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 MAY 30, 1998 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
------------------ TO -----------------
0-24390
Commission file number . . . . . . . . . . . . . . . . .
TREND - LINES, INC.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Exact name of registrant as specified in its charter)
Massachusetts 04-2722797
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
135 American Legion Highway, Revere, Massachusetts 02151
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Address of principal executive office) (Zip Code)
(617) 853 - 0900
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS NUMBER OF SHARES OUTSTANDING JULY 7, 1998
----- ------------------------------------------
Class A Common Stock, $.01 par value 5,923,341
Class B Common Stock, $.01 par value 4,726,794
<PAGE>
TREND-LINES, INC. AND SUBSIDIARY
INDEX
Page
----
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
May 30, 1998 (Unaudited) and March 1, 1998 3
Condensed Consolidated Statements of Operations
Three Months Ended May 30, 1998 and
May 31, 1997 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended May 30, 1998 and May 31,1997 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
And Results of Operations 8-10
Part II - Other Information
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TREND-LINES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
(Unaudited)
May 30, March 1,
1998 1998
------------- ----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 658 $ 669
Accounts receivable, net 17,379 18,546
Inventories 109,465 102,172
Prepaid expenses and other current assets 6,914 6,906
--------- ---------
Total current assets 134,416 128,293
PROPERTY AND EQUIPMENT, NET 20,554 19,387
INTANGIBLE ASSETS, NET 6,885 6,973
OTHER ASSETS 803 799
--------- ---------
$ 162,658 $ 155,452
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank credit facility (Note 3) $ 57,771 $ 43,801
Current portion of capital lease obligations 809 777
Accounts payable 48,769 53,830
Accrued expenses 11,091 8,111
--------- ---------
Total current liabilities 118,440 106,519
--------- ---------
CAPITAL LEASE OBLIGATIONS, NET OF CURRENT PORTION 970 1,182
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value -
Class A --
Authorized - 20,000,000 shares
Issued - 6,422,991 and 6,385,178 shares at May 30, 1998
and March 1, 1998, respectively 64 64
Class B --
Authorized - 5,000,000 shares
Issued and outstanding - 4,726,794 and 4,738,066 shares at
May 30, 1998 and March 1, 1998, respectively 47 47
Additional paid-in capital 41,624 41,524
Retained earnings 3,973 8,576
Less: 500,000 Class A shares held in treasury at May 30, 1998
and March 1, 1998, at cost (2,460) (2,460)
--------- ---------
Total stockholders' equity 43,248 47,751
--------- ---------
$ 162,658 $ 155,452
========= =========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
TREND-LINES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
May 30, May 31,
1998 1997
------------ ------------
<S> <C> <C>
NET SALES $ 59,639 $ 57,089
COST OF SALES 42,058 38,157
------------ ------------
Gross Profit 17,581 18,932
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 23,418 17,601
------------ ------------
Income (loss) from operations (5,837) 1,331
INTEREST EXPENSE, NET 1,053 654
------------ ------------
Income (loss) before provision (benefit) for income taxes (6,890) 677
PROVISION (BENEFIT) FOR INCOME TAXES (2,287) 264
------------ ------------
Net income (loss) $ (4,603) $ 413
============ ============
BASIC NET INCOME (LOSS) PER SHARE $ (0.43) $ 0.04
============ ============
DILUTED NET INCOME (LOSS) PER SHARE $ (0.43) $ 0.04
============ ============
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING (Note 2) 10,641,896 10,585,124
============ ============
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING (Note 2) 10,641,896 11,193,040
============ ============
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
TREND-LINES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended
May 30, May 31,
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (4,603) $ 413
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities--
Depreciation and amortization 1,014 557
Changes in current assets and liabilities
Accounts receivable 1,167 1,358
Inventories (7,293) 2,023
Prepaid expenses and other current assets (8) 753
Accounts payable (5,061) (9,349)
Accrued expenses 2,980 399
-------- --------
Net cash (used in) operating activities (11,804) (3,846)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,093) (1,378)
Proceeds from sale of property and equipment -- 9
Increase in other assets (4) (200)
-------- --------
Net cash (used in) investing activities (2,097) (1,569)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under bank credit facilities 13,970 5,241
Payments on capital lease obligations (180) (219)
Proceeds from exercise of stock options 100 34
Purchases of treasury stock -- (310)
-------- --------
Net cash provided by financing activities 13,890 4,746
-------- --------
NET (DECREASE) IN CASH AND CASH EQUIVALENTS (11) (669)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 669 1,006
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 658 $ 337
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for -
Interest $ 1,021 $ 600
======== ========
Income taxes $ 1,550 $ 863
======== ========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
TREND-LINES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
- ------------------------
The information set forth in these financial statements is unaudited and may be
subject to normal year end adjustments. In the opinion of management, the
information reflects all adjustments, which consist of normal recurring
accruals, that are considered necessary to present a fair statement of the
results of operations of Trend-Lines, Inc. (the "Company") for the interim
periods presented. The operating results for the three months ended May 30, 1998
are not necessarily indicative of the results to be expected for the fiscal year
ending February 27, 1999.
The financial statements presented herein should be read in conjunction with the
financial statements included in the Company's Annual Report on Form 10-K for
the year February 28, 1998. Certain information in footnote disclosures normally
included in financial statements have been condensed or omitted in accordance
with the rules and regulations of the Securities and Exchange Commission.
2. EARNINGS PER SHARE DATA
- --------------------------
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128
Earnings Per Share, which changed the method of calculating earnings per share.
SFAS 128 requires the presentation of "basic" earnings per share and "diluted"
earnings per share. Basic earnings per share is computed by dividing the net
income available to common shareholders by the weighted average number of shares
of common stock outstanding. For the purposes of calculating diluted earnings
per share, the denominator includes both the weighted average number of common
stock outstanding and dilutive effect of common stock equivalents such as stock
options and warrants. The Company adopted SFAS 128 in the fourth quarter of
fiscal 1997. All prior period per share amounts have been restated to comply
with SFAS 128.
Potentially dilutive securities include outstanding options under the Company's
stock option plan. For the quarter ended, May 30, 1998, the diluted earnings per
share calculation has been computed using the basic weighted average shares
outstanding, as the potentially dilutive securities are anti-dilutive. The
number of potentially dilutive shares excluded from the earnings per share
calculation was 538,047. Below is a summary of the shares used in calculating
basic and dilutived earnings per share:
May 30, May 31,
1998 1997
Weighted average number of shares of common
stock outstanding 10,641,896 10,585,124
Dilutive effect of stock options 0 607,916
---------- ----------
Shares used in calculating diluted earnings per share 10,641,896 11,193,040
---------- ----------
6
<PAGE>
3. BANK CREDIT FACILITY
- -----------------------
During fiscal 1996, the Company entered into a secured line-of-credit agreement
with a bank that, as amended during fiscal 1997, expires on December 31, 2000.
The facility bears interest at the bank's reference rate plus .75% (9.0% at May
30, 1998) or LIBOR plus 2.25% (7.625% at May 30, 1998). If for any 12 month
rolling period the fixed charges ratio exceeds certain limits, as defined, the
bank's interest rate on the facility is decreased by .25% for the period
immediately following such rolling period. A commitment fee of .375% per year of
the average unused commitment amount, as defined, is payable monthly. The
Company's revolving credit facility allows for borrowing up to $80 million based
on a borrowing formula related to inventory levels, as defined (borrowings
include 50% of the amounts reserved for outstanding letters of credit.)
At May 30, 1998, the Company had approximately $57.8 million of borrowings
outstanding and approximately $0.3 million of letters of credit outstanding. The
Company had approximately $3.1 million in available borrowings under this
facility at May 30, 1998. The bank has a security interest in substantially all
assets of the Company. The bank credit facility agreement contains certain
restrictive covenants, including, but not limited to, maintenance of certain
levels of tangible net worth, maintaining stipulated interest coverage ratios
and limitations on capital expenditures. The Company was in compliance with all
bank covenants at May 30, 1998.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Net sales for the first quarter of fiscal 1998 increased by $2.5 million, or
4.4%, from $57.1 million for the first quarter of fiscal 1997 to $59.6 million.
Net catalog sales for the first quarter of fiscal 1998 decreased $7.4 million or
40.9%, from $18.1 million for the first quarter of fiscal 1997 to $10.7 million
for the first quarter of fiscal 1998. Net retail sales for the first quarter of
1998 increased $10.0 million or 25.6% from $39.0 million for the first quarter
of fiscal 1997 to $49.0 million. The decrease in net catalog sales was
attributed to the Company's difficulties to ship merchandise on a timely basis
to its catalog customers as a result of problems encountered during the
implementation of a new warehouse management system. The decrease in net catalog
sales is also attributed to the Company's opening of retail stores in areas
previously only served by its catalog. The revenue growth of retail stores is
attributable to the maturation and expansion of the Company's retail store base.
The store base expanded over 34% from 158 locations at the end of the first
quarter of fiscal 1997 to 213 locations at the end of the first quarter of
fiscal 1998. However, comparable net store sales for Woodworkers Warehouse /
Post Tool stores and Golf Day stores for the first quarter of fiscal 1998
decreased by 1.4% as compared to the first quarter of fiscal 1997. The decrease
in comparable store sales is attributed to difficulties with the implementation
of the new warehouse management system, which also disrupted the flow of
merchandise to Woodworkers Warehouse and Golf Day stores.
Gross profit for the first quarter of fiscal 1998 decreased $1.3 million, or
6.9%, from $18.9 million for the first quarter of fiscal 1997 to $17.6 million
for the first quarter of fiscal 1998. As a percentage of net sales, gross profit
decreased from 33.2% of net sales for the first quarter of fiscal 1997 to 29.5%
of net sales in the first quarter of fiscal 1998. The decrease in the Company's
gross profit percentage is the result of the Company's changing sales mix. The
sales mix change was exacerbated by a particularly sharp 40.9% decline in
catalog sales combined with a 25.6% increase in retail store sales as compared
to last year's sales.
Selling, general and administrative expenses for the first quarter of fiscal
1998 increased $5.8 million, or 33.0%, from $17.6 million for the first quarter
of fiscal 1997 to $23.4 million for the first quarter of fiscal 1998. As a
percentage of net sales, selling, general and administrative expenses increased
from 30.8% of net sales in the first quarter of fiscal 1997 to 39.3% of net
sales in the first quarter of fiscal 1998. The higher than normal increase in
selling, general and administrative expenses as a percentage of net sales is
primarily attributable to the unanticipated decrease in catalog and retail
comparable sales, while operating infrastructure was positioned to achieve
higher levels of sales. Also, the retail store base expanded over 34% to 213
locations, while negative comparable store sales reversed potential productivity
improvements. The dollar increases in selling, general and administrative
expenses are primarily related to the Company's continuing retail expansion.
However, the Company also experienced significant, increased operating expenses
due to problems encountered in the implementation of its warehouse management
systems.
Interest expense, net of interest income, for the first quarter of fiscal 1998
increased by $399,000 from $654,000 in the first quarter of fiscal 1997 to $1.1
million in the first quarter of fiscal 1998. The increase in interest expense is
attributable to the increase in the Company's bank credit facility and a 25
basis point increase in its effective interest rate as a result of fixed charges
ratio falling below a 1:1 level.
8
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Management believes that projected cash flows from operations in combination
with current and projected available resources are more than sufficient to meet
the working capital needs, such as store openings, and debt payments, of the
Company.
The Company's working capital decreased by $5.8 million, from $21.8 million as
of March 1, 1998 to $16.0 million as of May 30, 1998. The decrease resulted
primarily from a $5.1 million decrease in accounts payable and $3.0 increase in
accrued expenses, which was only partially offset by a $14.0 million increase in
bank debt, primarily to support the Company's expanding retail operations, a
$7.3 million increase in inventories and a $1.2 million decrease in accounts
receivable.
The cash used in operating activities was approximately $11.8 million. The
primary use of the cash was the $6.1 million net increase in inventories and
accounts receivable, as well as the $5.1 million decrease in accounts payable.
The net cash used in investing activities was approximately $2.1 million. The
main use of the cash was for the purchase of property and equipment required for
the Company's retail expansion.
The net cash provided by investing activities was approximately $13.9 million,
primarily attributable to the increase in borrowings on the Company's bank
credit facility.
The Company has used its revolving, secured bank credit facility over the last
several years primarily to finance its operations and retail expansion. The
maximum amount available under the credit facility is $80 million, as amended
during fiscal 1997 and which expires on December 31, 2000, of which $57.8
million (including letters of credit totaling approximately $0.3 million) was
outstanding as of May 30, 1998. The Company is permitted to borrow against its
bank credit facility based on a borrowing formula related to inventory levels.
The Company had approximately $3.1 million in available borrowings under this
facility at May 30, 1998. Under the terms of the agreement, the facility
contains financial covenants and bears interest at the bank's reference rate
plus .75% (9.0% at May 30, 1998) or LIBOR plus 2.25% (7.625% at May 30, 1998).
If for any 12 month rolling period the fixed charges ratio exceeds certain
levels, as defined, the bank's interest rate on the facility is decreased by
.25% for the period immediately following such rolling period. In addition, the
agreement provides that the Company will pay a commitment fee of .375% per year
of the average unused committed amount.
The Company anticipates that in fiscal 1998, it will continue to invest in
leasehold improvements and equipment to support its retail store expansion
plans. In addition, the Company's expansion plans will require the use of cash
to fund increased inventories associated with the operation of additional retail
stores. The Company estimates that the cost of opening a new store (exclusive of
distribution center inventory) averages approximately $350,000, including
$290,000 of inventory, in the case of tool store, and approximately $425,000,
including $300,000 of inventory, in the case of a golf store. In each case, a
portion of the inventory investment is financed with trade credit. The Company
opened eight new tool stores and five new golf stores, and closed three tool
stores and began the process of relocating two tool stores. For fiscal 1998, the
Company currently plans to open approximately 45 to 55 retail stores.
Like many other companies, the Year 2000 computer issue creates risk for the
Company. If internal systems do not correctly recognize date information when
the year changes to 2000, it could have an adverse impact on the Company's
operations. The Company is currently updating its software to accommodate
programming logic that properly interprets Year 2000 dates. Except for
9
<PAGE>
merchandising and call center applications, all software is under maintenance
agreements by software companies that provide updated, Year 2000 compliant
software. The Company is in the process of replacing its call center and
merchandising software with new, industry-leading year 2000 compliant
applications to be supplied by outside vendors at a cost estimated at
approximately $2.0 million.
Based on the Company's work-to-date and assuming that the Company's call center
and merchandising software replacement projects can be implemented as planned,
the Company believes that future costs relating to the Year 2000 issue will not
have a material impact on the Company's consolidated financial position, results
of operations or cash flows.
IMPACT OF INFLATION
- -------------------
The Company does not believe that inflation has had a material impact on its net
sales or results of operations.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
- --------------------------------------------------------------------------------
Statements included in this report that do not relate to present or historical
conditions are "forward-looking statements" within the meaning of the Safe
Harbor provisions of the Private Securities Litigation Reform Act of 1995.
Additional oral or written forward-looking statements may be made by the Company
from time to time, and such statements may be included in documents other than
this report that are filed with the Securities and Exchange Commission. Such
forward-looking statements involve risks and uncertainties that could cause
results or outcomes to differ materially from those expressed in such
forward-looking statements. Forward-looking statements in this report and
elsewhere may include without limitation, statements relating to the Company's
plans, strategies, objectives, expectations, intentions and adequacy of
resources and are intended to be made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Words such as "believes,"
"forecasts," "intends," "possible," "expects," "estimates," "anticipates," or
"plans" and similar expressions are intended to identify forward-looking
statements. Investors are cautioned that such forward-looking statements involve
risks and uncertainties including without limitation the following: (i) the
Company's plans, strategies, objectives, expectations and intentions are subject
to change at any time at the discretion of the Company; (ii) increased
competition, a change in the retail business in the tool and/or golf sectors or
a change in the Company's merchandise mix; (iii) a change in the Company's
advertising, pricing policies or its net product costs after all discounts and
incentives; (iv) the Company's plans and results of operations will be affected
by the Company's ability to manage its growth and inventory as well as year end
inventory and adjustments; (v) the timing and effectiveness of programs dealing
with the Year 2000 issue and the Company's warehouse management system; and (vi)
other risks and uncertainties indicated from time to time in the Company's
filings with the Securities and Exchange Commission.
10
<PAGE>
TREND-LINES, INC. AND SUBSIDIARY
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable
ITEM 2. CHANGES IN SECURITIES
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
ITEM 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - not applicable
(b) Reports on Form 8-K - not applicable
11
<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.
TREND-LINES, INC.
---------------------------
Registrant
Date: July 13, 1998 /s/ Stanley D. Black
---------------------------
Stanley D. Black
(Chief Executive Officer)
/s/ Karl P. Sniady
---------------------------
Karl P. Sniady
(Executive Vice President,
Chief Financial Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-1-1998
<PERIOD-END> MAY-30-1998
<CASH> 658
<SECURITIES> 0
<RECEIVABLES> 17,162
<ALLOWANCES> 217
<INVENTORY> 109,465
<CURRENT-ASSETS> 134,416
<PP&E> 29,881
<DEPRECIATION> 9,327
<TOTAL-ASSETS> 162,658
<CURRENT-LIABILITIES> 118,440
<BONDS> 970
0
0
<COMMON> 111
<OTHER-SE> 43,137
<TOTAL-LIABILITY-AND-EQUITY> 162,658
<SALES> 59,639
<TOTAL-REVENUES> 59,639
<CGS> 42,058
<TOTAL-COSTS> 42,058
<OTHER-EXPENSES> 23,418
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,053
<INCOME-PRETAX> (6,890)
<INCOME-TAX> (2,287)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,603)
<EPS-PRIMARY> (0.43)
<EPS-DILUTED> (0.43)
</TABLE>
