<PAGE>
As filed with the Securities and Exchange Commission on July 15, 1997
_____________________________________________________________________________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
-------------------
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended May 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-24904
STROUDS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-4107241
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
780 SOUTH NOGALES STREET
CITY OF INDUSTRY, CA 91748
(Address of principle executive offices)
(818) 912-2866
(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
---- ----
Number of shares of common stock outstanding at JULY 11, 1997: 8,535,812
<PAGE>
STROUDS, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Balance Sheets as of March 1, 1997
and May 31, 1997 3
Condensed Statements of Operations for the Thirteen
Weeks Ended May 31, 1997 and June 1, 1996 4
Condensed Statements of Cash Flows for the Thirteen
Weeks Ended May 31, 1997 and June 1, 1996 5
Notes to Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 15
2
<PAGE>
PART I. FINANCIAL INFORMATION
- ---------------------------------
ITEM 1. FINANCIAL STATEMENTS
STROUDS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, MARCH 1,
(in thousands, except share data) 1997 1997
- --------------------------------- -------- --------
<S> <C> <C>
ASSETS (Unaudited)
Current assets:
Cash $ 1,216 $ 765
Accounts receivable, less allowance for doubtful
accounts of $0 and $25, respectively 1,575 1,957
Merchandise inventory 69,892 69,934
Other 5,011 5,677
-------- --------
Total current assets 77,694 78,333
Property and equipment - at cost, net of accumulated
depreciation and amortization 24,568 25,108
Excess of cost over net assets acquired, net of
accumulated amortization 7,724 7,789
Other assets 868 874
-------- --------
Total assets $110,854 $112,104
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 560 $ 561
Accounts payable 12,191 16,950
Accrued expenses 12,064 9,419
Current portion of restructuring reserves 6,508 6,740
-------- --------
Total current liabilities 31,323 33,670
Long-term debt 36,112 32,132
Restructuring reserves 9,510 9,510
Other non-current liabilities 3,335 3,219
-------- --------
Total liabilities 80,280 78,531
Stockholders' equity:
Preferred stock, $0.0001 par value; authorized
750,000 shares; no shares issued or outstanding -- --
Preferred stock, Series B, $0.0001 par value;
authorized 250,000 shares; no shares issued or
outstanding -- --
Common stock, $0.0001 par value; authorized
25,000,000 shares; issued and outstanding
May 31, 1997 and March 1, 1997, 8,512,059 shares 1 1
Additional paid-in capital 39,018 39,018
Retained earnings (accumulated deficit) (8,445) (5,446)
-------- --------
Total stockholders' equity 30,574 33,573
-------- --------
Total liabilities and stockholders' equity $110,854 $112,104
======== ========
</TABLE>
See accompanying notes to condensed financial statements.
3
<PAGE>
STROUDS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
13 WEEKS ENDED
----------------------
MAY 31, JUNE 1,
1997 1996
--------- ---------
<S> <C> <C>
Net sales $ 50,451 $ 46,436
Costs and expenses:
Cost of sales, buying and occupancy 37,570 32,760
Selling and administrative expenses 15,005 14,670
Amortization of excess of cost over
net assets acquired 65 65
--------- ---------
52,640 47,495
--------- ---------
Operating loss (2,189) (1,059)
Other income 55 14
Interest expense, net (865) (276)
--------- ---------
Loss before income taxes (2,999) (1,321)
Income tax benefit --- 643
--------- ---------
Net loss $ (2,999) $ (678)
========= =========
Net loss per share $ (0.35) $ (0.08)
========= =========
Weighted average common and common
equivalent shares outstanding 8,512 8,512
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
4
<PAGE>
STROUDS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
13 WEEKS ENDED
----------------------
MAY 31, JUNE 1,
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,999) $ (678)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization of property
and equipment 1,235 1,004
Restructuring charge (232) ---
Amortization of excess of cost over net
assets acquired 65 65
(Increase) decrease in assets:
Accounts receivable 382 (245)
Merchandise inventory 42 (329)
Income taxes receivable 2,488 ---
Increase (decrease) in accounts payable and
accrued expenses (3,503) 1,567
Other (1,701) 1,902
--------- ---------
Net cash provided by (used in) operating
activities (4,223) 3,286
--------- ---------
Cash flows from investing activities:
Capital expenditures (695) (3,604)
--------- ---------
Net cash used in investing activities (695) (3,604)
--------- ---------
Cash flows from financing activities:
Borrowings under long-term debt 62,189 9,650
Repayment of long-term debt (58,196) (7,400)
Principal payments under capital lease obligations (13) (92)
Decrease (increase) in overdraft 1,389 (1,552)
--------- ---------
Net cash provided by financing activities 5,369 606
--------- ---------
Net increase in cash 451 288
Cash at beginning of period 765 210
--------- ---------
Cash at end of period $ 1,216 $ 498
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 902 $ 263
Income taxes --- 191
========= =========
</TABLE>
See accompanying notes to condensed financial statements.
5
<PAGE>
STROUDS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(1) INTERIM FINANCIAL STATEMENTS
The accompanying Condensed Balance Sheet as of May 31, 1997 and the related
Condensed Statements of Operations and Condensed Statements of Cash Flows for
the 13 weeks ended May 31, 1997 and June 1, 1996 are unaudited. The unaudited
operating results reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the financial position and operating results for the interim
periods. Information pertaining to the year ended March 1, 1997 is derived
from the audited financial statements included in the Company's 1996 Annual
Report on Form 10-K. This information should be read in conjunction with the
financial statements and notes thereto, together with management's discussion
and analysis of financial condition and results of operations, contained in
the Company's 1996 Annual Report filed with the Securities and Exchange
Commission on Form 10-K. The results of operations for the 13 weeks ended May
31, 1997 may not be indicative of the results to be expected for the entire
fiscal year.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Income Taxes
Income tax (expense) benefit is based upon the estimated effective tax rate
for the entire fiscal year. The effective rate is subject to ongoing review
and evaluation by management.
Net Income (Loss) per Share
Net income (loss) per share is based on the weighted average number of common
and common equivalent shares outstanding. Common stock equivalents, as
determined by the treasury stock method, represent shares which would be
issued assuming the exercise of common stock options and warrants reduced by
the number of shares which could be purchased with the proceeds from the
exercise of those options and warrants. Common stock equivalents are not
included in the calculation of net income (loss) per share if their inclusion
would be anti-dilutive.
Fully diluted net income per share is not presented since the amounts do not
differ significantly from the primary net income per share presented.
Reclassifications
Certain reclassifications have been made to the June 1, 1996 amounts to
conform to the May 31, 1997 presentation.
6
<PAGE>
STROUDS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(3) PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
MAY 31, MARCH 1,
(in thousands) 1997 1997
- -------------- --------- ---------
<S> <C> <C>
Furniture, fixtures and equipment $ 41,250 $ 42,346
Equipment held under capital leases 2,111 2,111
Leasehold improvements 9,100 7,308
--------- ---------
52,461 51,765
Impairment valuation reserve (1,750) (1,800)
Accumulated depreciation and amortization (26,143) (24,857)
--------- ---------
$ 24,568 $ 25,108
========= =========
</TABLE>
(4) RESTRUCTURING
During the fourth quarter of fiscal 1996, the Company initiated a
comprehensive restructuring plan (the "Restructuring Plan"), which resulted in
a pretax charge of $16.3 million. The Restructuring Plan is designed to
improve the operating performance of the Company through the closure or
disposition of up to 16 underperforming stores and implementing cost reduction
measures, including workforce reductions, to more closely align the Company's
cost structure with future expected revenues.
The Company closed 2 stores in the Midwest in May and June 1997. As of
May 31, 1997, no changes have been made to the estimated Restructuring Plan
costs and no charges were recorded to operations.
During the first quarter of fiscal 1997, cash used related to the
Restructuring Plan totaled $232,000, relating primarily to workforce
reductions and consulting and advisory fees associated with the Company's
restructuring and cost reduction efforts.
7
<PAGE>
STROUDS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the Restructuring Plan charges and payments or
asset write-downs:
<TABLE>
<CAPTION>
Payments and asset Future cash
1996 write-downs through outlays and
(in thousands) Provision May 31, 1997 charges
- ---------------------------- ----------- ------------------- -----------
<S> <C> <C> <C>
Occupancy, lease termination
and subsidy costs associated
with the closure or
disposition of stores $ 7,375 $ 15 $ 7,360
Asset write-down; merchandise
inventory, leasehold improve-
ments, furniture and fixtures
and equipment 7,215 -- 7,215
Employee severance and other
related costs 1,660 217 1,443
---------- ---------- ----------
Total $ 16,250 $ 232 $ 16,018
========== ========== ==========
</TABLE>
(5) LONG-TERM DEBT
At May 31, 1997, the Company had outstanding borrowings of $34,004,000 under
its $40,000,000 Revolving Credit Facility (the "Credit Facility"). Included
in the Credit Facility is a $6,000,000 letter of credit sub-facility. As of
May 31, 1997, the Company had outstanding letters of credit amounting to
$366,200 for purchase commitments to foreign suppliers under this sub-
facility.
On June 27, 1997, the Company and the provider of its Credit Facility amended
certain terms and conditions of the Credit Facility. Under the amended terms
and conditions, the Company's covenants will be reset to be reflective of the
Company's anticipated earnings, capital expenditures and cash flow over the
remaining term of the Credit Facility. Borrowings may not exceed 65% of
eligible inventory through August 31, 1998 and 60% thereafter except,
borrowings may be increased to 65% for 120 consecutive days commencing April
1, 1999. Interest will be payable at the provider's prime rate plus 1.125% or
LIBOR plus 3.25%. Commencing June 1, 1998, the Company can lower its interest
rate spread up to a maximum of 1.00% provided it achieves certain specified
earnings targets measured on a quarterly year-to-date basis. In addition, the
Company has also agreed to provide all of its unencumbered fixed assets as
additional security to the Credit Facility.
8
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The following sets forth certain factors that have affected the Company's
results of operations in recent periods, and management believes will continue
to affect the Company in the future.
Restructuring and Asset Impairment
During the fourth quarter of fiscal 1996, the Company initiated a
comprehensive restructuring and cost reduction plan (the "Restructuring
Plan"), resulting in a pretax charge of $16.3 million. The Restructuring Plan
is designed to improve the operating performance of the Company through the
closure or disposition of up to 16 underperforming stores and implementing
cost reduction measures, including workforce reductions, to more closely align
the Company's cost structure with future expected revenues. During the first
quarter of fiscal 1997, the Company closed 1 store in the greater Chicago
area. Management believes that the closing and disposition of up to 15
additional stores will approximate 2 years to complete.
During the fourth quarter of fiscal 1996, the Company recorded a pretax charge
of $1.8 million for the impairment of certain operating assets. The principal
factors leading up to the charge were current and future operating losses on
individual operating assets, whereby the carrying value of certain operating
assets exceeded the current estimate of future cashflows from the related
assets. The Company will continually evaluate the performance of its
operating assets for the factors noted above and, if conditions warrant,
write-down the value of such assets commensurate with the current and
estimated future operating performance.
RESULTS OF OPERATIONS
13 Weeks Ended May 31, 1997 Compared to the 13 Weeks Ended June 1, 1996
- -----------------------------------------------------------------------
Net sales for the thirteen weeks ended May 31, 1997 increased $4.0 million, or
8.6%, to $50.5 million versus $46.4 million in the same period last year.
Comparable store sales decreased $2.1 million, or 5.0%, for the period. Sales
from new stores and expanded or replacement stores increased by $6.1 million.
Management believes the decrease in comparable store sales is volume related
and primarily attributable to a larger negative impact related to competitive
openings for the first quarter of 1997 versus the same period a year ago.
Approximately 21% of the comparable stores were affected by new competitive
openings for the first quarter of 1997 compared to approximately 10% for the
9
<PAGE>
same period last year. To a lesser extent, comparable store sales were
negatively impacted due to an decrease in advertising frequency versus a year
ago.
Cost of sales, buying and occupancy for the 13 weeks ended May 31, 1997 were
$37.6 million versus $32.8 million for the same period a year ago, a $4.8
million increase. This dollar increase was attributable primarily to new and
expanded stores. As a percent of net sales, cost of sales, buying and
occupancy increased to 74.5% from 70.5% for the same period a year ago. The
reduced gross margin was due to markdowns taken for inventory liquidation
related to the closing of 2 stores. Additionally, higher occupancy costs
associated with new and expanded stores, where average store sales were lower,
reduced gross margin.
Selling and administrative expenses for the 13 weeks ended May 31, 1997
increased $0.3 million to $15.0 million versus $14.7 million for the same
period in fiscal 1996 and decreased as a percentage of net sales from 31.6% to
29.7%. The decrease as a percent of net sales was primarily due to lower
advertising costs this year versus the first quarter last year in the Midwest
markets. General and administrative expense as a percent of sales was 5.7%
versus 6.5% a year ago. The decline as a percent of sales was primarily the
result of workforce reductions and related expenditures associated with the
Company's restructuring activities.
As a result of the factors noted above, the Company had an operating loss for
the 13 weeks ended May 31, 1997 of $2.2 million versus an operating loss of
$1.1 million for the same period a year ago, a $1.1 million increase.
Interest expense net, increased $0.6 million to $0.9 million for the 13 weeks
ended May 31, 1997 versus $0.3 million for the same period in fiscal 1996.
Interest expense grew as a result of increased borrowings to meet working
capital needs and to finance the development of new stores.
The Company recorded no income tax benefit associated with its operating loss
for the 13 weeks ended May 31, 1997 due to the uncertainty of the Company's
future taxable earnings. The Company recognized an income tax benefit of $0.6
million for the same period last year. The estimated effective tax rate is
subject to continuing evaluation and modification by management.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash needs are primarily to support its inventory requirements,
store expansion and refurbishment and systems development. The Company has
historically financed its operations primarily with internally generated funds
and its credit facilities. At May 31, 1997, the Company's working capital was
$46.4 million, while advances from its revolving promissory note (the "Credit
Facility") was $34.0 million. The Company had $0.6 million available for
borrowings under its Credit Facility as determined by the Company's eligible
"borrowing base" at May 31, 1997.
10
<PAGE>
On June 27, 1997, the Company and the provider of its Credit Facility amended
certain terms and conditions of the Credit Facility. Under the amended terms
and conditions, the Company's covenants will be reset to be reflective of the
Company's anticipated earnings, capital expenditures and cash flow over the
remaining term of the Credit Facility. Borrowings may not exceed 65% of
eligible inventory through August 31, 1998 and 60% thereafter except,
borrowings may be increased to 65% for 120 consecutive days commencing
April 1, 1999. Interest will be payable at the provider's prime rate plus
1.125% or LIBOR plus 3.25%. Commencing June 1, 1998, the Company can lower
its interest rate spread up to a maximum of 1.00% provided it achieves certain
specified earnings targets measured on a quarterly year-to-date basis. In
addition, the Company has also agreed to provide all of its unencumbered fixed
assets as additional security to the Credit Facility.
Cash used in operating activities for the 13 weeks ended May 31, 1997 was $4.2
million. During the 13 week period ended May 31, 1997, accounts payable and
accrued expenses decreased $3.5 million as a result of the Company's slower
expansion program and seasonal factors related to inventory and product
purchases. Additionally for the period ended May 31, 1997, cash used in
operating activities included a refund of $2.5 million in income taxes and
$0.2 million in restructuring payments. These items did not occur for the
same period in fiscal 1996.
Net cash used in investing activities for the 13 weeks ended May 31, 1997 was
$0.7 million. These funds were used for capital expenditures supporting the
Company's store expansion program and systems development. In the first
quarter of fiscal 1997, the Company opened 1 superstore and converted 1
original format store into an outlet store.
Cash provided by financing activities for the 13 weeks ended May 31, 1997 was
$5.4 million. The Company had net borrowings of $4.0 million primarily to
fund expansion and to meet working capital needs for the 13 weeks ended
May 31, 1997.
The Company's capital expenditures for the remainder of fiscal 1997 are
currently expected to be approximately $2.0 million and will relate primarily
to the Company's commitment to develop 2 additional new superstores, convert 3
superstores to outlet stores and continue to improve the Company's management
information systems. The commitment to open 2 additional new superstores in
fiscal 1997 will approximate $0.5 million for furniture, fixtures and
equipment and $120,000 for related leasehold improvements. The conversion of
3 superstores into outlet stores will require estimated capital improvements
of $35,000 per store. Existing store expansion and improvements will cost
approximately $350,000. In addition to capital improvements, the Company
estimates that the gross inventory requirements of a new superstore will be
approximately $1.0 million per store. The Company plans to spend $720,000 for
replacement, enhancements and upgrades of its management information systems.
11
<PAGE>
SEASONALITY AND QUARTERLY RESULTS
The Company's business is subject to seasonal and quarterly fluctuations.
Historically, the Company has realized a higher portion of its net sales and
an even greater proportion of its profits in the months of November, December
and January. Additionally, the timing of promotional events may affect the
Company's results in different fiscal quarters from period to period.
CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR PROVISIONS" OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations that are not related to
historical results are forward looking statements. Actual results may differ
materially from those projected or implied in the forward looking statements.
Further, certain forward looking statements are based upon assumptions of
future events which may not prove to be accurate. These forward looking
statements involve risks and uncertainties which are more fully described in
Item 1, Part I of the Company's Annual Report on Form 10-K for the Fiscal Year
Ended March 1, 1997.
12
<PAGE>
PART II. OTHER INFORMATION
- -----------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
The exhibits on the accompanying Index to Exhibits are filed as part of,
or incorporated by reference into, this report.
Exhibit No. Description
- ----------- -----------
3.1 Form of Restated Certificate of Incorporation of the Company.
Incorporated herein by reference to Amendment No. 1 to
the Company s Form S-1, Registration No. 33-82090, as
filed with the Commission on September 13, 1994.
3.2 Restated By-laws of the Company.
Incorporated herein by reference to Amendment No. 1 to
the Company s Form S-1, Registration No. 33-82090, as
filed with the Commission on September 13, 1994.
4 Rights Agreement, dated as of November 17, 1995, between
Strouds, Inc. and American Stock Transfer & Trust Company.
Incorporated herein by reference to the Company s Form
8-K, as filed with the Commission on December 1, 1995.
10.1 Stock Option Plan for Executive and Key Employees of the
Company, including the form of the individual option
agreement thereunder.
Incorporated herein by reference to the Company s Form
S-1, Registration No. 33-82090, as filed with the
Commission on July 29, 1994.
10.2 Form of Amendment to Stock Option Plan for Executive and Key
Employees of the Company, including the form of the amendment
to the individual option agreement thereunder.
Incorporated herein by reference to Amendment No. 1 to
the Company s Form S-1, Registration No. 33-82090, as
filed with the Commission on September 13, 1994.
10.3 Amended and Restated 1994 Equity Participation Plan of the
Company, including the forms of the individual option
agreements thereunder.
Incorporated herein by reference to Amendment No. 1 to
the Company s Form S-1, Registration No. 33-82090, as
filed with the Commission on September 13, 1994.
10.4 Form of the Company s Employee Qualified Stock Purchase Plan.
Incorporated herein by reference to Amendment No. 1 to
the Company s Form S-1, Registration No. 33-82090, as
filed with the Commission on September 13, 1994.
10.5 Amendment to the Strouds, Inc. Employee Qualified Stock
Purchase Plan, January 5, 1995.
Incorporated herein by reference to the Company s Form
10-K for the fiscal year ended February 25, 1995, as
filed with the Commission on May 25, 1995.
13
<PAGE>
10.6 Warrant Agreement (Warrant 1), dated as of November 20, 1992,
between the Company and BT Capital.
Incorporated herein by reference to the Company s Form
S-1, Registration No. 33-82090, as filed with the
Commission on July 29, 1994.
10.7 Warrant Agreement (Warrant 2), dated as of November 20, 1992,
between the Company and BT Capital.
Incorporated herein by reference to the Company s Form
S-1, Registration No. 33-82090, as filed with the
Commission on July 29, 1994.
10.8 Loan and Security Agreement between BankAmerica Business
Credit, Inc. and Strouds, Inc., dated January 13, 1997.
Incorporated herein by reference to the Company's Form
10-K for the fiscal year ended March 1, 1997, as filed
with the Commission on May 30, 1996.
* 10.9 First Amendment to Loan and Security Agreement between
BankAmerica Business Credit, Inc. and Strouds, Inc., dated
January 15, 1997.
* 10.10 Second Amendment to Loan and Security Agreement between
BankAmerica Business Credit, Inc. and Strouds, Inc., dated
June 27, 1997.
10.11 International Swap Dealers Association, Inc. Master Agreement
between Bank of America National Trust and Savings
Association and Strouds, Inc., dated March 6, 1996.
Incorporated herein by reference to the Company s Form
10-K for the period ended March 2, 1996, as filed with
the Commission on May 24, 1996.
10.12 Registration Rights Agreement dated as of January 2, 1996 by
and between the Company and BT Capital.
Incorporated herein by reference to the Company s Form
10-K for the period ended March 2, 1996, as filed with
the Commission on May 24, 1996.
10.13 Security Agreement between Lyon Credit Corporation and
Strouds, Inc., dated July, 1996.
Incorporated herein by reference to the Company s Form
10-Q for the period ended August 31, 1996, as filed with
the Commission on October 11, 1996.
* 10.14 Employment Agreement between Charles Chinni and Strouds,
Inc., dated July 7, 1997.
* 11 Statement re: Computation of Per Share Earnings.
* 27 Financial Data Schedule
__________________________________
* Filed herewith
b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the quarter ended
May 31, 1997.
14
<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: July 14, 1997
STROUDS, INC.
(Registrant)
/s/ Charles Chinni
---------------------
Charles Chinni
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Douglas C. Felderman
------------------------
Douglas C. Felderman
Senior Vice President, Finance
and Chief Financial Officer
(Principal Financial Officer)
15
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Form of Restated Certificate of Incorporation of the Company.
Incorporated herein by reference to Amendment No. 1 to
the Company s Form S-1, Registration No. 33-82090, as
filed with the Commission on September 13, 1994.
3.2 Restated By-laws of the Company.
Incorporated herein by reference to Amendment No. 1 to
the Company s Form S-1, Registration No. 33-82090, as
filed with the Commission on September 13, 1994.
4 Rights Agreement, dated as of November 17, 1995, between
Strouds, Inc. and American Stock Transfer & Trust Company.
Incorporated herein by reference to the Company s Form
8-K, as filed with the Commission on December 1, 1995.
10.1 Stock Option Plan for Executive and Key Employees of the
Company, including the form of the individual option
agreement thereunder.
Incorporated herein by reference to the Company s Form
S-1, Registration No. 33-82090, as filed with the
Commission on July 29, 1994.
10.2 Form of Amendment to Stock Option Plan for Executive and Key
Employees of the Company, including the form of the amendment
to the individual option agreement thereunder.
Incorporated herein by reference to Amendment No. 1 to
the Company s Form S-1, Registration No. 33-82090, as
filed with the Commission on September 13, 1994.
10.3 Amended and Restated 1994 Equity Participation Plan of the
Company, including the forms of the individual option
agreements thereunder.
Incorporated herein by reference to Amendment No. 1 to
the Company s Form S-1, Registration No. 33-82090, as
filed with the Commission on September 13, 1994.
10.4 Form of the Company s Employee Qualified Stock Purchase Plan.
Incorporated herein by reference to Amendment No. 1 to
the Company s Form S-1, Registration No. 33-82090, as
filed with the Commission on September 13, 1994.
10.5 Amendment to the Strouds, Inc. Employee Qualified Stock
Purchase Plan, January 5, 1995.
Incorporated herein by reference to the Company s Form
10-K for the fiscal year ended February 25, 1995, as
filed with the Commission on May 25, 1995.
10.6 Warrant Agreement (Warrant 1), dated as of November 20, 1992,
between the Company and BT Capital.
Incorporated herein by reference to the Company s Form
S-1, Registration No. 33-82090, as filed with the
Commission on July 29, 1994.
10.7 Warrant Agreement (Warrant 2), dated as of November 20, 1992,
between the Company and BT Capital.
Incorporated herein by reference to the Company s Form
S-1, Registration No. 33-82090, as filed with the
Commission on July 29, 1994.
<PAGE>
Exhibit No. Description
- ----------- -----------
10.8 Loan and Security Agreement between BankAmerica Business
Credit, Inc. and Strouds, Inc., dated January 13, 1997.
Incorporated herein by reference to the Company's Form
10-K for the fiscal year ended March 1, 1997, as filed
with the Commission on May 30, 1996.
* 10.9 First Amendment to Loan and Security Agreement between
BankAmerica Business Credit, Inc. and Strouds, Inc., dated
January 15, 1997.
* 10.10 Second Amendment to Loan and Security Agreement between
BankAmerica Business Credit, Inc. and Strouds, Inc., dated
June 27, 1997.
10.11 International Swap Dealers Association, Inc. Master Agreement
between Bank of America National Trust and Savings
Association and Strouds, Inc., dated March 6, 1996.
Incorporated herein by reference to the Company s Form
10-K for the period ended March 2, 1996, as filed with
the Commission on May 24, 1996.
10.12 Registration Rights Agreement dated as of January 2, 1996 by
and between the Company and BT Capital.
Incorporated herein by reference to the Company s Form
10-K for the period ended March 2, 1996, as filed with
the Commission on May 24, 1996.
10.13 Security Agreement between Lyon Credit Corporation and
Strouds, Inc., dated July, 1996.
Incorporated herein by reference to the Company s Form
10-Q for the period ended August 31, 1996, as filed with
the Commission on October 11, 1996.
* 10.14 Employment Agreement between Charles Chinni and Strouds,
Inc., dated July 7, 1997.
* 11 Statement re: Computation of Per Share Earnings.
* 27 Financial Data Schedule
__________________________________
* Filed herewith
<PAGE>
FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
This FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT (this
"Amendment") dated as of this 15th day of January 1997, between BankAmerica
Business Credit, Inc. ("Lender"), and Strouds, Inc. ("Borrower"), is made in
reference to the following facts:
A. The Borrower and the Lender previously entered into a Loan and
Security Agreement dated as of January 13, 1997 (as it may be amended,
supplemented or modified from time to time, the "Loan Agreement"). In
addition, the Borrower previously executed certain related documents,
instruments and agreements in connection with the Loan Agreement
(collectively, including the Loan Agreement, the "Loan Documents").
B. The Borrower and the Lender desire to amend the Loan Agreement
on the terms and subject to the conditions set forth in this Amendment.
NOW THEREFORE, for valuable consideration, the parties do hereby
agree as follows:
1. DEFINITIONS. Terms used herein, unless otherwise defined herein, shall
have the meanings set forth in the Loan Agreement.
2. ADJUSTED NET INCOME (LOSS). Section 10.20 of the Loan Agreement is
amended in full to read as follows:
"10.20 ADJUSTED NET INCOME (LOSS). The Borrower will achieve,
measured as of the end of each fiscal quarter on a Fiscal Year-to-date
basis, Adjusted Net Income of not less than (or loss not greater than)
the following amounts during the following periods:
<TABLE>
<CAPTION>
PERIOD AMOUNT
<S> <C>
Fiscal Year 1997 $(2,750,000)
First fiscal quarter
of Fiscal Year 1998 $(1,950,000)
Second fiscal quarter
of Fiscal Year 1998 $(2,430,000)
Third fiscal quarter
of Fiscal Year 1998 $(3,600,000)
Fiscal Year 1998 $(3,000,000)
First fiscal quarter
of Fiscal Year 1999 $(1,788,000)
Second fiscal quarter
of Fiscal Year 1999 $(2,228,000)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Third fiscal quarter
of Fiscal Year 1999 $(3,301,000)
Fiscal Year 1999 $(2,750,000)
First fiscal quarter
of Fiscal Year 2000 $(1,625,000)
Second fiscal quarter
of Fiscal Year 2000 $(2,205,000)
Third fiscal quarter
of Fiscal Year 2000 $(3,000,000)
Fiscal Year 2000 $(2,500,000)
</TABLE>
The Lender reserves the right to set more restrictive covenants under
this SECTION 10.20 for periods during Fiscal Year 1999 and Fiscal Year
2000 if the Borrower's projections for such periods forecast a positive
Adjusted Net Income or an Adjusted Net Loss of less than $2,200,000 for
Fiscal Year 1999 or less than $2,000,000 for Fiscal Year 2000. Such
adjusted covenants shall be binding upon the Borrower unless manifestly
unreasonable."
3. REAFFIRMATION. Except as modified by the terms herein, the Loan Agreement
and all other Loan Documents remain in full force and effect. If there is any
conflict between the terms and provisions of this Amendment and the terms and
provisions of the Loan Agreement, the terms and provisions of this Amendment
shall govern.
4. COUNTERPARTS. This Amendment may be executed in one or more counterparts,
each of which shall be deemed an original but all of which together shall
constitute one and the same instrument.
5. GOVERNING LAW. This Amendment shall be governed by and construed
according to the laws of the State of California.
6. ATTORNEYS' FEES; COSTS. The Borrower shall pay, on demand, all attorneys'
fees and costs incurred in connection with the negotiation, documentation and
execution of this Amendment. If any legal action or proceeding shall
commenced at any time by any party to this Amendment in connection with its
interpretation or enforcement, the prevailing party in such action or
proceeding shall be entitled to reimbursement of its reasonable attorneys'
fees and costs in connection therewith, in addition to all other relief to
which the prevailing party may be entitled.
2
<PAGE>
"Borrower"
STROUDS, INC., a Delaware Corporation
By: /s/ Douglas Felderman
Title: Vice President, Finance
"Lender"
BANKAMERICA BUSINESS CREDIT, INC.
By: /s/ Randy Bowman
Title: Vice President
3
<PAGE>
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
This Second Amendment to Loan and Security Agreement ("Amendment")
dated as of this 27th of June, 1997, is entered into between Strouds, Inc.
("Borrower") and BankAmerica Business Credit, Inc. ("Lender") in reference to
the following facts:
A. Borrower previously entered into a Loan and Security Agreement
with Lender dated as of January 13, 1997 ( as it may have been amended,
supplemented or modified from time to time, the "Loan Agreement"). In
addition, Borrower previously executed certain related documents, instruments
and agreements in connection with the Loan Agreement (collectively, including
the Loan Agreement, the "Loan Documents").
B. Borrower has requested certain amendments to the Loan Agreement.
Lender is willing to enter into such amendments on the terms and conditions
set forth below.
C. Capitalized terms herein, unless otherwise defined herein, shall
have the meaning set forth in the Loan Documents.
Now therefore, the parties hereto do hereby agree as follows:
1. RECITALS. Recitals A through C above are incorporated herein by
reference.
2. AVAILABILITY. The definition of "Availability" in Section 1 of
the Loan Agreement is hereby amended by deleting the first three lines of
subparagraph (b) thereof prior to the proviso and substituting therefor the
following:
"(b) Up to and including the following of the value of Eligible
Inventory:
PERIOD PERCENTAGE
Date hereof through August 31, 1998 65%
September 1, 1998 through March 31, 1999 60%
April 1, 1999 through July 31, 1999 65%
August 1, 1999 and thereafter 60%;"
3. INTEREST. Section 3 of the Loan Agreement is hereby modified in
the following respects:
(a) Section 3.1(i) is hereby amended by changing the Reference Rate
Margin from three-eighths of one percent (0.375%) to one and one eighth
percent (1.125%).
(b) Section 3.1(ii) is hereby amended by changing the "LIBOR
Margin" from two and one-quarter percent (2.25%) to three and one-quarter
percent (3.25%).
Beginning June 1, 1998, based on the immediately prior fiscal
quarter, the modified Reference Rate Margin and the LIBOR Margin shall be
<PAGE>
reduced by twenty five basis points per fiscal quarter provided that (i) no
Default or Event of Default has occurred and is continuing and (ii) Borrower's
Adjusted Net Income (Loss) for the immediately prior fiscal quarter is at
least twenty-five percent less than the permitted Adjusted Net Income (Loss)
as set forth in Section 10.20 of the Loan Agreement and as modified below.
The continuance of the reduced Reference Rate Margin or the LIBOR Margin from
that set forth in Section 4(a) and (b) above is conditioned on no Default or
Event of Default occurring and Borrower maintaining at least a twenty-five
percent or more reduction of the permitted Adjusted Net Income (Loss) on a
cumulative basis. Without limiting the foregoing, the Reference Rate Margin
and the LIBOR Margin shall be decreased to 0.375% and 2.25% respectively if
(a) no Default or Event of Default has occurred and is continuing and (b)
Borrower achieves an Adjusted Net Income (Loss) for the Fiscal Year ending
March 1, 1999 of not more than ($1,500,000.00). All of the above interest
rate reductions are subject to the following additional terms and conditions:
(i) Borrower has qualified and continues to qualify for monthly
inventory reporting as set forth in Section 7.8 of the Loan Agreement;
(ii) In no event shall the Reference Rate Margin be less than
0.375% or the LIBOR Margin be less than 2.25%; and
(iii) All interest rate reductions shall be applied prospectively
only.
For purposes of this Section only, Adjusted Net Income (Loss) shall
be determined before any provision for income taxes.
4. COLLATERAL. Section 7.1 of the Loan Agreement is hereby
amended by adding the following to the definition of Collateral: "all
equipment, fixtures, leasehold improvements, goods, furniture and furnishings,
now existing or hereafter arising and wherever located and all proceeds
thereof."
Section 7.1 is further amended by deleting the following from that
Section: "but excluding Borrower's equipment, fixtures and leasehold
improvements" and substituting in lieu thereof the words "but excluding
Borrower's equipment, fixtures and leasehold improvements at Store Number 64
(Reno, Nevada) and Store Number 67 (Old Orchard Mall, Chicago, Illinois) and
all point-of-sale and related equipment leased by Borrower.
5. REPORTING. The last sentence of Section 7.8 of the Loan
Agreement is hereby deleted and the following is substituted therefor:
"Notwithstanding clause (a) above, if the Borrower's
Availability at any time is less than $1,000,000 or if the
Borrower's average Availability for any two consecutive
thirty (30) day periods is less than $2,500,000, the Borrower
shall thereafter provide the Lender with weekly inventory
reports by category and location, accompanied by a
reconciliation, and such weekly reporting shall continue
until either the Lender otherwise agrees in writing or for so
long as Borrower's average Availability is and continues to
<PAGE>
be $4,000,000 or more per month for three consecutive
months."
6. CONSULTANT. Borrower has agreed to retain the services of a
turnaround consulting firm, chosen and paid for by Borrower, to assist
Borrower's management until such time as the employment of the replacement
chief executive officer of Borrower shall have commenced.
7. CAPITAL EXPENDITURES. Section 10.19 of the Loan Agreement is
hereby Amended by deleting the text thereof and substituting therefor the
following:
"10.19 CAPITAL EXPENDITURES. Neither the Borrower nor any
of its Subsidiaries shall make or incur any Capital
Expenditures if, after giving effect thereto, the aggregate
amount of all Capital Expenditures by the Borrower and its
Subsidiaries in the 1997 Fiscal Year, would exceed
$3,400,000.00. For the 1998 Fiscal Year and thereafter,
Capital Expenditures by the Borrower and its Subsidiaries
will be permitted up to the sum of Borrower's depreciation
and amortization, not to exceed $5,000,000, as reflected in
its year end audited Financial Statements for the respective
Fiscal Year. Up to $500,000 of any unused amount of
permitted Capital Expenditures in any Fiscal Year may be
carried over to the subsequent Fiscal Year, but not
thereafter.
8. Section 10.20 of the Loan Agreement is hereby amended by
deleting the text thereof and substituting therefore the following:
"10.20 ADJUSTED NET INCOME (LOSS). The Borrower will
achieve, measured as of the end of each fiscal quarter on a
Fiscal Year-to-date basis, Adjusted Net Income (Loss) of not
less than (or loss not greater than) the following amounts
during the following periods:
<TABLE>
<CAPTION>
PERIOD AMOUNT
<S> <C>
fiscal quarter ending May 31, 1997 (3,649,000.00)
fiscal quarter ending August 30, 1997 (4,625,000.00)
fiscal quarter ending November 29, 1997 (5,610,000.00)
fiscal quarter ending February 28, 1998 (4,534,000.00)
fiscal quarter ending May 30, 1998 (1,610,000.00)
fiscal quarter ending August 29, 1998 (2,040,000.00)
fiscal quarter ending November 28, 1998 (2,475,000.00)
fiscal quarter ending February 27, 1999 (2,000,000.00)
fiscal quarter ending May 29, 1999 (805,000.00)
fiscal quarter ending August 28, 1999 (1,020,000.00)
fiscal quarter ending November 27, 1999 (1,238,000.00)
fiscal quarter ending February 26, 2000 (1,000,000.00)
</TABLE>
9. ACCOMMODATION FEE. In addition to all other fees and
<PAGE>
charges, Borrower shall pay to Lender on the date hereof the amount of $50,000
representing the outstanding balance of the accommodation fee of $100,000.00
payable by Borrower.
10. REAFFIRMATION. Except as modified by the terms herein, the
Loan Agreement remains in full force and effect.
11. ATTORNEY'S FEES. Borrower agrees to pay, on demand, all
reasonable attorney's fees and costs incurred in connection with the
negotiation, documentation and execution of this Amendment. Without limiting
any other section of the Loan Agreement, Sections 15.5, 15.6 and 15.7 thereof
are hereby incorporated herein and shall apply fully to this Amendment.
12. COUNTERPART. This Amendment may be executed in one or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
STROUDS, INC.
By: /s/Douglas C. Felderman
------------------------
Its: Vice President, Finance
BANKAMERICA BUSINESS CREDIT, INC.
By: /s/Randy Bowman
---------------
Its: Vice President
<PAGE>
EMPLOYMENT AGREEMENT WITH CHARLES CHINNI
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into
this 7 day of July, 1997, by and between Strouds, Inc. ("Employer") and
Charles Chinni ("Employee").
1. EMPLOYMENT AND TERM. Employer hereby employs Employee and
Employee hereby accepts employment with and agrees to serve Employer in the
capacities and subject to and upon the terms and conditions hereinafter set
forth. The term of Employee's employment hereunder shall be the period
commencing on July 7, 1997, subject to termination as provided in paragraphs
15 and 16 hereof, and ending on February 26, 2000.
2. DUTIES. Employee shall be employed by Employer as President and
Chief Executive Officer of Strouds, Inc. reporting to the Board of Directors
of Strouds, Inc. Employee shall perform the duties normally associated with
such position, subject at all times to the general supervision and pursuant to
the orders, advice and direction of the Board of Directors of Employer, and
Employee shall perform such other duties as the Board of Directors of Employer
may reasonably assign to Employee from time to time. Employee agrees that so
long as this Agreement continues in effect, Employee shall devote his full
business time and energies to the business and affairs of Employer, use his
best efforts, skills and abilities to promote Employer's interests, and
perform the duties described herein and such other duties as may be reasonably
assigned to Employee.
3. BOARD OF DIRECTORS. Employee shall be a member of the Board of
Directors of Strouds, Inc. (the Board ) as of July 8, 1997 subject to
election by the Board at its July 8, 1997 meeting, and continue as a member of
the Board thereafter during the term of the Agreement, subject to Employer's
by-laws and to nomination and election by Employer's shareholders in fiscal
years after 1997.
4. BASE SALARY. Employer shall pay Employee, and Employee hereby
agrees to accept, as compensation for services rendered hereunder a salary of
Three Hundred Fifty Thousand Dollars ($350,000.00) per year ($13,461.54 bi-
weekly) payable in arrears in installments at such intervals as Employer pays
the salaries of Employer's executive officers subject to the termination
provisions of paragraphs 15 and 17 hereof. Employer will reevaluate
Employee's base salary no later than May 1, 1999. Employee understands and
agrees that Employer has no obligation to increase his base salary as a result
of such evaluation.
5. CONTRACT REVIEW. Strouds will reimburse Employee for his
reasonable attorneys fees incurred in drafting and reviewing this Agreement,
up to Two Thousand Dollars ($2,000.00). Alternatively, at Employee's request,
such payment will be made directly to Employee's counsel.
<PAGE>
6. TRANSITION AND MOVING EXPENSES.
(a) Employer shall lease or rent an apartment or condominium for
Employee for up to 18 months from the commencement of his employment, which
payment shall be considered taxable income. The rent to be paid by Employer
shall be agreed upon by Employer and Employee but shall be no more than Four
Thousand Two Hundred Dollars ($4,200.00) per month.
(b) Employer shall pay moving expenses from New Jersey to
California for Employee s automobile and limited household items from one
household.
(c) When, during the term of this Agreement, Employee sells his
current residence in New Jersey, Employer shall pay the commission on the sale
and the moving expenses for remaining household items upon completion of the
sale, grossed up to cover Employee's income tax thereon.
7. BONUS.
(a) Employer shall pay Employee a cash bonus for fiscal 1997 in
the amount of Eighty-Seven Thousand Five Hundred Dollars ($87,500.00) if
Strouds, Inc. achieves an Adjusted Net Income (Loss) of ($3,600,000.00) or
less for fiscal 1997. Employer shall pay Employee an additional cash bonus
for fiscal 1997 in the amount of Eighty-Seven Thousand Five Hundred Dollars
($87,500.00) if Strouds, Inc. achieves an Adjusted Net Income (Loss) of no
more than ($2,700,000.00) for fiscal 1997, for a total possible bonus of
$175,000 for fiscal 1997 results.
(b) Employer shall pay Employee a cash bonus for fiscal 1998 in
the amount of Eighty-Seven Thousand Five Hundred Dollars (87,500.00) if
Strouds, Inc. achieves an Adjusted Net Income (Loss) of ($2,000,000.00) or
less for fiscal 1998. Employer shall pay Employee an additional cash bonus
for fiscal 1998 in the amount of Eighty-Seven Thousand Five Hundred Dollars
($87,500.00) if Strouds, Inc. achieves an Adjusted Net Income (Loss) equal to
its Financial Plan approved by the Board, for a total possible bonus of
$175,000 for fiscal 1998 results.
(c) Adjusted Net Income (Loss) means Income or (Loss) before any
tax benefit and after any bonus expense.
(d) Cash bonus shall be paid as soon as practicable, but not
more than 14 days, after Employer's independent public accounting firm,
currently KPMG Peat Marwick, delivers its audit of Strouds, Inc. fiscal year
end.
(e) No cash bonus shall be paid to Employee with respect to a
fiscal year during which this Agreement terminates pursuant to paragraphs 15
(a), (b), (c), (d), (e), or (f) or 16 hereof. If the Agreement terminates
pursuant to paragraph 15 (g), 15 (h), or 15(i), and if (i) Strouds, Inc. has
2
<PAGE>
achieved the year-to-date Adjusted Net Income (Loss), established on a month-
by-month basis to equal the annual achievement levels set forth in paragraphs
7(a) or 7(b), whichever applies, as of the month ended immediately preceding
the date the Agreement terminates, and (ii) for the full fiscal year in which
the Agreement terminates Strouds, Inc. achieves the Adjusted Net Income (Loss)
set forth in paragraphs 7(a) or 7(b), whichever applies, then Employer will
pay Employee, pursuant to paragraph 7(d), a cash bonus with respect to the
fiscal year in which the Agreement terminates in an amount equal to the cash
bonus achieved for the full year pursuant to paragraph 7(a) or 7(b), whichever
applies, multiplied by a fraction, the numerator of which is the number of
full months in the fiscal year prior to the month in which the Agreement
terminates and the denominator of which is 12.
8. STOCK OPTIONS.
(a) On the date of employment, Employee shall be granted a
nonqualified stock option pursuant to Employer s Amended and Restated 1994
Equity Participation Plan (the "Plan") to purchase 100,000 shares of common
stock in Strouds, Inc. (the Common Stock ) with an exercise price equal to
the fair market value of the Common Stock on such date. In addition, on the
date of employment, Employee shall be granted a nonqualified stock option
under the Plan to purchase an additional 200,000 shares of the Common Stock
with an exercise price equal to the fair market value of the Common Stock on
such date subject to approval of an amendment to Employer s Plan to be
presented to Employer s shareholders at the 1998 annual meeting allowing for
the grant of such additional options under the Plan.
(b) At the time of payment of a cash bonus, if any, to Employee
for fiscal 1997 as provided in paragraph 7(a), Employee shall be granted a
nonqualified stock option under the Plan to purchase an additional 50,000
shares of the Common Stock if, and only if, Strouds, Inc. achieves an
Adjusted Net Income (Loss) of ($2,700,000.00) or less for fiscal 1997. In
addition, if Strouds, Inc. incurs an Adjusted Net Income (Loss) of less than
($2,700,000.00) for fiscal 1997, Employee shall be granted an additional
nonqualified stock option under the Plan to purchase 10,000 shares of the
Common Stock (up to a maximum of 50,000 shares) for every 1/2 of 1% by which
the Adjusted Net Income (Loss) is less than ($2,700,000.00) with an exercise
price equal to the fair market value of the Common Stock on the date of grant.
In the event that Strouds, Inc. does not achieve a ($2,700,000.00) Adjusted
Net Income (Loss) or less for fiscal 1997, the Board of Directors (or the
Compensation Committee established under the Plan) may nonetheless grant
additional stock options under the Plan (up to a maximum of 50,000 shares) if
it determines, in its sole discretion, that it is nonetheless appropriate to
make such grant upon review of all the circumstances leading to the fiscal
result for the year and the margin by which the financial goal of a
($2,700,000.00) Adjusted Net Income (Loss) was not attained.
(c) At the time of payment of a cash bonus, if any, to Employee
for fiscal year 1998 as provided in paragraph 7(b), Employee shall be granted
a nonqualified stock option under the Plan to purchase an additional 50,000
shares of the Common Stock if, and only if, Strouds, Inc. achieves an amount
of Adjusted Net Income (Loss) equal to its Financial Plan approved by the
3
<PAGE>
Board. In addition, if Strouds, Inc. incurs Adjusted Net Income greater than,
or Adjusted Net (Loss) less than, the goal established pursuant to the
preceding sentence for fiscal 1998, Employee shall be granted an additional
nonqualified stock option under the Plan to purchase 10,000 shares of the
Common Stock (up to a maximum of 50,000 shares) for every 1/2 of 1% by which
the goal is bettered. In the event Strouds, Inc. does not achieve the
established goal for the 1998 fiscal year, the Board of Directors may
nonetheless grant additional stock options under the Plan (up to a maximum of
50,000 shares) if it determines in its sole discretion that it is nonetheless
appropriate to make such grant upon review of all the circumstances leading to
the fiscal result for the year and the margin by which the goal was not
attained.
(d) All options granted pursuant to the above provision shall
vest at the rate of 25% per year on each anniversary date of the date of the
grant of such options.
(e) For purpose of this paragraph Adjusted Net Income (Loss) is
defined in paragraph 7(c).
9. AIRLINE TICKETS. Employer shall provide Employee airline tickets
each month beginning in August 1997 having a cost no greater than $1,666.67
per month, subject to the last sentence of this paragraph. Employer will pay
Employee such additional amount as necessary to defray income tax, if any,
attributable to provision of these tickets. These airline tickets are limited
to use by Employee and his wife and will be provided for as long as Employee's
wife maintains her primary residence in New Jersey and Employee and his wife
are not legally separated, but no longer than 18 months beginning in August
1997. The entitlement to such airline tickets is cumulative from month-to-
month.
10. BENEFITS. Employer shall provide Employee with medical, hospital,
surgical, disability, accidental death, travel and/or life insurance coverage,
if any, on the same basis as such coverage is provided to Employer's executive
officers, subject to Employee's satisfaction of any eligibility criteria for
such coverage. Employee shall be entitled to participate in Employer's
retirement plans, if any, on the same basis as Employer's comparable
employees, subject to Employee's satisfaction of any eligibility criteria for
such participation. Employee shall be entitled to three weeks paid vacation
for each 12 months of employment, subject to the terms of Employer's vacation
policy for employees as it now exists and as changed from time-to-time. Such
vacation shall be taken at such time or times as shall not unduly disrupt the
orderly conduct of business of Employer.
11. EXPENSES. Employer will reimburse Employee for all ordinary and
reasonable out-of-pocket business expenses incurred by Employee in connection
with his performance of services hereunder during the term of this Agreement
in accordance with Employer's expense approval procedures then in effect,
including, $269.23 bi-weekly for lease, insurance, maintenance and fuel of
one vehicle. Travel for business will be by coach class.
4
<PAGE>
12. CONFIDENTIALITY. Employee recognizes and acknowledges that in the
course of Employee's employment by Employer pursuant to this Agreement,
Employee will have access to or may obtain information of a secret, special
and unique value to Employer concerning customers, customer lists, marketing
strategies, business plans, contracts, personnel information, financial
information, relationships between Employer and those persons, entities, and
others with which Employer has contracted and others who have business
dealings with Employer, processes, products, formulas, devices, designs,
inventions, discoveries and methods of operation (collectively and
individually "Confidential Information"). Employee further recognizes and
acknowledges that all Confidential Information which is now or may hereafter
be in Employee's possession is the property of Employer and that protection of
the Confidential Information against unauthorized disclosure or use is of
critical importance to Employer in order to protect Employer from unfair
competition. Employee therefore agrees that Employee shall not at any time,
either while employed by Employer, except in performance of Employee's duties
hereunder, or afterwards, without the prior written consent of Employer, make
any independent use of such Confidential Information, or disclose the same,
directly or indirectly, to any other person, firm, corporation or other
entity, for any reason or purpose whatsoever, except on advice of counsel
during testimony under subpoena in any court or before any administrative
agency having jurisdiction or during any authorized governmental inquiry or
investigation, provided that Employee shall cooperate with Employer in taking
all necessary and appropriate steps to assure the protection of such
Confidential Information from unauthorized use or disclosure outside of such
action, proceeding, inquiry or investigation, or except to the extent that any
such Confidential Information shall be in the public domain other than by
reason of Employee's breach of this paragraph 12.
13. RESTRICTIVE COVENANT. Employee acknowledges that Employee is a
key employee and that the services to be rendered hereunder are of a critical
nature to the success of Employer. In view of the value to Employer of the
services of Employee for which Employer has contracted hereunder, and in
recognition of Employer's obligations hereunder, Employee covenants and agrees
as follows:
(a) During Employee's employment hereunder, Employee shall not,
directly or indirectly, as employee, consultant, agent, officer, director,
owner, partner, broker, dealer, or stockholder, solicit business for any
person, firm, entity, or supplier engaged primarily in the home textiles
specialty retail business in which Employer engages or in any other business
in which Employer, from time to time, shall be engaged in those cities or
counties of the United States in which Employer shall then be transacting
business, from any client, customer or account of Employer or attempt to
convert said persons or entities to other methods of using the same or similar
products or services as provided by Employer;
(b) During Employee's employment hereunder, Employee shall not,
directly or indirectly, as employee, consultant, agent, officer, director,
owner, partner, broker, dealer, or stockholder, for any person, firm, entity,
or supplier, engage in the home textiles specialty retail business in which
Employee engages or in any other business in which Employer, from time to
time, shall be engaged, in those cities or counties of the United States in
5
<PAGE>
which Employer shall then be transacting business, or in any other business
activity for gain or profit or other pecuniary advantage; provided, however,
that this paragraph shall not limit or restrict Employee's right to make and
have personal investments (i) in such form or manner as will not require
Employee's active services in the daily operations or affairs of the business
in which such investments are made and will not otherwise conflict with
Employee's duties and obligations to Employer; (ii) if such investments do not
constitute more than 5% of any class of securities of any corporation that has
a class of securities registered pursuant to the Securities Exchange Act of
1934; and, (iii) such investments are not in a direct competitor of Employer
in the home textiles specialty retail business.
(c) For two years after termination of this Agreement pursuant
to paragraph 15 or 16, Employee shall not directly or indirectly, as employee,
consultant, agent, officer, director, owner, partner, broker, dealer, or
stockholder, engage in the home textiles specialty retail business in which
Employee engages or in any other business in which Employer, from time to
time, shall be engaged during the term of this Agreement, in those cities or
counties of the United States in which Employer shall then be transacting
business.
(d) During Employee's employment hereunder, and for a period of
two years after Employee ceases to be employed by Employer, Employee shall
not, directly or indirectly, solicit for employment or employ any employee of
Employer.
As used herein, the term transacting business within "those cities and
counties" includes the carrying on of a business which may be located
elsewhere but which involves sales or any activity within the stipulated city
or county. The covenants contained in this paragraph shall be deemed to be a
series of separate covenants, for each city and county of each state where
Employer is carrying on such business. If in any judicial proceeding a court
shall refuse to enforce all of the separate covenants deemed included in such
action, then such unenforceable covenants shall be deemed eliminated from the
provisions hereof for the purposes of such proceedings to the extent necessary
to permit the remaining separate covenants to be enforced in such proceedings.
14. RELIEF. It is recognized that in the event of Employee's breach
of paragraph 12 or 13 the damages resulting from such breach would be
difficult, if not impossible, to ascertain and that Employer would be subject
to irreparable injury therefrom. It is agreed, therefore, that Employer, in
addition to and without limiting any other remedy or right it may have, shall
be entitled to such equitable and injunctive relief as may be available to
restrain Employee from violation of any of said covenants, such right to
injunctive and equitable relief to be cumulative and in addition to whatever
other remedies Employer may have in the premises, including the recovery of
damages from Employee.
15. BASES FOR TERMINATION. This Agreement and the employment of
Employee hereunder shall terminate upon the occurrence of the first to occur
of the following events or conditions:
6
<PAGE>
(a) the expiration of the term specified in paragraph 1 hereof;
(b) the death of Employee;
(c) the voluntary resignation of Employee;
(d) Employee's disability, subject to the Employee's right to
receive a disability benefit as provided in paragraph 10 hereof, if any;
(e) the election of Employer to terminate Employee's employment
for "cause," which shall mean (i) a determination by Employer in its sole
discretion exercised in good faith that there has been continued neglect by
Employee of Employee's duties hereunder, a breach or non-observance by
Employee of any of the covenants of Employee contained herein, or Employee's
failure within a reasonable time after written notice to correct any
performance deficiency specified in the notice to the satisfaction of
Employer; or (ii) Employee's embezzlement, fraud, acceptance of a bribe or
kickback or other similar act for Employee's personal benefit or to the
detriment of Employer on Employee's part, or a failure, willful or otherwise,
to implement reasonable or proper policies or procedures established by
Employer for the transaction of business by Employer;
(f) the election of Employer to terminate Employee's employment
upon the entry of any order for relief in respect of Employee under any
bankruptcy, reorganization, arrangement, insolvency, readjustment of debt or
similar law of any jurisdiction now or hereafter in effect;
(g) the election of Employer to terminate without cause at any
time by giving Employee written notice of termination;
(h) failure of Employee to be nominated as a member of the Board
or to be elected as a member of the Board by Employer's shareholders in a
fiscal year after 1997; or
(i) rejection by the shareholders of Strouds, Inc. of the
amendment to the Employer s Plan to be presented pursuant to paragraph 8(a)
hereof, but only if Employee notifies Employer within 30 days after the
rejection that he elects to terminate the Agreement pursuant to this
subparagraph 15(i).
Any termination of this Agreement pursuant to subparagraphs (a), (b) or (c)
above, shall be effective on the expiration date of this Agreement or the date
of death or resignation, as the case may be. Any termination pursuant to
subparagraphs (d), (e), (f), (g), or (h) shall be effective immediately upon
delivery of notice of termination to Employee. Any termination pursuant to
subparagraph (i) shall be effective immediately upon delivery of notice of
termination to Employer. In the case of termination pursuant to paragraph
7
<PAGE>
15(h), such delivery shall be deemed to occur immediately upon the action or
inaction, as the case may be, becoming final in accordance with the by-laws of
Strouds, Inc. For purposes of this Agreement, the term "disability" shall mean
a physical or mental illness or injury of a permanent nature which prevents
Employee from performing his essential duties and other services which he is
employed to perform, even with reasonable accommodation. Employer and
Employee will cooperate with each other and comply with all reasonable
requests to determine whether a disability exists and, if so, whether there is
a reasonable accommodation that does not produce undue hardship to Employer's
operation. It is the parties' intent to comply with the Americans with
Disabilities Act and the California Fair Employment and Housing Act with
respect to disability. Employee shall be deemed to have terminated his
employment on account of disability as of the date he is determined by
Employer to be disabled as defined herein.
16. VOLUNTARY TERMINATION BY EMPLOYEE. Employee may terminate this
Agreement for any reason by giving Employer at least 30 days' written notice
of termination.
17. PARTIES' RIGHTS AND OBLIGATIONS UPON TERMINATION. Except as noted
hereinafter, upon the expiration or earlier termination of this Agreement
Employer's sole obligation shall be to pay Employee or Employee's estate any
compensation remaining unpaid through the effective date of termination, and,
in the case of the death of Employee, to pay to Employee's estate or
designated beneficiary the insurance benefits to which they are entitled, if
any, and Employee shall have no other right to wages, salaries, bonuses,
benefits (except as required by COBRA), fees, commissions, non-vested stock
options, expenses not yet incurred of the types specified in paragraphs 6, 9,
and 11 hereof, severance pay, or debt or equity interest in Employer not
already owned by Employee. The parties' rights and obligations on expiration
or earlier termination of this Agreement are further limited as follows:
(a) If this Agreement is terminated pursuant to subparagraphs
15(b), (c), (d), (e), (f), (g), (h), or (i), Employer shall be obligated to
pay Employee's salary and earned but unused vacation, prorated on a daily
basis, through the date of termination.
(b) If this Agreement is terminated pursuant to subparagraphs
15(g) , 15(h), or 15(i), Employer shall be obligated to pay to Employee, in
addition to the obligations set forth in subparagraph 17(a), Employee's base
salary in effect at the time of termination for the remaining term of the
Agreement or for one year, whichever is greater, which shall be paid in equal
installments at the same intervals as Employee has been paid during his
employment by Employer.
(c) The respective rights and obligations of Employer and
Employee pursuant to paragraphs 12, 13 and 14 hereof, shall survive the
expiration or earlier termination of this Agreement.
8
<PAGE>
18. PERSONS BOUND. This Agreement shall inure to the benefit of and
be binding upon Employee, his legal representatives and testate or intestate
distributes, and Employer, its successors and assigns. This Agreement may not
be assigned by Employee. This Agreement may be assigned by Employer.
19. NOTICES. Any notice or request required or permitted under this
Agreement shall be in writing and given or made by hand delivery or registered
or certified mail, return receipt requested, addressed to Employer or to
Employee at Employer's then principal place of business, with a copy to
Employee at Employee's home address, as set forth on the records of Employer,
or to either party hereto at such other address or addresses as such party may
from time to time specify for the purpose in a notice similarly given to the
other party.
20. NO WAIVER, MODIFICATION. The waiver of the breach of any term or
condition of this Agreement shall not be deemed to constitute the waiver of
any other or subsequent breach of the same or any other term or condition. No
amendment or modification of this Agreement shall be valid or binding unless
made in writing and signed by the other party against whom such waiver or
modification is to be enforced.
21. GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws of the State of California applicable to agreements
made and to be performed in said State.
22. DISPUTES. Any controversy or claim arising out of or relating to
this Agreement or for the breach thereof or to Employee's employment by
Employer, including without limitation any dispute relating to the termination
of this Agreement or Employee's employment, if not otherwise settled by the
parties hereto, shall be finally settled by arbitration to be held in Los
Angeles, California, in accordance with the National Rules for the Resolution
of Employment Disputes of the American Arbitration Association. The parties
hereto hereby consent to personal jurisdiction in Los Angeles, California with
respect to such arbitration. The award resulting from such arbitration shall
be final and binding upon both parties hereto. Judgment upon said award may
be entered in any court having jurisdiction thereof. In the event that any
arbitration or other proceeding shall be brought by Employee or Employer in
respect of an alleged breach by or default in the performance of the other
party hereto, each party shall bear his or its own attorneys' fees and costs
associated with or arising from such arbitration or other proceeding.
Notwithstanding the foregoing, Employer may institute and prosecute to
judgment in any court having jurisdiction an action, suit or proceeding for
equitable or injunctive relief under paragraph 14 hereof and Employee shall
reimburse Employer for all reasonable costs and expenses (including attorneys'
fees) incurred by Employer, if successful, in connection therewith.
23. ENTIRE AGREEMENT. This Agreement represents the entire agreement
of the parties hereto with respect to the subject matter hereof, and
supersedes all prior agreements, understandings, representations, or written
or oral, express or implied, if any, between Employer and Employee. No
9
<PAGE>
representation, condition, provision or term related to or connected with this
Agreement exists, or has been relied upon by either party hereto except as
specifically set forth herein.
24. EMPLOYEE'S WARRANTY. Employee represents and warrants to Employer
that Employee is not bound by any agreement or subject to any restriction
which would interfere with or prevent Employee from entering into and carrying
out this Agreement.
25. SEVERABILITY. The invalidity of all or any part of any paragraph
or subparagraph of this Agreement shall not render invalid the remainder of
this Agreement or of any such paragraph or subparagraph.
Date: JULY 11, 1997 STROUDS, INC.
By /s/ Wilfred C. Stroud
Date: JULY 10, 1997
/s/ Charles Chinni
----------------------------
Charles Chinni
10
<PAGE>
EXHIBIT 11
STROUDS, INC.
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
13 WEEKS ENDED
----------------------
MAY 31, JUNE 1,
1997 1996
(in thousands, except share data) --------- ---------
- ---------------------------------
<S> <C> <C>
Weighted average number of common shares
outstanding 8,512 8,512
========= =========
Net income (loss) $ (2,999) $ (678)
========= =========
Net income (loss) per common and common
equivalent shares $ (0.35) $ (0.08)
========= =========
</TABLE>
Fully diluted net income (loss) per share is not presented since the amounts
do not differ significantly from the primary net income per share presented.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEETS AND STATEMENTS OF INCOME FOUND ON PAGES 3 AND 4 OF
THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1998
<PERIOD-START> MAR-02-1997
<PERIOD-END> MAY-31-1997
<CASH> 1,216
<SECURITIES> 0
<RECEIVABLES> 1,575
<ALLOWANCES> 0
<INVENTORY> 69,892
<CURRENT-ASSETS> 77,694
<PP&E> 50,711
<DEPRECIATION> 26,143
<TOTAL-ASSETS> 110,854
<CURRENT-LIABILITIES> 560
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 30,573
<TOTAL-LIABILITY-AND-EQUITY> 110,854
<SALES> 50,451
<TOTAL-REVENUES> 50,451
<CGS> 37,570
<TOTAL-COSTS> 37,570
<OTHER-EXPENSES> 15,070
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 865
<INCOME-PRETAX> (2,999)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,999)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,999)
<EPS-PRIMARY> (0.35)
<EPS-DILUTED> (0.35)
</TABLE>
