<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended November 1, 1997
Commission File Number 000-24328
RICHMAN GORDMAN 1/2 PRICE STORES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 47-0771211
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
12100 WEST CENTER ROAD, OMAHA, NEBRASKA 68144
(Address of principal executive offices) (zip code)
(402) 691-4000
(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
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Class of Common Stock Outstanding at November 1, 1997
--------------------- -------------------------------
Common Stock:
Series A 19,260,000 shares
Series B Option 10,200,000 shares
Page 1 of 23
Exhibit Index Appears At Page 21
<PAGE> 2
RICHMAN GORDMAN 1/2 PRICE STORES, INC. AND SUBSIDIARY
-----------------------------------------------------
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets as of
November 1, 1997 and February 1, 1997 3
Consolidated Statements of Operations -
Three Months and Nine Months Ended
November 1, 1997 and November 2, 1996 4
Consolidated Statements of Cash Flows -
Nine Months Ended November 1, 1997
and November 2, 1996 5
Notes to Consolidated Financial Statements 6 - 7
Item 2 - Management's Discussion and Analysis of 8 - 17
Financial Condition and Results of
Operations
PART II - OTHER INFORMATION
Items 1-4 - None 18
Item 5 - Other Information 18
Item 6 - Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit Index 21
Page 2 of 23
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
RICHMAN GORDMAN 1/2 PRICE STORES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
November 1, 1997 February 1, 1997
---------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $192,885 388,267
Accounts receivable, less allowance for doubtful
accounts of $697,900 and $587,150 1,319,426 782,312
Merchandise inventories 32,493,845 25,314,919
Prepaid expenses and other current assets 1,893,266 1,883,490
---------------- ----------------
Total current assets 35,899,422 28,368,988
PROPERTY, BUILDINGS AND EQUIPMENT, net 13,190,926 14,267,207
OTHER ASSETS 161,624 212,904
---------------- ----------------
$49,251,972 42,849,099
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line of credit borrowings $17,824,083 7,281,732
Accounts payable 8,979,855 7,038,664
Accrued expenses 4,937,131 4,797,191
Taxes accrued and withheld 2,526,850 1,935,810
Income taxes payable 1,361 23,715
Current portion of long-term debt 4,163,441 4,537,056
Current maturites of capital lease obligations 1,322,467 1,335,379
---------------- ----------------
Total current liabilities 39,755,188 26,949,547
CAPITAL LEASE OBLIGATIONS, net of current portion 8,285,996 9,258,949
OTHER LONG-TERM LIABILITIES 723,380 755,080
STOCKHOLDERS' EQUITY:
Common stock
Series A common stock: $.01 par value; 19,800,000
shares authorized; 19,260,000 shares issued 192,600 192,600
Series B option common stock: $.01 par value; 10,200,000
shares authorized, issued and outstanding 102,000 102,000
Paid-in capital 4,562,886 4,562,886
Retained earnings (accumulated deficit) (4,144,358) 1,253,757
Less: Treasury Stock, at cost, 2,565,000 shares (225,720) (225,720)
---------------- ----------------
Total stockholders' equity 487,408 5,885,523
---------------- ----------------
$49,251,972 42,849,099
================ ================
</TABLE>
See notes to consolidated financial statements.
Page 3 of 23
<PAGE> 4
RICHMAN GORDMAN 1/2 PRICE STORES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
NOVEMBER 1, 1997 NOVEMBER 2, 1996 NOVEMBER 1, 1997 NOVEMBER 2, 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
NET SALES $51,122,905 $50,484,778 $131,173,719 $137,950,813
COST OF SALES 32,819,996 32,367,912 84,811,275 89,650,635
----------- ----------- ------------ ------------
Gross Profit 18,302,909 18,116,866 46,362,444 48,300,178
OPERATING AND
ADMINISTRATIVE EXPENSES 17,422,402 18,119,210 49,510,199 53,004,416
----------- ----------- ------------ ------------
Income(Loss) from operations 880,507 (2,344) (3,147,755) (4,704,238)
INTEREST EXPENSE (743,483) (1,070,345) (2,250,361) (2,856,622)
----------- ----------- ------------ ------------
INCOME (LOSS) BEFORE PROVISION
FOR INCOME TAX 137,024 (1,072,689) (5,398,116) (7,560,860 )
PROVISION FOR INCOME TAXES - - - -
----------- ----------- ------------ ------------
NET INCOME(LOSS) 137,024 (1,072,689) (5,398,116) (7,560,860)
=========== =========== ============ ============
INCOME (LOSS) PER COMMON
SHARE $0.01 ($0.04) ($0.20) ($0.26)
=========== =========== ============ ============
WEIGHTED AVERAGE
SHARES OUTSTANDING 27,435,000 27,435,000 27,435,000 28,575,000
=========== =========== ============ ============
</TABLE>
See notes to consolidated financial statements.
Page 4 of 23
<PAGE> 5
RICHMAN GORDMAN 1/2 PRICE STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
NOVEMBER 1, 1997 NOVEMBER 2, 1996
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss ($5,398,116) ($7,560,860)
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation and amortization 2,063,806 2,346,929
Net changes in assets and liabilities:
Accounts receivable (537,114) (791,333)
Merchandise inventory (7,178,926) (7,060,286)
Prepaid expenses and other current assets (9,776) 278,310
Other assets 32,372 544,266
Accounts payable 1,941,191 2,867,404
Other accrued expenses 198,683 826,393
---------------- ----------------
Net cash used in operating activities (8,887,880) (8,549,177)
================ ================
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of land 770,000 0
Capital expenditures (1,126,568) (609,267)
---------------- ----------------
Net cash used in investing activities (356,568) (609,267)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from line of credit borrowing 10,542,351 10,955,770
Payments on obligations under capitalized leases (985,864) (921,011)
Payments on note payable-prepetition secured creditors (426,595) (603,000)
Payments on note payable-other (80,826) 0
Purchase of treasury stock 0 (225,720)
Payments made under plan of reorganization 0 (220,701)
---------------- ----------------
Net cash provided by financing activities 9,049,066 8,985,338
---------------- ----------------
NET DECREASE IN CASH (195,382) (173,106)
CASH, Beginning of period 388,267 488,012
---------------- ----------------
CASH, End of period $192,885 $314,906
================ ================
</TABLE>
See notes to consolidated financial statements
Page 5 of 23
<PAGE> 6
RICHMAN GORDMAN 1/2 PRICE STORES, INC. AND SUBSIDIARY
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. MANAGEMENT REPRESENTATION
-------------------------
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. In the opinion of management, all
adjustments necessary for a fair presentation of the results of operations
for the interim periods have been included. All such adjustments are of a
normal recurring nature. Because of the seasonal nature of the business,
results for interim periods are not necessarily indicative of a full year's
operations. The accounting policies followed by Richman Gordman 1/2 Price
Stores, Inc. and subsidiary (the "Company") and additional footnotes are
reflected in the audited consolidated financial statements contained in the
Annual Report on Form 10-K of the Company for the fiscal year ended
February 1, 1997.
2. DESCRIPTION OF BUSINESS
-----------------------
On October 20, 1993, the Company emerged from Chapter 11 of the United
States Bankruptcy Code pursuant to a confirmed Plan of Reorganization (the
"Plan"). The Company operated 32 1/2 Price Stores as of November 1, 1997
and November 2, 1996. The 1/2 Price Store concept is to offer recognizable,
name brand merchandise priced at one-half of department and specialty
store regular prices.
3. MERCHANDISE INVENTORIES
-----------------------
Merchandise inventories are stated at the lower of cost (on a last-in,
first-out, or LIFO basis) or market. Total inventories would have been
higher at November 1, 1997 and February 1, 1997, by approximately
$7,731,083 and $7,862,748, respectively, had the FIFO (first-in, first-out)
method been used to determine the cost of all inventories. Working capital
and stockholders' equity would also be increased under FIFO. Quarterly
LIFO inventory determinations reflect assumptions regarding fiscal year-end
inventory levels and the estimated impact of annual inflation.
4. INCOME TAXES
------------
As of February 1, 1997 (the Company's most recent tax year-end), the
Company had net operating loss carryforwards of approximately $27,800,000,
which expire through 2011. A valuation allowance has been provided against
this net operating loss benefit until realization of these benefits becomes
more likely than not. No income tax benefit was recorded for fiscal 1997
and 1996 because of the uncertainty of the realization of such benefits in
the future.
Page 6 of 23
<PAGE> 7
5. STOCKHOLDERS' EQUITY
--------------------
At such time as the Company fulfills its minimum obligation to the
unsecured creditors under the Plan, the Company and the former preferred
shareholder's designee have the option to purchase all or a portion of the
10,200,000 shares of Series B Option Common Stock issued to the unsecured
creditors at a price equal to the fair value of the stock on February 2,
1998, less the amount of any Excess Cash Balance paid to the unsecured
creditors during the term of the Plan. As of November 1, 1997 there is no
excess cash paid to the unsecured creditors.
6. EARNINGS PER SHARE
------------------
Earnings per common share were calculated using weighted average common
shares outstanding for all periods presented. For purposes of the weighted
average shares outstanding, all shares issued to certain members of
management or to the unsecured creditors during the term of the Plan are
considered outstanding. Effective September 12, 1997, the Company awarded
existing employees options to purchase 619,000 shares of Series A Common
Stock under the 1997 Stock Option Plan. The options vest over a five year
period and carry an exercise price of $.051 per share. The options are not
considered dilutive for purposes of computing Earnings Per Share.
7. DEPRECIATION
------------
During the third quarter of fiscal 1997, the Company evaluated the useful
lives of certain of its equipment, fixtures and leaseholds and adjusted the
useful lives where deemed appropriate. These changes in estimates reduced
depreciation expense by approximately $300,000 in the third quarter.
8. ACCOUNTING PRONOUNCEMENT
------------------------
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, Earnings Per Share, which specifies the computation, presentation and
disclosure requirements for earnings per share. The objective of the
statement is to simplify the computation of earnings per share. The
Company does not expect this pronouncement to have a material impact on its
earnings per share as currently computed. SFAS No. 128 is applicable for
the Company beginning in the fourth quarter of fiscal 1997.
9. RECLASSIFICATIONS
-----------------
Certain amounts in the February 1, 1997 balance sheet have been
reclassified to conform to current presentation.
Page 7 of 23
<PAGE> 8
PART I - FINANCIAL INFORMATION
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
PROGRESS REPORT
- ---------------
In our 1996 Annual Report we discussed the strategies we are using to improve
the Company's performance following a change in senior management and direction
in mid-1996. We made steady progress in the fundamental aspects of our
turnaround efforts during the first year. We created the liquidity necessary
to manage our business effectively, improved cash flow, lowered inventories,
improved merchandise mix and presentation and strengthened our staff. Results
for the third quarter of fiscal 1997 ended on November 1, 1997 (which began the
second year of our turnaround) were very encouraging. We were profitable for
the third quarter and we achieved a comparable store sales increase - both
significant accomplishments. We are pleased with the results of our turnaround
efforts over the past 15 months and will continue to report our progress in
future updates. A summary of the progress is provided below.
1. We have significantly improved our liquidity, as defined by excess
availability under our line of credit.
a. Average excess availability under our line of credit during
the first nine months of 1997 was $8.3 million, a 47% increase
compared to the same period in fiscal 1996.
b. Excess availability was $7.7 million at November 1, 1997.
c. Average borrowings under our line of credit during the first nine
months of fiscal year 1997 were $12.9 million, a decrease of 15%
compared to the same period in fiscal 1996.
d. Our primary lender, Congress Financial Corporation (Central),
continues to be very supportive, agreeing over the past 15 months to
increase our line of credit to $27.5 million, increase our advance
rate, lower our interest rate and extend the term of our loan
agreement to October, 1999. Our lending agreement has no annual clean
down provision nor does it contain any covenants specifying our
earnings, working capital, net worth or cash flow levels, but does
include limitations on annual cumulative capital expenditures and
additional borrowing.
Page 8 of 23
<PAGE> 9
e. Our investment in inventory during the first nine months of
fiscal 1997 is 20% lower, on average, than it was a year ago,
translating into a $6.6 million reduction.
f. Inventory turnover has increased by 21% during the first nine
months of fiscal 1997 as compared to the first nine months of fiscal
1996. Our turnover in the first nine months was the highest in the
Company's recent history.
g. Gross margin return on inventory (GMROI) increased by 27%
during the first nine months of fiscal 1997 as compared to the first
nine months of fiscal 1996. GMROI is at its highest in the
Company's recent history.
h. In August we made the final of a series of payments to our
pre-petition secured creditor.
i. Working capital was a negative $3.5 million at the end of the
third quarter. However, our reported working capital is
significantly lowered by two of our accounting policies. First, we
report our inventory on a LIFO basis, unlike many public companies
who report inventory on a FIFO basis. Using LIFO lowers reported
inventory, working capital and equity as compared to FIFO. Had our
Company used FIFO, working capital and stockholders' equity would
have increased by $7.7 million. Second, we classify all borrowings
under our line of credit as current liabilities, even though our
credit agreement extends through October, 1999 and does not include
a clean down provision.
2. Sales results improved in the third quarter.
a. Comparable store sales in the third quarter increased 1.3%
over last year. Comparable store sales were strongest in October,
when they increased 7.6%. A major snowstorm which hit Colorado,
Nebraska and Iowa in October caused us to close several stores for
one or more days over a weekend, decreasing sales by an estimated
$400,000. We experienced a 3.3% comparable store sales increase in
August, and a 5.7% decrease in September. Comparable store sales
have improved, relative to the previous month, in eight of the past
nine months.
Page 9 of 23
<PAGE> 10
b. Sales increased in five of our eight merchandising divisions
during the third quarter of fiscal 1997 as compared to fiscal 1996.
These divisions are Women's (+13%), Intimate Apparel (+19%), Juniors
(+15%), Women's Accessories (+5%), and. Men's (+3%). Women's is one
of our most important divisions, not only because of its size
relative to our other divisions, but also because it attracts the
female shopper to our store to buy clothing for herself, which we
believe will have a halo effect throughout the store in the future
as she also buys shoes, accessories, children's clothes and toys,
home goods and certain men's clothing. Our childrens business
declined 1% for the third quarter. Our Shoe (-25%) and Home (-6%)
divisions performed well below our expectations. We are addressing
Home aggressively by intensifying key brand and category offerings,
improving our merchandise assortment and focusing significant
attention from senior management. We have moved aggressively to
correct the problems in Shoes, as detailed in item 5 below.
c. Year to date, net sales are down 4.9% from last year. During
the first nine months of fiscal 1997 we continued a strategic shift
to offering desirable name brand merchandise at everyday prices well
below department and specialty store regular prices. Comparable
store sales in the current year nine-month period decreased by 4.2%
as compared to the prior year nine-month period. During the first
half of fiscal 1996, the Company was driving sales through a
promotional and advertising plan that offered discounts off everyday
prices. Thus a large part of our sales decrease for the first six
months of fiscal 1997 was planned.
d. November, which is not part of our third quarter results
described in this report, was also a very strong month, with our
comparable store sales up almost 9% for the month.
3. Our margins have improved as a result of our strategies.
a. Gross margins were 35.3% in the first nine months of fiscal
1997 compared to 35.0% in the first nine months of fiscal 1996.
However, gross margin percentage excluding the effects of inventory
aging reserves and the LIFO provision was up .7% for the first nine
months of fiscal 1997 compared to fiscal 1996, from 34.5% to 35.2%.
Gross margins for the third quarter of fiscal 1997 were 35.8% as
compared to 35.9% for the third quarter of fiscal 1996.
b. Gross margin percentages in the first nine months of fiscal
1997 exceeded the first nine months of fiscal 1996 in all of our
merchandise divisions except Home.
Page 10 of 23
<PAGE> 11
4. We produced operating income of $881,000 during the third quarter of
fiscal 1997 and a net income of $137,000. During the third quarter of
fiscal 1996 we had an operating loss of $2,000 and a net loss of
$1,073,000.
5. We have formed a strategic alliance to lease out our shoe business
beginning in the fourth quarter.
a. Effective November 9, 1997 our shoe business has been leased
to Shoe Corporation of America, Inc. ("SCOA"). SCOA is one of the
nation's leading shoe retailers and currently operates the shoe
departments of several retailers including Gottshalks, Goody's, ZOMI
Department Stores, Uptons and Carson Pirie Scott. Under the
agreement, SCOA purchased all of our existing shoe inventory and
fixtures, assumed responsibility for all shoe department employees
and will pay us a percentage of all ongoing shoe sales. The term of
the agreement is 3 years, with mutual options to renew.
b. As we have previously disclosed, our shoe business had been
underperforming for some time. By executing this leasing
arrangement, we are allying ourselves with the expertise and buying
power of SCOA, a company we believe to be the premier shoe licenser
in the Country.
c. The initial sales of our shoe inventory to SCOA will not
result in a material impact to our earnings. Going forward, we
expect the license fees we earn from SCOA to exceed the profit
contribution we could have earned by retaining our shoe business.
d. Outsourcing our shoe department will free up time, energy and
resources to focus on other aspects of our business.
6. Key initiatives aimed at continuing to drive up our sales have been
implemented in merchandising, marketing and stores.
a. We have intensified, in terms of inventory and management
attention, those merchandise areas that represent the largest growth
potential. These include juniors, full figure, petites, men's and
women's activewear, women's career sportswear, fine jewelry, men's
bottoms, athletic footwear, gifts, frames and rugs.
b. We have added or intensified key brands to our inventory mix,
such as Nike activewear, Levi Strauss, Dockers, Sag Harbor, Guess,
Calvin Klein and Mikassa. We have upgraded our brand offerings in
most areas, including denim, activewear, women's career and casual
wear, and shoes.
c. We increased our planned merchandise receipts by 15% for the
fourth quarter of fiscal 1997.
Page 11 of 23
<PAGE> 12
d. We increased our advertising plan for the second half of
fiscal 1997, raising it 15% over fiscal 1996 and focusing on Sunday
pre-print circulars, television and radio. We coupled that
increased spending with several fundamental changes in the content
of our advertising.
e. In July, 1997 our Commitment to Customer Satisfaction was
rolled out Company-wide. The goal of the Commitment to Customer
Satisfaction is to revolutionize the culture in our stores - making
the customer the number one priority and to increase the average
sales per transaction. Achieving a $1 increase per transaction
would translate into $8 million in sales (approximately 4% of fiscal
year 1996 net sales) annually.
7. Selected upgrades in our key personnel make us a stronger Company, and
are having an impact on our results.
a. In the past year we have added two new divisional merchandise
managers, five new buyers, and new Vice Presidents of Marketing and
Finance.
b. A recently revised incentive plan more directly ties
compensation to performance for our key people.
8. Although we have made significant progress in our turnaround efforts, we
realize that several factors will have a significant impact on our future
success. These include (i) our ability to increase sales volume, (ii) our
ability to procure merchandise opportunistically such that it can be
offered at half price, (iii) continued availability of the trade credit we
now receive and (iv) our ability to sustain an adequate level of borrowing
capacity.
We have accomplished a great deal in the past 15 months and remain optimistic
about our prospects in the future.
Page 12 of 23
<PAGE> 13
RESULTS OF OPERATIONS
The following table sets forth an analysis of various components of the
Consolidated Statements of Operations as a percentage of sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
November 1, November 2, November 1, November 2,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 64.2 64.1 64.7 65.0
----- ----- ----- -----
Gross Profit 35.8 35.9 35.3 35.0
Operating and
Administrative Expenses 34.1 35.9 37.7 38.4
----- ----- ----- -----
Income (Loss) From Operations 1.7 0.0 (2.4) (3.4)
Interest Expense (1.4) (2.1) (1.7) (2.1)
----- ----- ----- -----
Net Income (Loss)
Before Provision For Taxes 0.3 (2.1) (4.1) (5.5)
Provision For Income Taxes - - - -
----- ----- ----- -----
Net Income (Loss) 0.3% (2.1)% (4.1)% (5.5)%
----- ----- ----- -----
</TABLE>
Net Sales for the third quarter of fiscal 1997 increased approximately
$638,000, or 1.3%, compared to net sales for the third quarter of fiscal 1996.
The comparable store sales increase was 1.3%. Sales were 4.4% above plan for
the third quarter. The comparable store sales increase was the result of
strong sales in our women's, juniors, and intimate apparel divisions. Women's
accessories and Men's also had sales increases while Childrens, Home, and Shoes
had sales decreases.
Net sales for the first nine months of fiscal 1997 decreased by approximately
$6,777,000, or 4.9%, compared to net sales for the first nine months of fiscal
1996. Comparable store sales decreased by 4.2% during the first nine months of
1997. Sales were 2.9% below plan for the first nine months of 1997.
Page 13 of 23
<PAGE> 14
Much of the planned decrease in sales for the first six months was the result
of the Company's strategic shift to offering desirable brand name merchandise
at everyday prices well below department and specialty store regular prices.
During comparable periods of fiscal 1996, the Company was driving sales through
a promotional and advertising plan that offered discounts off everyday prices.
That practice was changed during July, 1996, and thus had no effect on the
third quarter, only on the nine month period.
Gross Profit increased by approximately $186,000, or 1.0%, for the third
quarter of fiscal 1997 compared to the third quarter of fiscal 1996. As a
percentage of net sales, gross margins were 35.8% in the third quarter of
fiscal 1997 compared to 35.9% for the third quarter of fiscal 1996.
Gross profit dollars decreased approximately $1,937,000, or 4.0%, for the first
nine months of fiscal 1997 versus the first nine months of fiscal 1996. As a
percentage of sales, gross margins were 35.3% in the first nine months of
fiscal 1997 compared to 35.0% the first nine months of fiscal 1996.
The increases in gross margin percentages for the nine month period was the
result of the Company's strategy described above which reduced the amount of
promotional discounting in prices. The gross margin dollar decrease was the
result of the sales decrease. Gross profit is calculated after giving effect
to inventory markdown, aging reserves and the LIFO provision. Gross margins on
merchandise sold (excluding the effect of reserves and LIFO) during the first
nine months of 1997 were 35.2% compared to 34.5% for the first nine months of
1996.
Operating and Administrative Expenses decreased approximately $697,000, or
3.9%, for the third quarter of fiscal 1997 compared to the third quarter of
fiscal 1996. As a percentage of net sales, operating and administrative
expenses were 34.1% in the third quarter of 1997 versus 35.9% in the prior year
period. The decrease in expenses was the result of lower payroll and other
costs at the corporate office, and depreciation, offset by higher variable
selling costs as a result of the sales increase.
Operating and administrative expenses decreased approximately $3,494,000, or
6.6%, for the first nine months of fiscal 1997 over the first nine months of
fiscal 1996. As a percentage of sales, operating and administrative expenses
were 37.7% for the first nine months of fiscal 1997 and 38.4% for the first
nine months of fiscal 1996. The decrease in expense was due to lower payroll
and other costs at the corporate office and $1,100,000 of severance costs
related to the Company's former President which are included in 1996 expenses.
Page 14 of 23
<PAGE> 15
Interest Expense decreased by approximately $327,000 for the third quarter of
fiscal 1997 compared to the third quarter of fiscal 1996 and was approximately
$606,000 less for the first nine months of fiscal 1997 compared to the first
nine months of fiscal 1996. The decrease in interest expense for both periods
was the result of decreases in borrowings on the Company's revolving line of
credit.
Net Income for the third quarter of fiscal 1997 was $137,024 compared to a net
loss of $1,072,689 for the third quarter of 1996, an improvement of $1,209,713.
Net loss for the first nine months of 1997 was $5,398,116 compared to
$7,560,860 for the first nine months of 1996, an improvement of $2,162,744.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity, as defined by line of credit borrowings and excess
availability on the line, has strengthened considerably, as compared to last
year, as evidenced by the following:
- - The Company's average excess borrowing capacity for the first nine
months of fiscal 1997 was $8,300,000, an increase of 47% compared to
the same period in fiscal 1996.
- - The Company's average borrowings for the first nine months of fiscal
1997 were $12,900,000, a decrease of 15% versus the same period in
fiscal 1996.
These results are primarily attributable to the following developments:
1. In the first nine months of fiscal 1997, average inventories were
20% less than during the first nine months of fiscal 1996. This
improvement was achieved by taking markdowns on a more timely basis and
better correlating receipt flow to sales. As of November 1, 1997,
merchandise inventories were lower than last year by $5,353,000 or
14.0%. Inventory turnover and gross margin return on inventory (GMROI)
have improved significantly. Inventory turnover has increased by 21.4%
during the first nine months of fiscal 1997 as compared to the first
nine months of 1996 and was the highest in the Company's recent
history. GMROI has increased by 27.5% from the comparable period.
2. On September 12, 1996, the Company negotiated amendments to the
existing financing agreement with its primary lender, Congress
Financial Corporation (Central), which increased cash availability by
approximately $6.0 million. The current loan agreement extends to
October 1999, and provides a maximum line of $27.5 million. The
interest rates is prime plus 1%. Our agreement with Congress does not
have a clean down provision or covenants specifying our earnings,
working capital, net worth, or cash flow levels, but does include
limitations on annual cumulative capital expenditures and additional
borrowing.
Page 15 of 23
<PAGE> 16
3. In January 1997, the Unsecured Creditors' Committee agreed to defer
for up to one year the $1,900,000 payment due for 1996 under the Joint
Plan of Reorganization, even though the Company had sufficient excess
availability under its financing agreement to make this payment. The
deferral provides additional flexibility to continue to implement our
turnaround plans. The Company has paid Creditors over $21,000,000
since its emergence from Chapter 11 in late 1993, and currently has
less than $4,000,000 in remaining minimum payments which are due to be
escrowed on January 31, 1998, and paid to Creditors within 90 days
thereafter.
The Company's primary ongoing cash requirements are for operating expenses,
inventory and the minimum payments to the Company's creditors (pursuant to the
Plan). The Company's primary sources of funds for its business activities are
cash from operations and borrowings under its revolving credit facility with
Congress Financial Corporation (Central). In addition, short term trade credit
(normally for 30-day periods) represents a significant source of financing for
merchandise inventories. Trade creditors, representing approximately two-thirds
of all merchandise purchases, are extending normal credit terms. During the
first nine months of fiscal 1997 approximately 32% of the Company's purchases,
primarily from those vendors that factor their invoices, had to be prepaid
because the factor would not extend normal credit terms to the Company. The
percentage of prepayments decreased in the third quarter of fiscal 1997 as the
Company continued to seek less restrictive credit arrangements with vendors.
Management believes the percentage of prepayments will not increase over the
next few months.
During the first nine months of fiscal 1997 and 1996, capital expenditures were
approximately $1,126,000 and $609,000, respectively. The Company plans to
invest approximately $250,000 in capital expenditures for the remainder of
fiscal 1997.
The Company recognizes that it has a high level of indebtedness, primarily in
the form of line of credit borrowings, creditor debt and capital lease
obligations. Its projections take this fact into account, and the Company
believes that future cash flows will be sufficient to cover this level of
indebtedness. Management is closely monitoring liquidity in light of current
operating results. Sales, inventory purchases, expenses and other items
impacting liquidity are being closely managed to assure that adequate liquidity
for operations is maintained.
Management believes that with its present operating plan and continued focus on
liquidity, cash flow from operations and the expanded credit facility will be
sufficient to fund capital expenditures, working capital requirements
(including prepayments to vendors not extending terms), creditor and long-term
debt payments.
Page 16 of 23
<PAGE> 17
SEASONALITY AND INFLATION
The company's business is seasonal, with the back-to-school season (July and
August) historically contributing approximately 17% of annual sales and the
Christmas season (November and December) accounting for approximately 28% of
annual sales. Sales and income are also affected by the timing of new store
openings. Although the Company's operations are influenced by general economic
conditions and inflationary pressures, the Company does not believe that
inflation has had a material effect on operations during the past 3 - 5 years.
FORWARD-LOOKING STATEMENTS
In this section of this Report on Form 10-Q, the Company and persons acting on
its behalf have made certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "1995 Act"). These
forward-looking statements are identified as including terms such as "may",
"will", "should", "anticipates", expects", "plans", "intends", or similar
language. Such statements are made in good faith by the Company and such
persons pursuant to the safe-harbor provisions of the 1995 Act. In connection
with these safe-harbor provisions, the Company has identified in its Annual
Report to Shareholders for the fiscal year ended February 1, 1997 (the "Annual
Report"), important factors which could cause actual results to differ
materially from those contained in any forward-looking statement made by or on
behalf of the Company. The Company further cautions that the factors
identified in the Annual Report are not exhaustive or exclusive. The Company
does not undertake to update any forward-looking statement which may be made
from time to time by or on behalf of the Company.
Page 17 of 23
<PAGE> 18
PART II - OTHER INFORMATION
Items 1 - 4.
There are no items to report.
Item 5. - Other Information
The Series B Option Common Stock is subject to an option to purchase
exercisable by the Company or the Trustee of the R.G. Stock Trust in 1998
(the "Option"). The Option is noted upon the face of the Series B Option
Common Stock certificates. If the Option is exercised, the holder or
holders of shares must sell them for a price equal to the fair value of
the shares, as determined by an independent appraisal on February 2,
1998, less any payments of Excess Cash Balance (as defined in the Plan)
that have been made to creditors entitled to payment under the Plan
("Creditors"). Holders of the Series B Option Common Stock will not
have any rights of appraisal similar to dissenters' rights if they
dispute the market value as determined by the independent appraisal.
Payments of Excess Cash Balance would result in shareholders having to
sell their shares for less than fair market value. Holders of Series B
Option Common Stock should note that the Excess Cash Balance paid to the
Creditors, if any, shall be credited against, and shall reduce the
exercise price for, the option whether or not the holder of any shares of
Series B Option Common Stock with respect to which the option is
exercised received such Excess Cash Balance.
Although with respect to the Company's Fiscal Years ended
January 29, 1994, and January 28, 1995, the Company made Excess Cash
Balance payments of $1,444,613 and $1,832,611, respectively, to
Creditors, the Company's cash position during Fiscal Year 1995 was such
that all of the prior Excess Cash Balance payments were utilized to make
a portion of the $5.5 million minimum payment to creditors required for
the Fiscal Year ended February 3, 1996. There were no payments of Excess
Cash Balance for the fiscal year ended February 1, 1997. Therefore, if
the Option were exercised at this date, the Excess Cash Balance payments
would result in no reduction from fair market value in the Option
exercise price. Additional payments of Excess Cash Balance may be
created in the future which may reduce the Option exercise price. For
any given Fiscal Year, the Excess Cash Balance is the excess of the
Company's actual year-end cash balance over the Cumulative Plan Cash
Balance for that year. The cumulative total of the Excess Cash Balance
will be reported in the Company's annual and quarterly financial reports.
Page 18 of 23
<PAGE> 19
PART II - OTHER INFORMATION (CONTINUED)
Item 6 - Exhibits and Reports on Form 8-K.
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
There are no items to report.
Page 19 of 23
<PAGE> 20
PART II - OTHER INFORMATION
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.
RICHMAN GORDMAN 1/2 PRICE
STORES, INC.
Date: December 12, 1997 By: /s/ Jeffrey J. Gordman
----------------------- -----------------------------------
Jeffrey J. Gordman, President and
Chief Executive Officer
Date: December 12, 1997 By: /s/ Michael A. Mallero
----------------------- -----------------------------------
Michael A. Mallaro, Vice President of
Finance, Chief Financial Officer,
Secretary and Treasurer
Page 20 of 23
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Page
- ------- ----------- ----
<S> <C> <C>
(27) Financial Data Schedule 22
</TABLE>
Page 21 of 23
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> FEB-02-1997
<PERIOD-END> NOV-01-1997
<CASH> 192,885
<SECURITIES> 0
<RECEIVABLES> 2,017,326
<ALLOWANCES> 697,900
<INVENTORY> 32,493,845
<CURRENT-ASSETS> 35,899,422
<PP&E> 47,202,241
<DEPRECIATION> 34,011,314
<TOTAL-ASSETS> 49,251,972
<CURRENT-LIABILITIES> 39,755,188
<BONDS> 8,285,996
0
0
<COMMON> 294,600
<OTHER-SE> 192,808
<TOTAL-LIABILITY-AND-EQUITY> 49,251,972
<SALES> 131,173,719
<TOTAL-REVENUES> 131,173,719
<CGS> 84,811,275
<TOTAL-COSTS> 84,811,275
<OTHER-EXPENSES> 49,510,199
<LOSS-PROVISION> 19,703
<INTEREST-EXPENSE> 2,250,361
<INCOME-PRETAX> (5,398,116)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,398,116)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,398,116)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
