<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 28, 1998
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________.
Commission File Number: 0-19972
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
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
55441
(ZIP CODE)
(612) 551-5000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
-------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
------- -------
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
------- -------
As of January 4, 1999, 4,432,361 shares of the registrant's common stock
were outstanding.
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<PAGE>
BRAUN'S FASHIONS CORPORATION
FORM 10-Q QUARTERLY REPORT
INDEX
PART I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Consolidated Condensed Financial Statements: Page
----
<S> <C> <C>
Consolidated Condensed Balance Sheet
As of November 28, 1998 and February 28, 1998. . . . . . . . . . . . . . 3
Consolidated Condensed Income Statement
For the Quarters Ended November 28, 1998 and November 29, 1997 . . . . . 4
Consolidated Condensed Income Statement
For the Three Quarters Ended November 28, 1998 and November 29, 1997 . . 5
Consolidated Condensed Statement of Cash Flows
For the Three Quarters Ended November 28, 1998 and November 29, 1997 . . 6
Notes to Consolidated Condensed Financial Statements . . . . . . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . . . . . . . 8
Item 3. Quantitative and Qualitative Disclosures
About Market Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
PART 2
OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . . . . . . 13
Item 3. Defaults Upon Senior Securities. . . . . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . 13
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . 13
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
2
<PAGE>
BRAUN'S FASHIONS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
NOVEMBER 28, FEBRUARY 28,
ASSETS 1998 1998
(Unaudited) (Audited)
-------------- ---------------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................. $ 9,543,799 $ 15,848,439
Accounts receivable................................................... 2,291,206 847,746
Merchandise inventory................................................. 13,371,264 10,735,681
Prepaid expenses...................................................... 498,294 414,341
Current deferred tax asset............................................ 322,570 322,570
-------------- ---------------
Total current assets................................................ 26,027,133 28,168,777
Equipment and improvements, net............................................ 11,832,840 10,943,054
Other assets:
Long-term deferred tax asset.............................................. 1,414,789 1,414,789
Other..................................................................... 28,787 63,424
-------------- ---------------
Total other assets................................................... 1,443,576 1,478,213
-------------- ---------------
Total assets......................................................... $ 39,303,549 $ 40,590,044
-------------- ---------------
-------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................................... $ 2,068,314 $ 3,666,921
Accrued liabilities....................................................... 4,300,341 4,461,532
Current maturities of long-term debt...................................... 265,889 681,424
Income taxes payable...................................................... 1,420,995 186,982
-------------- ---------------
Total current liabilities............................................ 8,055,539 8,996,859
Long-term liabilities:
Long-term debt............................................................ 5,107,079 9,616,311
Accrued rent obligation................................................... 1,022,600 1,017,556
-------------- ---------------
Total long-term liabilities.......................................... 6,129,679 10,633,867
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;
4,712,761 and 4,523,393 shares issued and outstanding
at November 28, 1998 and February 28, 1998, respectively............. 47,128 45,234
Additional paid-in capital................................................ 29,193,157 28,588,350
Common stock subscriptions receivable..................................... (205,000) --
Common stock held in treasury - 62,600 shares, at cost.................... (500,800) --
Accumulated deficit....................................................... (3,416,154) (7,674,266)
-------------- ---------------
Total stockholders' equity........................................... 25,118,331 20,959,318
-------------- ---------------
Total liabilities and stockholders' equity........................... $ 39,303,549 $ 40,590,044
-------------- ---------------
-------------- ---------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
BRAUNS FASHIONS CORPORATION
CONSOLIDATED CONDENSED INCOME STATEMENT
(Unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------
NOVEMBER 28, NOVEMBER 29,
1998 1997
-------------- ---------------
<S> <C> <C>
Net sales....................................................................... $ 30,826,270 $ 29,466,181
Cost of sales:
Merchandise, buying and occupancy.......................................... 19,373,036 18,437,708
-------------- ---------------
Gross profit............................................................... 11,453,234 11,028,473
Selling, general and administrative expenses.................................... 6,441,654 6,245,762
Depreciation ................................................................... 669,057 662,358
-------------- ---------------
Operating income........................................................... 4,342,523 4,120,353
Interest, net................................................................... 83,713 216,461
-------------- ---------------
Income before income taxes and extraordinary gain.......................... 4,258,810 3,903,892
Income tax provision ........................................................... 1,618,348 1,483,479
-------------- ---------------
Income before extraordinary gain........................................... 2,640,462 2,420,413
Extraordinary gain.............................................................. 35,396 --
-------------- ---------------
Net income ................................................................ $ 2,675,858 $ 2,420,413
-------------- ---------------
-------------- ---------------
Basic earnings per common share:
Income before extraordinary gain........................................... $ 0.56 $ 0.54
Extraordinary gain......................................................... 0.01 --
-------------- ---------------
Net income................................................................. $ 0.57 $ 0.54
-------------- ---------------
-------------- ---------------
Weighted average common shares outstanding................................. 4,667,545 4,514,833
-------------- ---------------
-------------- ---------------
Diluted earnings per common share:
Income before extraordinary gain........................................... $ 0.55 $ 0.50
Extraordinary gain......................................................... 0.01 --
-------------- ---------------
Net income ................................................................ $ 0.56 $ 0.50
-------------- ---------------
-------------- ---------------
Weighted average common and common equivalent shares outstanding........... 4,815,432 4,856,687
-------------- ---------------
-------------- ---------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
BRAUN'S FASHIONS CORPORATION
CONSOLIDATED CONDENSED INCOME STATEMENT
(Unaudited)
<TABLE>
<CAPTION>
THREE QUARTERS ENDED
----------------------------------
NOVEMBER 28, NOVEMBER 29,
1998 1997
-------------- ---------------
<S> <C> <C>
Net sales....................................................................... $ 78,771,053 $ 72,246,914
Cost of sales:
Merchandise, buying and occupancy.......................................... 51,090,564 46,798,996
-------------- ---------------
Gross profit............................................................... 27,680,489 25,447,918
Selling, general and administrative expenses.................................... 18,574,235 17,183,503
Depreciation ................................................................... 1,991,727 1,879,466
-------------- ---------------
Operating income........................................................... 7,114,527 6,384,949
Interest, net................................................................... 303,696 618,130
-------------- ---------------
Income before income taxes and extraordinary gain.......................... 6,810,831 5,766,819
Income tax provision ........................................................... 2,588,116 2,191,391
-------------- ---------------
Income before extraordinary gain........................................... 4,222,715 3,575,428
Extraordinary gain.............................................................. 35,396 112,841
-------------- ---------------
Net income ................................................................ $ 4,258,111 $ 3,688,269
-------------- ---------------
-------------- ---------------
Basic earnings per common share:
Income before extraordinary gain........................................... $ 0.92 $ 0.80
Extraordinary gain......................................................... 0.01 0.03
-------------- ---------------
Net income................................................................. $ 0.93 $ 0.83
-------------- ---------------
-------------- ---------------
Weighted average common shares outstanding................................. 4,582,077 4,469,974
-------------- ---------------
-------------- ---------------
Diluted earnings per common share:
Income before extraordinary gain........................................... $ 0.87 $ 0.74
Extraordinary gain......................................................... 0.01 0.03
-------------- ---------------
Net income ................................................................ $ 0.88 $ 0.77
-------------- ---------------
-------------- ---------------
Weighted average common and common equivalent shares outstanding........... 4,852,197 4,817,107
-------------- ---------------
-------------- ---------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
BRAUN'S FASHIONS CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE QUARTERS ENDED
----------------------------------
NOVEMBER 28, NOVEMBER 29,
1998 1997
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................................ $ 4,258,111 $ 3,688,269
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................................. 1,991,727 1,879,466
Extraordinary gain from early extinguishment of debt....................... (57,090) (182,001)
Gain on disposals of equipment, net........................................ (35) (5,810)
Decrease in deferred tax asset............................................. -- 285,998
Increase in accrued rent obligation........................................ 5,044 155,045
Changes in operating assets and liabilities:
Increase in merchandise inventory,
prepaid expenses, receivables and other............................... (4,128,359) (5,451,187)
Increase (decrease) in accounts payable,
accrued liabilities and income taxes payable.......................... (525,785) 749,376
-------------- ---------------
Net cash provided by operating activities............................. 1,543,613 1,119,156
Cash flows from investing activities:
Purchase of equipment and improvements..................................... (2,924,747) (2,423,312)
Proceeds from sale of equipment............................................ 43,269 34,949
-------------- ---------------
Net cash used in investing activities................................. (2,881,478) (2,388,363)
Cash flows from financing activities:
Redemption of 12% Senior Notes............................................. (4,870,942) (748,000)
Principal payments on long-term debt....................................... (185,115) (170,047)
Interest on 12% Senior Notes added to principal............................ 188,380 231,220
Exercise of stock options.................................................. 606,702 438,557
Issuance of common stock subscription receivable........................... (205,000) --
Acquisition of common stock held in treasury............................... (500,800) --
-------------- ---------------
Net cash used in financing activities................................. (4,966,775) (248,270)
-------------- ---------------
Net decrease in cash and cash equivalents....................................... (6,304,640) (1,517,477)
Cash and cash equivalents at beginning of year.................................. 15,848,439 10,913,716
-------------- ---------------
Cash and cash equivalents at end of period...................................... $ 9,543,799 $ 9,396,239
-------------- ---------------
-------------- ---------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
6
<PAGE>
BRAUN'S FASHIONS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The financial statements included in this Form 10-Q have been prepared
by Braun's Fashions Corporation and its wholly owned subsidiary Braun's
Fashions, Inc. (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed, or omitted, pursuant to such rules and regulations. These
financial statements should be read in conjunction with the financial
statements and related notes included in the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 1998.
The results of operations for the interim periods shown in this report
are not necessarily indicative of results to be expected for the entire
fiscal year. In the opinion of management, the information contained herein
reflects all adjustments necessary to make the results of operations for the
interim periods a fair statement of such operations. All such adjustments are
of a normal recurring nature.
NOTE 2 -- NET INCOME PER SHARE
In fiscal 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("FASB No. 128").
Under FASB No. 128, basic earnings per share ("EPS") is computed based on the
weighted average number of shares of common stock outstanding during the
applicable periods while diluted EPS is computed based on the weighted average
number of common and common equivalent shares (dilutive stock options)
outstanding.
The following is a reconciliation of the number of shares (denominator)
used in the basic and diluted EPS computations:
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------
NOVEMBER 28, 1998 NOVEMBER 29, 1997
---------------------------------------- ----------------------------------------
INCOME NET INCOME INCOME NET INCOME
BEFORE AFTER BEFORE AFTER
EXTRAORDINARY EXTRAORDINARY EXTRAORDINARY EXTRAORDINARY
SHARES GAIN GAIN SHARES GAIN GAIN
--------- ------------- ------------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS 4,667,545 $ 0.56 $ 0.57 4,514,833 $ 0.54 $ 0.54
Effect of dilutive stock options 147,887 (0.01) (0.01) 341,854 (0.04) (0.04)
--------- -------- -------- --------- -------- --------
Diluted EPS 4,815,432 $ 0.55 $ 0.56 4,856,687 $ 0.50 $ 0.50
--------- -------- -------- --------- -------- --------
--------- -------- -------- --------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
THREE QUARTERS ENDED
----------------------------------------------------------------------------------------
NOVEMBER 28, 1998 NOVEMBER 29, 1997
---------------------------------------- ----------------------------------------
INCOME NET INCOME INCOME NET INCOME
BEFORE AFTER BEFORE AFTER
EXTRAORDINARY EXTRAORDINARY EXTRAORDINARY EXTRAORDINARY
SHARES GAIN GAIN SHARES GAIN GAIN
--------- ------------- ------------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS 4,582,077 $ 0.92 $ 0.93 4,469,974 $ 0.80 $ 0.83
Effect of dilutive stock options 270,120 (0.05) (0.05) 347,133 (0.06) (0.06)
--------- -------- -------- --------- -------- --------
Diluted EPS 4,852,197 $ 0.87 $ 0.88 4,817,107 $ 0.74 $ 0.77
--------- -------- -------- --------- -------- --------
--------- -------- -------- --------- -------- --------
</TABLE>
NOTE 3 -- ACCOUNTING PRONOUNCEMENT
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("FASB No, 130"), establishes standards of disclosure
and financial statement display for reporting total comprehensive income and
the individual components thereof in a full set of general-purpose financial
statements. The adoption of this standard had no impact on the Company's
financial statements in the first three quarters of fiscal 1999.
7
<PAGE>
NOTE 4 -- LONG-TERM DEBT
In the third quarter of fiscal 1999, the Company completed its Senior Note
repurchase program and retired approximately $4.7 million original principal
face amount of the Companys outstanding 12% Senior Notes. These purchases have
satisfied all of the January 1, 1999 to January 1, 2004 annual mandatory
redemption requirements, leaving no additional mandatory payments due until
January 1, 2005. The Company recorded an extraordinary gain, net of tax, of
$35,396 as a result of the early extinguishment of this long-term debt.
NOTE 5 -- COMMON STOCK
In November 1998, the Company's Board of Directors authorized a stock
repurchase program enabling the Company to acquire up to $3.0 million of its
common stock, subject to market conditions. The program permits the Company to
purchase its shares from time to time on the open market. All shares repurchased
under this program will be held by the Company as treasury shares. As of January
4, 1999, the Company had repurchased 280,400 shares of its common stock at a
total cost, including commissions, of $2,253,000.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
Braun's Fashions Corporation is a Minneapolis-based regional retailer of
women's specialty apparel, which operates through its wholly-owned
subsidiary, Braun's Fashions, Inc. As of January 4, 1999, the Company
operated 199 stores in 22 states, primarily in the Midwest. The Company's
stores offer coordinated assortments of moderately priced sportswear,
sweaters, dresses and accessories.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items
from the Company's income statement data expressed as a percentage of net sales.
<TABLE>
<CAPTION>
QUARTER ENDED THREE QUARTERS ENDED
-------------------------- --------------------------
NOVEMBER 28, NOVEMBER 29, NOVEMBER 28, NOVEMBER 29,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Merchandise, buying and occupancy 62.8 62.6 64.9 64.8
------ ------ ------ ------
Gross profit 37.2 37.4 35.1 35.2
Selling, general and administrative 20.9 21.2 23.6 23.8
Depreciation and amortization 2.2 2.2 2.5 2.6
------ ------ ------ ------
Operating income 14.1 14.0 9.0 8.8
Interest, net 0.3 0.8 0.4 0.8
------ ------ ------ ------
Income before income taxes and extraordinary gain 13.8 13.2 8.6 8.0
Income tax provision 5.2 5.0 3.2 3.1
------ ------ ------ ------
Income before extraordinary gain 8.6 8.2 5.4 4.9
Extraordinary gain 0.1 -- 0.0 0.2
------ ------ ------ ------
Net income 8.7% 8.2% 5.4% 5.1%
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
8
<PAGE>
QUARTER ENDED NOVEMBER 28, 1998 COMPARED TO QUARTER ENDED NOVEMBER 29,
1997.
NET SALES. Net sales for the quarter ended November 28, 1998, were $30.8
million, an increase of 5% from $29.5 million for the quarter ended November 29,
1997. The increase in sales was attributable to an increase in the number of
stores operated by the Company. The Company operated 197 stores at November 28,
1998 compared to 180 at November 29, 1997. Same store sales decreased 3% for the
quarter ended November 28, 1998.
GROSS PROFIT. Gross profit, which is net sales less cost of merchandise,
buying and occupancy expenses, was $11.5 million or 37.2% of net sales during
the third quarter of fiscal 1999 compared to $11.0 million or 37.4% of net sales
during the same period in fiscal 1998. The decrease in gross margin as a percent
of net sales was due to a slight increase in occupancy costs as a percent of net
sales substantially offset by a modest improvement in merchandise margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the third quarter of fiscal 1999 were $6.4 million
or 20.9% of net sales compared to $6.2 million or 21.2% of net sales for the
third quarter of fiscal 1998. The decrease as a percent of net sales was
primarily the result of leveraging administrative salary costs.
OPERATING INCOME. Operating income for the quarter ended November 28, 1998,
was $4.3 million or 14.1% of net sales compared to operating income of $4.1
million or 14.0% of net sales for the quarter ended November 29, 1997.
INTEREST, NET. Net interest decreased from $216,461 in the third quarter of
fiscal 1998 to $83,713 in the current year's quarter. This decrease was
primarily due to a reduction of the Companys long-term debt and related interest
expense.
INCOME TAXES. Income tax expense in the third quarter of fiscal 1999 was
$1.6 million compared to $1.5 million in the third quarter of fiscal 1998.
EXTRAORDINARY GAIN. During the third quarter of fiscal 1999, the Company
repurchased and retired approximately $4.7 million original principal face
amount of its 12% Senior Notes. This retirement resulted in the recognition of
an extraordinary gain on the early extinguishment of debt, net of tax, of
$35,396.
NET INCOME. As a result of the foregoing factors, net income for the
quarter ended November 28, 1998 was $2.7 million or 8.7% of net sales compared
to $2.4 million or 8.2% of net sales for the quarter ended November 29, 1997.
NINE MONTHS ENDED NOVEMBER 28, 1998 COMPARED TO NINE MONTHS ENDED NOVEMBER
29, 1997.
NET SALES. Net sales for the nine months ended November 28, 1998, were
$78.8 million, an increase of 9% from $72.2 million for the nine months ended
November 29, 1997. The increase in sales was attributable to a 2% increase in
same-store sales combined with an increase in the number of stores operated by
the Company. The Company operated 197 stores at November 28, 1998 compared to
180 at November 29, 1997.
GROSS PROFIT. Gross profit was $27.7 million or 35.1% of net sales during
the first nine months of fiscal 1999 compared to $25.5 million or 35.2% of net
sales during the same period in fiscal 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the first nine months of fiscal 1999 were $18.6
million or 23.6% of net sales compared to $17.2 million or 23.8% of net sales
for the first nine months of fiscal 1998. The decrease as a percent of net sales
was a result of leveraging associated with increased sales.
OPERATING INCOME. Operating income for the nine months ended November 28,
1998 was $7.1 million or 9.0% of net sales compared to operating income of $6.4
million or 8.8% of net sales for the comparable period of fiscal 1998.
INTEREST, NET. Net interest decreased from $618,130 for the first nine
months of fiscal 1998 to $303,696 in the current year's comparable period.
This decrease was primarily due to a higher cash balance during the year and
a reduction in the Company's long-term debt.
9
<PAGE>
INCOME TAXES. Income tax expense in the first nine months of fiscal 1999
was $2.6 million compared to $2.2 million in first nine months of fiscal 1998.
EXTRAORDINARY GAIN. The Company purchased and retired approximately $4.7
million and $908,000 original principal face amount of its 12% Senior Notes at a
discount from par during the first nine months of fiscal 1999 and fiscal 1998,
respectively. These purchases resulted in the recognition of an extraordinary
gain on the early extinguishment of debt, net of tax, of $35,396 in fiscal 1999
and $112,841 in fiscal 1998.
NET INCOME. As a result of the foregoing factors, net income for the nine
months ended November 28, 1998 was $4.3 million or 5.4% of net sales compared to
$3.7 million or 5.1% of net sales for the nine months ended November 29, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal needs for cash are to finance the construction
of new stores and the remodeling of certain existing stores, to purchase
merchandise inventories and to fund 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 provided by operating activities totaled $1.5 million for the
first nine months of fiscal 1999. Cash was used to finance $2.9 million of
capital expenditures to open 22 new stores and for other miscellaneous capital
expenditures. During the fourth quarter of the current fiscal year the Company
intends to spend approximately $2 million on capital expenditures to open two
new stores, to finance six major remodels and to install new computer software
which will allow the Company to manage inventory more efficiently and provide
the Company with improved merchandise planning, sales tracking and trend
analysis. Management expects its cash on hand combined with cash flows from
operations to be sufficient to meet its capital expenditure and working capital
requirements and its other needs for liquidity during the upcoming year. During
fiscal 2000, the Company intends to increase its store count by a net of
approximately 30 stores in furtherance of its store expansion strategy. The net
capital expenditures associated with these store openings is expected to
approximate $150,000 per store. The Company also plans to close four stores, as
leases expire, in January and February 1999.
In December 1996, the Company entered into a borrowing agreement with
Norwest Bank Minnesota, National Association (the "Norwest Revolver") expiring
April 1, 1999. The Company has initiated discussions with Norwest regarding a
new revolving credit facility to replace the Norwest Revolver upon its
expiration.
The Norwest Revolver provides the Company with revolving credit loans and
letters of credit up to $10 million, subject to a borrowing base formula. Loans
under the Norwest Revolver bear interest at Norwest's base rate plus 3/4%,
subject to a rate reduction provision based on the financial performance of the
Company (as described in the Norwest Revolver). Due to the Company's favorable
financial performance, the interest rate at January 4, 1999 was Norwest's base
rate plus 1/2% or 8-1/4%. Interest is payable monthly in arrears.
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 calculated 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 January 4, 1999 was $6.4 million. As of January 4,
1999, the Company had no borrowings and outstanding letters of credit in the
amount of $3.1 million under the Norwest Revolver. Accordingly, the availability
of revolving credit loans under the Norwest Revolver was $3.3 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 requiring the maintenance of certain financial
ratios.
10
<PAGE>
In December 1996, the Company issued $10,300,200 of debt in the form of
12% Senior Notes (the "Senior Notes") due January, 2005 pursuant to an
Indenture dated as of December 2, 1996. The principal amount of the Senior
Notes bears interest at the rate of 12% per annum. Interest at the rate of 9%
per annum on the outstanding principal amount is to be paid monthly on the
last day of each calendar month until all amounts due and owing on the Senior
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. During the first nine months
of fiscal 1999 the Company purchased and retired approximately $4.7 million
original principal face amount of the Company's outstanding 12% Senior Notes.
These purchases have satisfied all of the January 1, 1999 to January 1, 2004
annual mandatory redemption requirements leaving no additional mandatory
payments due until January 1, 2005. The Company recorded an extraordinary
gain, net of tax, of $35,396 as a result of the early extinguishment of this
long-term debt.
The Senior Notes are general unsecured senior obligations of the Company.
The Indenture for the Senior Notes, as amended, contains certain covenants
which, among other things, limit the ability of the Company to incur liens and
incur additional indebtedness.
In November 1998, the Company's Board of Directors authorized a stock
repurchase program enabling the Company to acquire up to $3.0 million of its
common stock, subject to market conditions. The program permits the Company to
purchase its shares from time to time on the open market. All shares repurchased
under this program will be held by the Company as treasury shares. As of January
4, 1999, the Company had repurchased 280,400 shares of its common stock at a
total cost, including commissions, of $2,253,000.
The Company purchases approximately 50% of its merchandise from overseas
vendors. Since the Company purchases this merchandise using letters of credit
denominated in U.S. dollars, primarily from vendors in countries whose currency
is pegged to the U.S. dollar, management does not believe the Company will be
materially affected by foreign currency fluctuations.
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.
SEASONALITY
The Company's sales reflect seasonal variation as sales in the third and
fourth quarters, which include the fall and holiday season, generally have
been higher than sales in the first and second quarters. Sales generated
during the fall and holiday 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 promotional events, timing of new store
openings, and customer response to the Company's seasonal merchandise mix.
INFLATION
Although the operations of the Company are influenced by general economic
conditions, the Company does not believe that inflation has had a material
effect on the results of operations during the quarters and nine month periods
ended November 28, 1998, and November 29, 1997.
YEAR 2000 MATTERS
The year 2000 issue results from computer programs being written using two
digits rather than four to define the applicable year. Certain of the Company's
computer information technology systems and their associated software ("IT
Systems") may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in system failures or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions or to engage in similar business activities.
READINESS FOR YEAR 2000. As is the case with most other companies using
IT Systems in their operations, the Company has been in the process of
addressing the year 2000 issue. In connection with a general upgrade of its
IT Systems, the Company had previously planned to install new merchandise and
financial system software packages in fiscal 1999. The Company expects to
begin using these systems in March, 1999. In addition to being year 2000
compliant, management expects the new merchandise systems will allow for
improved merchandise planning, sales tracking and trend analysis. Further,
the Company also expects these systems will allow for improved distribution
center processing and more flexible allocation of merchandise to the Company's
stores.
11
<PAGE>
COSTS TO ADDRESS YEAR 2000 ISSUES. Management estimates that new year 2000
compliant software packages and related hardware improvements, which the Company
had previously planned to install irrespective of any year 2000 considerations,
will cost approximately $1.4 million. All costs related to year 2000 compliance
issues will be funded through cash flows from operations.
RISKS OF YEAR 2000 ISSUES. The Company expects to implement the changes
necessary to address the year 2000 issue. The Company presently believes
that, with the conversions to new software and modifications to existing IT
Systems, the year 2000 issue will not pose significant operational problems
for the Company's IT Systems and thus will not have a materially adverse
effect on the Company's operations. However, the year 2000 problem is
pervasive and complex and can potentially affect any computer process.
Accordingly, no assurance can be given that the year 2000 compliance can be
achieved without additional unanticipated expenditures and uncertainties that
might affect future financial results.
Moreover, in its normal course of operations the Company relies upon
vendors, government agencies, utility companies, telecommunications companies,
shipping companies, suppliers and other third party service providers over which
it can assert little control. The Company's ability to conduct its business is
dependent upon the ability of these third parties to avoid year 2000 related
disruptions. The Company has contacted and will continue to contact its key
suppliers and other third party service providers to inquire as to their year
2000 readiness. If these third parties do not adequately address their year 2000
issues, the Company's business may be affected, which could result in a
materially adverse effect on the results of operations and financial condition
of the Company.
CONTINGENCY PLANS. With the exception of the above plans, the Company has
not to date developed any further contingency plans in the event the Company, or
any key third party providers, should fail to become year 2000 compliant.
FORWARD LOOKING INFORMATION
Information contained in this Form 10-Q 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", "intend", "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
Company's ability to open new stores on favorable terms and the timing of
such store openings; 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.
ITEM 3.
QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK
Not applicable.
PART II OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
There are no material legal proceedings pending against the Company.
12
<PAGE>
ITEM 2.
CHANGES IN SECURITIES
AND USE OF PROCEEDS
There have been no material modifications to the Company's registered
securities.
ITEM 3.
DEFAULTS UPON
SENIOR SECURITIES
There has been no default with respect to any indebtedness of the Company.
ITEM 4.
SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
third quarter of fiscal 1999.
ITEM 5.
OTHER INFORMATION
None.
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
(a Exhibits
Exhibit 10 -- First Supplemental Indenture dated as of November 9,
1998
Exhibit 27 -- Financial Data Schedules (submitted for SEC use
only)
(b) Reports on Form 8-K
None.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: January 4, 1999
BRAUN'S FASHIONS CORPORATION
By /S/ ANDREW K. MOLLER
------------------------------------------
Andrew K. Moller
Vice President Finance and
Chief Financial Officer
Signing on behalf of the
registrant and as principal
financial officer.
14
<PAGE>
FIRST SUPPLEMENTAL INDENTURE
Dated as of November 9, 1998
To
INDENTURE
Dated as of December 2, 1996
_____________
12% Senior Notes due 2005
First Supplemental Indenture, dated as of November 9, 1998, between BRAUNS
FASHIONS CORPORATION, a Delaware corporation, and BRAUNS FASHIONS, INC., a
Minnesota corporation (each a "Company" and collectively, the "Companies"),
having their principal offices at 2400 Xenium Lane North, Plymouth, Minnesota
55441, and IBJ SCHRODER BANK & TRUST COMPANY, a banking corporation organized
and association existing under the laws of the State of New York, having its
principal corporate trust office located at One State Street, New York, New York
10004, as trustee (the "Trustee").
RECITALS OF THE COMPANIES
The Companies have previously executed and delivered an Indenture dated as
of December 2, 1996, (the "Indenture") providing for the issuance of
$10,300,200 aggregate principal amount of the Companies' 12% Senior Notes due
2005 (the "Securities").
The Companies desire to amend the Indenture to delete Section 10.7 of the
Indenture in its entirety.
The execution and delivery of this First Supplemental Indenture has been
authorized by a resolution of the Board of Directors of the Companies.
All conditions and requirements necessary to make this First Supplemental
Indenture a valid and binding instrument in accordance with its terms have been
performed and fulfilled and the execution and delivery of it have been in all
respects duly authorized.
NOW, THEREFORE, THIS FIRST SUPPLEMENTAL INDENTURE WITNESSETH:
For and in consideration of the above terms, it is mutually covenanted and
agreed, for the equal and proportionate benefit of all Holders of the
Securities, as follows:
<PAGE>
ARTICLE ONE
DELETION OF SECTION 10.7
Pursuant to Section 9.2 of the Indenture, Section 10.7 of the Indenture is
hereby deleted in its entirety.
ARTICLE TWO
MISCELLANEOUS PROVISIONS
Section 2.1. TERMS DEFINED. For all purposes of this First Supplemental
Indenture, except as otherwise defined or unless the context otherwise requires,
terms used in capitalized form in this First Supplemental Indenture and defined
in the Indenture have the meanings specified in the Indenture.
Section 2.2. INDENTURE; SECURITIES. Except as amended hereby, the
Indenture and the Securities are in all respects ratified and confirmed and all
of their terms shall remain in full force and effect.
Section 2.3. GOVERNING LAW. THIS FIRST SUPPLEMENTAL INDENTURE SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MINNESOTA.
Section 2.4. SUCCESSORS. All agreements of the Company and the Trustee in
this First Supplemental Indenture and the Securities shall bind their respective
successors.
Section 2.5. MULTIPLE COUNTERPARTS. The parties may sign multiple
counterparts of this First Supplemental Indenture. Each signed counterpart
shall be deemed an original, but all of them together represent the same
agreement.
Section 2.6. EFFECTIVENESS. The provisions of this First Supplemental
Indenture shall take effect immediately on its execution and delivery by the
Trustee and the Company in accordance with the provisions of Section 9.4 of the
Indenture.
Section 2.7. RECITALS. The recitals of fact contained herein shall be
taken as the statements of the Company and the Trustee assumes no responsibility
for the correctness of them. The Trustee shall not be responsible or
accountable in any way whatsoever for or with respect to and makes no
representations as to the validity or adequacy of this First Supplemental
Indenture or to its due execution by the Company.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental
Indenture to be duly executed and their respective corporate seals to be
hereunto affixed and attested, all as of the day and year first above written.
BRAUNS FASHIONS CORPORATION
By: /s/ Andrew K. Moller
---------------------------------------
Andrew K. Moller
Vice President - Finance
Attest: and Chief Financial Officer
/s/
- ------------------------------
BRAUNS FASHIONS, INC.
By: /s/ Andrew K. Moller
---------------------------------------
Andrew K. Moller
Vice President - Finance
Attest: and Chief Financial Officer
/s/
- ------------------------------
IBJ SCHRODER BANK AND TRUST
COMPANY, as Trustee
By: /s/ Luis Perez
---------------------------------------
Name: Luis Perez
Attest: Title: Assistant Vice President
/s/
- ------------------------------
3
<PAGE>
State of Minnesota )
) ss.
County of Hennepin )
On the ____ day of _________, 1998, before me personally came Andrew K.
Moller to me known, who, being by me duly sworn, did depose and say that he is
the Vice President - Finance and Chief Financial Officer of Brauns Fashions
Corporation and Brauns Fashions, Inc., one of the corporations described in and
which executed the foregoing instrument; that the seal affixed to said
instrument is such corporate seal; that it was so affixed by authority of the
Board of Directors of said corporation; and that he signed his name thereto by
like authority.
------------------------------------
Notary Public
State of New York )
) ss.
County of New York )
On the ____ day of ______, 1998, before me personally came
_______________________ to me known, who, being by me duly sworn, did depose and
say that he is an ___________________________ of IBJ Schroder Bank & Trust
Company, one of the corporations described in and which executed the foregoing
instrument; that the seal affixed to said instrument is such corporate seal;
that it was so affixed by authority of the Board of Directors of said
corporation; and that he signed his name thereto by like authority.
------------------------------------
Notary Public
4
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S 10-Q FOR THE NINE MONTHS ENDED NOVEMBER 28, 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-27-1999
<PERIOD-START> MAR-01-1998
<PERIOD-END> NOV-28-1998
<CASH> 9,543,799
<SECURITIES> 0
<RECEIVABLES> 2,334,564
<ALLOWANCES> 43,358
<INVENTORY> 13,371,264
<CURRENT-ASSETS> 26,027,133
<PP&E> 26,368,621
<DEPRECIATION> 14,535,781
<TOTAL-ASSETS> 39,303,549
<CURRENT-LIABILITIES> 8,055,539
<BONDS> 5,107,079
0
0
<COMMON> 47,128
<OTHER-SE> 25,071,203
<TOTAL-LIABILITY-AND-EQUITY> 39,303,549
<SALES> 78,771,053
<TOTAL-REVENUES> 78,771,053
<CGS> 51,090,564
<TOTAL-COSTS> 51,090,564
<OTHER-EXPENSES> 20,565,962
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 303,696
<INCOME-PRETAX> 6,810,831
<INCOME-TAX> 2,588,116
<INCOME-CONTINUING> 4,222,715
<DISCONTINUED> 0
<EXTRAORDINARY> 35,396<F1>
<CHANGES> 0
<NET-INCOME> 4,258,111
<EPS-PRIMARY> 0.93
<EPS-DILUTED> 0.88
<FN>
<F1>DURING THE FIRST NINE MONTHS OF FISCAL 1999 THE COMPANY REPURCHASED
APPROXIMATELY $4.7 MILLION ORIGINAL PRINCIPAL FACE AMOUNT OF THE COMPANY'S
OUTSTANDING 12% SENIOR NOTES. IN THE THIRD QUARTER THE COMPANY RECORDED AN
EXTRAORDINARY GAIN, NET OF TAX, OF $35,396 AS A RESULT OF THE RETIREMENT
OF THESE PURCHASES.
</FN>
</TABLE>
