of which 184,320 shares remain available
for grant. Options include qualified and non-qualified grants. The options
vest over zero to 4 years. Options are excercisable up to ten years from the
date of grant. Options are granted at a price not less than 100% of the fair
market value of the shares on the date of grant. In June 1996, the Company
repriced previously granted employee options to purchase up to 358,200 shares of
the Company's common stock. The initial exercise price of these options was
$7.00 per share and was reset to $2.00, $3.00, or $4.00 per share. The closing
price of BFC's common stock at the date of the repricing was $1.56 per share.
The Company established the 1992 Director Stock Option Plan, effective
March 1992. This plan provides for options to purchase 40,000 shares of common
stock, all of which shares have been granted. In June 1996, the Company
repriced previously granted director options to purchase up to 40,000 shares of
BFC's common stock. The initial exercise price of these options was $6.00 or
$7.00 per share and was reset to $3.00. The closing price of BFC's common stock
at the date of the repricing was $1.56 per share. The options vested one-third
upon issuance and one-third over the next two years in annual installments of
one-third per year. Vested options are exercisable for ten years from the date
of grant.
Warrants to purchase 48,784 shares of common stock are outstanding. The
warrants became exercisable on September 14, 1987 at an exercise price of $1.25
per share and expire on September 14, 1997.
The Company has elected to recognize compensation cost for its stock
based compensation plans in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees". Generally, no
compensation expense is recognized for stock options with exercise prices
equal to the market value of the underlying shares of stock at the date of
grant. In fiscal 1997, the Company adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 (SFAS No. 123),
"Accounting for Stock-Based Compensation." If compensation cost for these
plans had been determined based on the fair value methodology prescribed by
SFAS No. 123, the Company's net earnings and earnings per share in fiscal
1997 would have been reduced to the pro forma amounts indicated below. Pro
forma amounts of net income and earnings per share reflecting compensation
cost under SFAS No. 123 have not been presented for fiscal 1996 because the
compensation cost is not material.
1997
-----------------------------------------------------------------
Net loss - as reported $ (620,994)
Net loss - pro forma (686,827)
Net loss per share - as reported (0.15)
Net loss - pro forma (0.17)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model. The model was developed for use in
estimating the fair value of traded options which have no vesting registration
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The following weighted-average assumptions were used for grants in 1997:
1997
-----------------------------------------------------------------
Dividend yield 0.0%
Expected volatility 57.32%
Risk-free interest rate 5.99% - 6.50%
Expected lives 3 Years
27
<PAGE>
BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- STOCK OPTION PLANS AND WARRANTS (CONTINUED)
The following summarizes stock option transactions:
<TABLE>
<CAPTION>
OPTION SHARES
---------------------------- PRICE
OUTSTANDING EXERCISABLE RANGE
------------ ------------ --------------
<S> <C> <C> <C>
Balance at February 26, 1994. . . . . . . . . 461,960 145,991 $ 0.01-10.13
New options granted . . . . . . . . . . . . . 50,000 7.00
Cancelled . . . . . . . . . . . . . . . . . . (95,960) (21,820) 7.00-9.88
Became exercisable. . . . . . . . . . . . . . 74,521 0.01-7.00
Exercised . . . . . . . . . . . . . . . . . . (16,440) (16,440) 0.01-1.88
------------ ------------ --------------
Balance at February 25, 1995. . . . . . . . . 399,560 182,252 $ 0.01-7.00
New options granted . . . . . . . . . . . . . 35,000 7.00
Cancelled . . . . . . . . . . . . . . . . . . (24,200) (13,420) 7.00
Became exercisable. . . . . . . . . . . . . . 101,088 1.88-7.00
Exercised . . . . . . . . . . . . . . . . . . (2,040) (2,040) 1.25-1.88
------------ ------------ --------------
Balance at March 2, 1996. . . . . . . . . . . 408,320 267,880 $ 0.01-7.00
New options granted . . . . . . . . . . . . . 176,000 2.00-8.13
Cancelled . . . . . . . . . . . . . . . . . . (401,360) (235,540) 1.88-7.00
Reissued options. . . . . . . . . . . . . . . 358,200 13,334 2.00-4.00
Exercised . . . . . . . . . . . . . . . . . . (21,760) (21,760) 0.01-1.88
------------ ------------ --------------
Balance at March 1, 1997. . . . . . . . . . . 519,400 23,914 $ 1.25-7.00
------------ ------------ --------------
------------ ------------ --------------
</TABLE>
As of March 1, 1997, the weighted-average exercise price of the 23,914
options exercisable under the Company's stock option plans was $3.30. The
weighted-average exercise price and weighted-average remaining contractual life
of the 519,400 options outstanding under the Company's stock option plans was
$3.27 and 9.24 years, respectively.
NOTE 5 -- INCOME TAXES
The provision (benefit) for income taxes for the fiscal years ended March
1, 1997, March 2, 1996, and February 25, 1995 consisted of:
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Current
Federal . . . . . . . . . . . . . . . . . . $ (917,043) $ (791,836) $ (51,505)
State . . . . . . . . . . . . . . . . . . . 20,000 (23,000) 20,000
------------- ------------- -------------
Current tax expense (benefit) . . . . . . (897,043) (814,836) (31,505)
Deferred. . . . . . . . . . . . . . . . . . . (1,998,103) 1,743,957 (118,538)
------------- ------------- -------------
Provision (benefit) for income tax . . . . . $(2,895,146) $ 929,121 $ (150,043)
------------- ------------- -------------
------------- ------------- -------------
The Company's effective income tax rate for fiscal years ended
March 1, 1997, March 2, 1996, and February 25, 1995, differs from the federal
income tax rate due to the following:
1997 1996 1995
------------ ------------ ------------
Federal income tax at statutory rate. . . . . (34.0)% (34.0)% (34.0)%
State income tax (net of federal benefit) . . 0.4 (0.6) 1.0
Valuation allowance . . . . . . . . . . . . . (50.9) 70.7 --
Other . . . . . . . . . . . . . . . . . . . . 2.2 0.6 (5.0)
------------ ------------ ------------
(82.3)% 36.7% (38.0)%
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
28
<PAGE>
BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The net deferred tax assets included in the consolidated balance sheet as of
March 1, 1997 and March 2, 1996 are as follows:
<TABLE>
<CAPTION>
MARCH 1, MARCH 2,
1997 1996
------------ ------------
<S> <C> <C>
NOL carryforward. . . . . . . . . . . . . . . . . $ 285,998 $ --
Vacation accrual. . . . . . . . . . . . . . . . . 143,726 143,726
Inventory . . . . . . . . . . . . . . . . . . . . 117,785 166,582
Self-funded insurance . . . . . . . . . . . . . . 27,670 47,103
Other . . . . . . . . . . . . . . . . . . . . . . 224,773 110,358
------------ ------------
Current deferred tax assets . . . . . . . . . . 799,952 467,769
------------ ------------
Depreciation. . . . . . . . . . . . . . . . . . . 509,793 953,524
Accrued rent obligation . . . . . . . . . . . . . 304,726 367,778
Other . . . . . . . . . . . . . . . . . . . . . . 383,632 --
------------ ------------
Long-term deferred tax assets . . . . . . . . . 1,198,151 1,321,302
------------ ------------
Total deferred tax assets . . . . . . . . . . . 1,998,103 1,789,071
Valuation allowance for deferred tax assets . . -- (1,789,071)
------------ ------------
Total net deferred tax assets . . . . . . . . . $ 1,998,103 $ --
------------ ------------
------------ ------------
</TABLE>
The deferred income tax assets represent potential future income tax
benefits; realization of these assets is ultimately dependent upon future
taxable income. At the end of fiscal 1996, the Company believed that
realization of these future benefits was uncertain. Accordingly, the Company
recorded a valuation allowance equal to the full amount of deferred tax assets.
In fiscal 1997, the Company reversed the valuation allowance as recent operating
performance has made the future realization of these assets more likely than
not.
NOTE 6 -- EMPLOYEE BENEFIT PLANS
Effective March 3, 1991, the Company established a defined contribution
plan qualified under Section 401(k) of the Internal Revenue Code for the benefit
of all employees who meet certain eligibility requirements, primarily age and
length of service. The plan allows eligible employees to invest from 1% to 16%
of their compensation. Annually, the Company's Board of Directors approves a
discretionary matching contribution up to a maximum of 25% of the first 6% of
the participants' pre-tax contributions. Such contributions are based
principally on Company performance. Company contributions made for the fiscal
years ended March 1, 1997, March 2, 1996, and February 25, 1995 were $56,993,
$28,188, and $25,884, respectively.
The Company does not offer any other post-retirement, post-employment or
pension benefits to directors or employees.
NOTE 7 -- LEASE COMMITMENTS
The Company leases its computer equipment, office and warehouse facility
and each of its store locations, all of which are accounted for as operating
leases. The store lease terms, including rental period, renewal options,
escalation clauses and rent as a percentage of sales, vary among the leases.
Most store leases require the Company to pay real estate taxes and common area
maintenance charges.
Total rental expense for all leases was as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------
MARCH 1, MARCH 2, FEBRUARY 25,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Minimum rent. . . . . . . . . . . . . . . . . . . . . . $ 6,219,379 $ 7,745,859 $ 7,792,723
Contingent rent -- based on a percentage of sales . . . 1,443,340 580,350 454,274
Maintenance, taxes and insurance. . . . . . . . . . . . 3,367,817 4,368,948 4,407,283
------------ ------------ ------------
$ 11,030,536 $ 12,695,157 $ 12,654,280
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
In addition, the Company leases its point-of-sale (POS) registers. This
lease agreement has been capitalized at the present value of the future minimum
lease payments.
29
<PAGE>
BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- LEASE COMMITMENTS (CONTINUED)
In December 1994, the Company subleased 80,000 square feet of warehouse
space in its distribution center to a third party. Under the agreement the
Company received minimum rent of $278,040 per year. The subtenant was also
required to reimburse the Company for property taxes, utilities and other
operating costs of the subleased portion of the facility. The agreement
terminated on January 31, 1997, and the Company is actively pursuing a
replacement subtenant. The sublease income and related rent reimbursements
which the Company received were offset against rent expense in the preceeding
table.
Future minimum rental commitments for all leases are as follows:
<TABLE>
<CAPTION>
CAPITAL
LEASE OPERATING LEASES
------------ --------------------------------------------------------------
POS RETAIL OFFICE/
REGISTER STORE WAREHOUSE
FISCAL YEAR EQUIPMENT FACILITIES FACILITIES OTHER TOTAL
- ----------- ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
1998 . . . . . . . . . . . . . . . . . . . . $ 298,723 $ 3,880,681 $ 687,804 $ 13,633 $ 4,582,118
1999 . . . . . . . . . . . . . . . . . . . . 298,723 4,027,445 687,804 -- 4,715,249
2000 . . . . . . . . . . . . . . . . . . . . 298,723 3,778,464 728,263 -- 4,506,727
2001 . . . . . . . . . . . . . . . . . . . . 174,255 3,615,472 746,088 -- 4,361,560
2002 . . . . . . . . . . . . . . . . . . . . -- 3,409,759 746,088 -- 4,155,847
Thereafter . . . . . . . . . . . . . . . . . -- 6,455,414 2,466,443 -- 8,921,857
------------ ------------ ------------ ------------ ------------
Total minimum
lease payments. . . . . . . . . . . . . . $ 1,070,424 $ 25,167,235 $ 6,062,490 $ 13,633 $ 31,243,358
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Less: Amount representing interest . . . . . 150,757
------------
Present value of minimum capital
lease payments. . . . . . . . . . . . . . 919,667
Less: Current maturities . . . . . . . . . . 229,179
------------
Obligation under capital lease,
less current maturities . . . . . . . . . $ 690,488
------------
------------
</TABLE>
The Company leases its office and warehouse facility under an agreement
which commenced on June 15, 1994, and expires on June 14, 2005. The Company is
required to pay property taxes, insurance, utilities and other operating costs
of the facility.
NOTE8 -- RELATED PARTY TRANSACTIONS
The Company's previous general office and warehouse facility was leased
under a 28-year lease commencing June 1, 1981 from a partnership whose partners
are current stockholders and former officers of the Company. On September 30,
1996, the Company rejected this lease and a related sublease in the United
States Bankruptcy Court.
In the previous fiscal years, the Company had consulting agreements with
Pennwood Capital Corporation and James Fuld, Jr. Corp., which expired on
September 1, 1995. These entities are affiliated with two directors who were
formerly majority owners of the Company. Under the agreement, as amended, the
Company received strategic development, management advisory and financial
consulting services for an annual fee.
30
<PAGE>
BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- RELATED PARTY TRANSACTIONS (CONTINUED)
Total expenses related to transactions with related parties are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------------
MARCH 1, MARCH 2, FEBRUARY 25,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cost of sales:
Rental expense . . . . . . . . . . . . . . . . $ 143,111 $ 245,333 $ 245,333
Selling and administrative:
Advisory fees and expenses . . . . . . . . . . -- 97,632 192,516
Rental expense . . . . . . . . . . . . . . . . 71,556 122,667 122,667
----------- ----------- -----------
$ 214,667 $ 465,632 $ 560,516
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
NOTE 9 -- QUARTERLY FINANCIAL DATA (UNAUDITED):
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA) FISCAL 1997 QUARTERS
----------------------------------------------------------------------
1ST 2ND 3RD 4TH
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales(1). . . . . . . . . . . . . . . . . . . $ 21,504 $ 22,777 $ 27,154 $ 24,511
Gross profit. . . . . . . . . . . . . . . . . . . 6,706 5,486 10,113 8,196
Operating income (loss) . . . . . . . . . . . . . 7 (1,037) 3,957 2,071
Reorganization expense. . . . . . . . . . . . . . -- 9,070 (899) (341)
Net income (loss) . . . . . . . . . . . . . . . . $ (218) $ (9,537) $ 4,830 $ 4,304(2)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Per share data:
Net earnings (loss) . . . . . . . . . . . . . . . $ (0.06) $ (2.51) $ 1.12 $ 0.90
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Market price -- high(3) . . . . . . . . . . . . . 1 7/8 3 7 1/8 10
-- low(3). . . . . . . . . . . . . . 1 1 1/16 2 3/4 5 5/8
FISCAL 1996 QUARTERS
------------------------------------------------------------------------
1ST 2ND 3RD 4TH
------------ ------------ ------------ ------------
Net sales(1). . . . . . . . . . . . . . . . . . . $ 21,967 $ 21,506 $ 27,443 $ 26,380
Gross profit. . . . . . . . . . . . . . . . . . . 6,100 5,095 8,470 7,245
Operating income (loss) . . . . . . . . . . . . . (752) (1,737) 1,290 58
Net income (loss) . . . . . . . . . . . . . . . . $ (659) $ (1,416) $ 569 $ (1,952)(2)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Per share data: . . . . . . . . . . . . . . . .
Net earnings (loss). . . . . . . . . . . . . . . . . . $ (0.17) $ (0.37) $ 0.15 $ (0.51)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Market price -- high(3). . . . . . . . . . . . . 3 1/2 3 2 1/2 2 1/2
-- low(3) . . . . . . . . . . . . . 2 1/2 1 5/8 1 9/16 1 1/2
</TABLE>
(1) The Company's quarterly net sales show seasonal variation, as sales in the
third and fourth quarters, which include the Christmas season, generally
have been higher than sales in the first and second quarters.
(2) The loss for the fourth quarter of fiscal 1996 includes an expense of
$1,789,000 or $.47 per share related to establishing a valuation allowance
for the Company's deferred tax assets. In fiscal 1997, the Company
reversed the valuation allowance as improved recent operating performance
has made the future realization of these assets more likely than not.
(3) The market prices presented above represent the quarterly high and low
closing bid quotations of the Company's common stock.
31
<PAGE>
BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10 -- SUBSEQUENT EVENT
In April 1997, the Company purchased $800,000 principal face amount of its
New Notes at a 20% discount from par. This purchase will satisfy the Company's
total January 1, 1998 redemption requirement and a portion of its January 1,
1999 requirement as well.
32
<PAGE>
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
There are no matters which are required to be reported under Item 9.
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding the Company's directors required by Item 10 is
incorporated herein by reference to the section entitled, "Item 1 - Election of
Directors," in the Company's proxy statement for its 1997 Annual Meeting of
Shareholders which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A within 120 days of the Company's fiscal year ended
March 1, 1997. Information regarding the Company's executive officers required
by Item 10 is included in Part I of this Annual Report on Form 10-K as permitted
by General Instruction G(3) to Form 10-K. Information required by this Item
concerning compliance with Section 16(a) of the Securities Act of 1934 is
included in the proxy statement under the section entitled "Security Ownership
of Certain Beneficial Owners and Management," and such information is
incorporated herein by reference.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated herein by reference to the
section entitled "Compensation of Executive Officers and Directors" in the
Company's proxy statement for its 1997 Annual Meeting of Shareholders which will
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days of the Company's fiscal year ended March 1, 1997.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated herein by reference to the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Company's proxy statement for its 1997 Annual Meeting of
Shareholders which will be filed with the Securities and Exchange Commission
pursuant to Regulations 14A within 120 days of the Company's fiscal year ended
March 1, 1997.
33
<PAGE>
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by reference to the
section entitled "Certain Relationships and Related Transactions" in the
Company's proxy statement for its 1997 Annual Meeting of Shareholders which will
be filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days of the Company's fiscal year ended March 1, 1997.
PART IV
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:
(1) FINANCIAL STATEMENTS: PAGE
----
Report of Independent Accountants . . . . . . . . . . . . . 18
Consolidated Balance Sheet. . . . . . . . . . . . . . . . . 19
Consolidated Statement of Operations. . . . . . . . . . . . 20
Consolidated Statement of Stockholders' Equity. . . . . . . 21
Consolidated Statement of Cash Flows. . . . . . . . . . . . 22
Notes to Consolidated Financial Statements. . . . . . . . . 23
(2) FINANCIAL STATEMENT SCHEDULES:
All schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
(3) EXHIBITS
SEQUENTIAL
EXHIBITS PAGE NO.
----------
+3.1 Restated Certificate of Incorporation of the Company. . . .
+3.2 By-Laws of the Company, as amended. . . . . . . . . . . . .
+3.3 Articles of Incorporation of BFI. . . . . . . . . . . . . .
+3.4 By-laws of BFI. . . . . . . . . . . . . . . . . . . . . . .
+4.1 Senior Note Indenture, including form of Note and form of
guarantee . . . . . . . . . . . . . . . . . . . . . . . . .
+4.2 Amended and Restated Credit Agreement dated October 13,
1993, by and among BFI, the Company and National Bank of
Canada and First Bank National Association. . . . . . . . .
+4.3 Inter-creditor Agreement dated October 13, 1993, by and
among BFI, the Company and National Bank of Canada and
First Bank National Association . . . . . . . . . . . . . .
+4.4 Warrant Agreement, dated as of September 14, 1987, between
the Company and Kidder Peabody Funding Co . . . . . . . . .
+10.1 Lease, dated as of December 11, 1980, between the Company
and Braun-Kaiser and Company. . . . . . . . . . . . . . . .
+10.2 First Amendment to Lease, dated as of June 10, 1981 . . . .
+10.3 Second Amendment to Lease, dated as of December 19, 1986. .
+10.4 Executive Employment Agreement, dated December 19, 1991,
between the Company and Nicholas H. Cook. . . . . . . . . .
34
<PAGE>
SEQUENTIAL
EXHIBITS PAGE NO.
- -------- ----------
+10.5 Executive Employment Agreement, dated December 19, 1991,
between the Company and Herbert D. Froemming. . . . . . . .
+10.6 1987 Stock Incentive Plan . . . . . . . . . . . . . . . . .
+10.7 Amendment No. 1 to 1987 Stock Incentive Plan. . . . . . . .
+10.8 Amendment No. 2 to 1987 Stock Incentive Plan. . . . . . . .
+10.9 1992 Director Stock Option Plan . . . . . . . . . . . . . .
+10.10 Braun's Fashions, Inc. Retirement Savings Plan. . . . . . .
+10.11 Investment Banking/Consulting Agreement, dated as of
September 1, 1987, between the Company and Pennwood Capital
Corporation ("Consulting Agreement"). . . . . . . . . . . .
+10.12 Amendment, dated as of May 31, 1990, to Consulting
Agreement . . . . . . . . . . . . . . . . . . . . . . . . .
+10.13 Amendment, dated as of February 26, 1991, to Consulting
Agreement . . . . . . . . . . . . . . . . . . . . . . . . .
+10.14 Amendment, dated as of February 12, 1992, to Consulting
Agreement . . . . . . . . . . . . . . . . . . . . . . . . .
+10.15 Consulting Agreement, dated as of December 19, 1986,
between the Company and Mr. Gilbert C. Braun ("Braun
Consulting Agreement"). . . . . . . . . . . . . . . . . . .
+10.16 Amendment dated February 14, 1990 to Braun Consulting
Agreement . . . . . . . . . . . . . . . . . . . . . . . . .
+10.17 Term Lease Master Agreement dated February 28, 1991 between
IBM Credit Corporation and the Company. . . . . . . . . . .
+10.18 IBM Customer Agreement, dated February 28, 1991 between
International Business Machines Corporation and the
Company . . . . . . . . . . . . . . . . . . . . . . . . . .
+10.19 Annual Support Agreement Plan, dated February 27, 1991
between Retail Interact Software and the Company. . . . . .
+10.20 Sublease Agreement by and between Westburne Supply, Inc.,
United Westburne, Inc. and Braun's Fashions, Inc., dated
February 16, 1994 . . . . . . . . . . . . . . . . . . . . .
+10.21 Side Agreement between Braun's Fashions, Inc., Westburne
Supply, Inc. and United Westburne, Inc. regarding moving
expenses dated February 16, 1994. . . . . . . . . . . . . .
+10.22 Sublease by and between Braun's Fashions, Inc. and CIMA
Labs, Inc. dated February 16, 1994. . . . . . . . . . . . .
+10.23 Consent, Non-Disturbance and Prime Lessor's Agreement by
and among Braun-Kaiser and Company, Braun's Fashions, Inc.
and CIMA Labs, Inc. dated February 22, 1994 . . . . . . . .
+10.24 First Modification of Amended and Restated Credit
Agreement, Notes and Related Documents by and among the
Company and National Bank of Canada and First Bank
National Association dated August 27, 1994. . . . . . . . .
+10.25 Second Modification of Amended and Restated Credit
Agreement, Notes and Related Documents by and among the
Company and National Bank of Canada and First Bank National
Association dated November 26, 1994.. . . . . . . . . . . .
+10.26 Sublease between Federal-Hoffman, Inc. and Brauns Fashions
Inc. dated November 30, 1994. . . . . . . . . . . . . . . .
+10.27 Third Modification of Amended and Restated Credit Agreement,
Notes and Related Documents by and among the Company and
National Bank of Canada and First Bank National Association
dated May 24, 1995. . . . . . . . . . . . . . . . . . . . .
35
<PAGE>
SEQUENTIAL
EXHIBITS PAGE NO.
- -------- ----------
+10.28 Fourth Modification of Amended and Restated Credit
Agreement, Notes and Related Documents by and among the
Company and National Bank of Canada and First Bank
National Association dated August 9, 1995 . . . . . . . . .
+10.29 Tax Sharing Agreement between Braun's Fashions
Corporation and Braun's Fashions, Inc.. . . . . . . . . . .
+10.30 Revolving Credit and Security Agreement dated as of
July 8, 1996 and between Braun's Fashions, Inc. and
Norwest Bank Minnesota, National Association. . . . . . . .
+10.31 Guaranty dated as of July 3, 1996 by and between Braun's
Fashions Corporation and Norwest Bank Minnesota, National
Association . . . . . . . . . . . . . . . . . . . . . . . .
+10.32 Revolving Note dated as of July 8, 1996 by and between
Braun's Fashions Corporation and Norwest Bank Minnesota,
National Association. . . . . . . . . . . . . . . . . . . .
+10.33 Registrant's press release dated July 2, 1996 relating to
the filing of the Registrant's plan of reorganization . . .
+10.34 Second Amended Plan of Reorganization dated October 22,
1996 (the "Plan of Reorganization") . . . . . . . . . . . .
+10.35 Motion to Approve Technical Amendment to the Plan of
Reorganization dated November 19, 1996. . . . . . . . . . .
+10.36 Revolving Credit and Security Agreement dated as of
December 2, 1996 between Norwest Bank Minnesota, National
Association and Braun's Fashions , Inc. and Braun's
Fashions Corporation. . . . . . . . . . . . . . . . . . . .
*11 Statement Re: Computation of Per Share Earnings . . . . . .
+22.1 Subsidiaries of Company . . . . . . . . . . . . . . . . . .
*27 Financial Data Schedules (submitted for SEC use only) . . .
- --------------------
+ Previously filed
* Filed with this report
(b) REPORTS ON FORM 8-K
The following report on Form 8-K was filed with the Securities and Exchange
Commission during the fourth quarter ended March 1, 1997.
Date of Report Item Reported
-------------- -------------
December 3, 1996 The Company reported that the Federal
Filed January 14, 1997 Bankruptcy Court for the District of Delaware
had confirmed the Second Amended Plan of
Reorganization.
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized on May 15, 1997.
BRAUN'S FASHIONS CORPORATION
By: /S/ NICHOLAS H. COOK
--------------------------------
Nicholas H. Cook
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Nicholas H. Cook and Herbert D. Froemming,
or either of them, as true and lawful attorneys-in-fact, each with full power
and authority to act as such without the other, and with full power of
substitution, for him and in any and all capacities, to sign any and all
amendments to this Form 10-K and post-effective amendments thereto, and to file
the same, with exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, the undersigned hereby ratifying
and confirming all that said attorneys-in-fact, or either of them or his
substitute or substitutes, shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ NICHOLAS H. COOK Chairman of the Board, Chief May 15, 1997
- -------------------------- Executive Officer and Director
Nicholas H. Cook (Principal Executive Officer)
/S/ HERBERT D. FROEMMING President, Chief Operating Officer,
- -------------------------- Secretary, Treasurer and Director May 15, 1997
Herbert D. Froemming (Principal Financial Officer and
Principal Accounting Officer)
/S/ MARC C. OSTROW Director May 15, 1997
- --------------------------
Marc C. Ostrow
/S/ JAMES J. FULD, JR. Director May 15, 1997
- --------------------------
James J. Fuld, Jr.
/S/ DONALD D. BEELER Director May 15, 1997
- --------------------------
Donald D. Beeler
/S/ LARRY C. BARENBAUM Director May 15, 1997
- --------------------------
Larry C. Barenbaum
37
<PAGE>
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------
MARCH 1, MARCH 2, FEBRUARY 25,
1997 1996 1995
---------------- --------- -----------
PRIMARY:
<S> <C> <C> <C>
Net loss..................................................... $ (620,994) $ (3,458,163) $ (244,980)
Weighted average common shares outstanding................... 4,029,041 3,791,612 3,785,132
Common stock equivalents: (stock options and warrants)....... --- --- ---
------------ ------------ ----------
Weighted average number of common shares
and common share equivalents outstanding..................... 4,029,041 3,791,612 3,785,132
------------ ------------ ----------
------------ ------------ ----------
EARNINGS PER SHARE:
Net loss per common and common equivalent share.............. $ (0.15) $ (0.91) $ (0.06)
------------ ------------ ----------
------------ ------------ ----------
</TABLE>
The Company's common stock has traded on the NASDAQ National Stock Market under
the symbol "BFCI" since March 31, 1992. Prior to that date there was no public
market for the Company's common stock.
NOTE: The calculation of fully diluted earnings per share is the same as the
calculation shown above.
38
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE COMPANY'S 10K FOR THE FISCAL YEAR ENDED MARCH 1, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000883943
<NAME> BRAUN'S FASHIONS CORPORATION
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-01-1997
<PERIOD-START> MAR-03-1996
<PERIOD-END> MAR-01-1997
<CASH> 10,913,716
<SECURITIES> 0
<RECEIVABLES> 1,402,829
<ALLOWANCES> 0
<INVENTORY> 9,253,896
<CURRENT-ASSETS> 22,540,061
<PP&E> 21,549,185
<DEPRECIATION> 10,763,888
<TOTAL-ASSETS> 34,637,139
<CURRENT-LIABILITIES> 7,794,452
<BONDS> 10,373,662
0
0
<COMMON> 44,326
<OTHER-SE> 15,528,446
<TOTAL-LIABILITY-AND-EQUITY> 34,637,139
<SALES> 95,946,046
<TOTAL-REVENUES> 95,946,046
<CGS> 65,445,103
<TOTAL-COSTS> 65,445,103
<OTHER-EXPENSES> 33,242,753<F1>
<LOSS-PROVISION> 90,000
<INTEREST-EXPENSE> 684,330
<INCOME-PRETAX> (3,516,140)
<INCOME-TAX> (2,895,146)<F2>
<INCOME-CONTINUING> (620,994)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (620,994)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
<FN>
<F1>INCLUDES $7,829,924 OF REORGANIZATION EXPENSES AS A RESULT OF THE
COMPANY'S JULY 2, 1996 CHAPTER 11 BANKRUPTCY FILING.
<F2>INCLUDES $1,789,071 RELATED TO THE REVERSAL OF A DEFERRED TAX ASSET
VALUATION ALLOWANCE. RECENT OPERATING PERFORMANCE HAS MADE THE FUTURE
REALIZATION OF THESE ASSETS MORE LIKELY THAN NOT.
</FN>
</TABLE>
