<PAGE>
As filed with the Securities and Exchange Commission on October 13, 1998
_____________________________________________________________________________
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 August 29, 1998
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)
(626) 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 October 2, 1998: 8,600,340
<PAGE>
STROUDS, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Balance Sheets as of August 29, 1998
(Unaudited) and February 28, 1998 3
Condensed Statements of Operations for the
Thirteen and Twenty-Six Weeks Ended August 29,
1998 and August 30, 1997 (Unaudited) 4
Condensed Statements of Cash Flows for the
Twenty-Six Weeks Ended August 29, 1998
and August 30, 1997 (Unaudited) 5
Notes to Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 20
Page 2
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PART I. FINANCIAL INFORMATION
- ---------------------------------
ITEM 1. FINANCIAL STATEMENTS
STROUDS, INC.
CONDENSED BALANCE SHEETS
AUGUST 29, February 28,
(in thousands, except share data) 1998 1998
- --------------------------------- -------- --------
ASSETS (Unaudited)
Current assets:
Cash $ 811 $ 518
Accounts receivable 1,976 1,650
Inventory 60,726 64,002
Other 4,746 5,030
-------- --------
Total current assets 68,259 71,200
Property and equipment - at cost, net of accumulated
depreciation and amortization 21,766 21,422
Excess of cost over net assets acquired, net of
accumulated amortization 7,402 7,531
Other assets 972 925
-------- --------
Total assets $ 98,399 $101,078
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 595 $ 567
Accounts payable 15,515 13,509
Accrued expenses 12,915 13,154
Current portion of restructuring reserves 5,802 7,247
-------- --------
Total current liabilities 34,827 34,477
Long-term debt 30,417 29,464
Restructuring reserves 1,000 4,121
Other non-current liabilities 3,246 3,177
-------- --------
Total liabilities 69,490 71,239
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
August 29, 1998, 8,600,340 shares; and
February 28, 1998, 8,579,022 shares 1 1
Additional paid-in capital 39,114 39,082
Accumulated deficit (10,206) (9,244)
-------- --------
Total stockholders' equity 28,909 29,839
-------- --------
Total liabilities and stockholders' equity $ 98,399 $101,078
======== ========
See accompanying notes to condensed financial statements.
Page 3
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STROUDS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
13 WEEKS ENDED 26 WEEKS ENDED
---------------------- ----------------------
August 29, August 30, August 29, August 30,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 54,190 $ 53,797 $109,205 $104,248
Costs and expenses:
Cost of sales, buying and occupancy 39,190 39,561 79,527 77,131
Selling and administrative expenses 14,578 14,389 29,085 29,394
Amortization of excess of cost over
net assets acquired 64 64 129 129
--------- --------- --------- ---------
53,832 54,014 108,741 106,654
--------- --------- --------- ---------
Operating income (loss) 358 (217) 464 (2,406)
Other income 65 61 125 116
Interest expense, net (789) (973) (1,551) (1,838)
--------- --------- --------- ---------
Loss before income taxes (366) (1,129) (962) (4,128)
Income tax (expense) benefit -- -- -- --
--------- --------- --------- ---------
Net loss $ (366) $ (1,129) $ (962) $ (4,128)
========= ========= ========= =========
Basic:
Net loss per share $ (0.04) $ (0.13) $ (0.11) $ (0.48)
========= ========= ========= =========
Weighted average shares outstanding 8,593 8,550 8,586 8,543
========= ========= ========= =========
Diluted:
Net loss per share $ (0.04) $ (0.13) $ (0.11) $ (0.48)
========= ========= ========= =========
Weighted average shares outstanding 8,593 8,550 8,586 8,543
========= ========= ========= =========
See accompanying notes to condensed financial statements.
</TABLE>
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STROUDS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
26 WEEKS ENDED
---------------------
AUGUST 29, AUGUST 30,
1998 1997
--------- ---------
Cash flows from operating activities:
Net loss $ (962) $ (4,128)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization of property
and equipment 2,340 2,407
Amortization of excess of cost over net
assets acquired 129 129
(Increase) decrease in assets:
Accounts receivable (326) (487)
Merchandise inventory 3,276 2,871
Income taxes receivable --- 2,488
Increase (decrease) in accounts payable and
accrued expenses 959 (1,275)
Decrease in restructuring reserve (4,566) (1,050)
Other 306 (1,377)
--------- ---------
Net cash provided by (used in) operating
activities 1,156 (422)
--------- ---------
Cash flows from investing activities:
Capital expenditures (2,684) (1,168)
--------- ---------
Net cash used in investing activities (2,684) (1,168)
--------- ---------
Cash flows from financing activities:
Net borrowings under long-term debt 981 (405)
Principal payments under capital lease obligations --- (26)
Decrease (increase) in overdraft 808 2,215
Other equity transactions 32 31
--------- ---------
Net cash provided by financing activities 1,821 1,815
--------- ---------
Net increase in cash 293 225
Cash at beginning of period 518 765
--------- ---------
Cash at end of period $ 811 $ 990
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 1,596 $ 1,785
========= =========
See accompanying notes to condensed financial statements.
Page 5
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STROUDS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(1) INTERIM FINANCIAL STATEMENTS
The accompanying Condensed Balance Sheet as of August 29, 1998 and the related
Condensed Statements of Operations for the 13 and 26 weeks ended August 29,
1998 and August 30, 1997 and Condensed Statements of Cash Flows for the 26
weeks ended August 29, 1998 and August 30, 1997 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 February 28, 1998 is
derived from the audited financial statements included in the Company's 1997
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 1997 Annual Report filed with the Securities and
Exchange Commission on Form 10-K. The results of operations for the 13 and 26
weeks ended August 29, 1998 may not be indicative of the results to be
expected for the entire fiscal year.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Income Taxes
The provision for income taxes 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
Effective February 28, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share." SFAS No. 128
requires dual presentation of basic and diluted earnings per share ("EPS") on
the face of the statement of operations for periods ending after December 15,
1997. Basic EPS excludes the effect of potentially dilutive options, warrants
and convertible securities. Diluted EPS reflects the potential dilution that
could occur if securities to issue common stock were exercised. Reported EPS
in prior periods have been restated to conform with the provisions of SFAS No.
128. During the 13 and 26 week periods ended August 29, 1998 and August 30,
1997, the impact of common stock options and warrants was anti-dilutive.
Accordingly, they were excluded from the calculation of EPS.
Page 6
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STROUDS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Issued Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No, 130"). SFAS No. 130 establishes standards for the
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general purpose financial
statements. SFAS No. 130 is effective for interim and annual periods
beginning after December 15, 1997. Management has determined that there are
no components of comprehensive income that are not disclosed in the statement
of operations, accordingly, there is no difference between net earnings and
net comprehensive income.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). SFAS No. 131 establishes standards for public business
enterprises to report information about operating segments in annual financial
statements and selected information in the notes thereto. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. In the initial year of application, comparative information for earlier
years is to be restated. SFAS No. 131 need not be applied to interim
financial statements in the year of adoption, but comparative information is
required in the second year of application. The Company has not determined
whether the adoption of SFAS No. 131 will have a material impact upon the
Company's financial reporting.
In April 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-up
Activities." SOP 98-5 requires that costs of start-up activities, including
organization costs and club openings, be expensed as incurred. SOP 98-5 is
effective for financial statements for fiscal years beginning after December
15, 1998. Restatement of previously issued financial statements is not
permitted. In the fiscal year SOP 98-5 is first adopted, the application
should be reported as a cumulative effect of a change in accounting principal.
The Company has not yet determined whether the application of SOP 98-5 will
have a material impact upon the Company's financial position or results of
operations.
Reclassifications
Certain reclassifications have been made to the August 30, 1997 amounts to
conform to the August 29, 1998 presentation.
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STROUDS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(3) PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
AUGUST 29, FEBRUARY 28,
(in thousands) 1998 1998
- -------------- --------- ---------
Furniture, fixtures and equipment $ 43,667 $ 41,091
Equipment held under capital leases --- 2,081
Leasehold improvements 9,244 9,137
--------- ---------
52,911 52,309
Impairment valuation reserve (1,501) (1,601)
Accumulated depreciation and amortization (29,644) (29,286)
--------- ---------
$ 21,766 $ 21,422
========= =========
(4) RESTRUCTURING
During fiscal 1996, the Company initiated a comprehensive restructuring and
cost reduction plan (the "Restructuring Plan"), which resulted in a pretax
charge of $16,250,000. The Restructuring Plan is designed to improve the
operating performance of the Company through the closure or disposition of
certain underperforming stores, elimination of underperforming merchandise
categories and implementation of cost reduction measures, including workforce
reductions, to more closely align the Company's cost structure with future
expected revenues.
During fiscal 1997, the Company closed 2 stores in its Midwest market, 1 store
in California and 1 store in Nevada. In the second quarter of fiscal 1998,
the Company closed 3 additional stores (1 in Southern California, 1 in Chicago
and 1 in greater Washington, D.C.). In addition, the Company may close up to
3 additional stores as part of its restructuring efforts. The Company plans
to continue to operate these stores, where appropriate, in the current format
or, if circumstances warrant, convert to an outlet format in order to improve
cash flow and minimize the ultimate cost of disposition. As of August 29,
1998, no changes have been made to the estimated Restructuring Plan costs and
no charges were recorded to operations.
During the first half of fiscal 1998, cash used related to the Restructuring
Plan totaled $684,000, relating primarily to lease termination fees, workforce
reductions and consulting and advisory fees associated with the Company's
restructuring and cost reduction efforts.
Page 8
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STROUDS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The following table summarizes the Restructuring Plan charges and payments or
asset write-downs:
Payments and asset Future cash
1996 write-downs through outlays and
(in thousands) Provision August 29, 1998 charges
- ---------------------------- ----------- ------------------- -----------
Occupancy, lease termination
and subsidy costs associated
with the closure or
disposition of stores $ 7,375 $ 2,648 $ 4,727
Asset write-down; merchandise
inventory, leasehold improve-
ments, furniture and fixtures
and equipment 7,215 5,452 1,763
Employee severance and other
related costs 1,660 1,349 311
---------- ---------- ----------
Total $ 16,250 $ 9,449 $ 6,801
========== ========== ==========
(5) LONG-TERM DEBT
On March 27, 1998, the Company entered into a new revolving credit agreement
with a new lender (the "Credit Facility"), commenced borrowings under the
Credit Facility and, concurrently, the Company's existing revolving credit
facility was terminated. The borrowing limit under this Credit Facility is
the lesser of $50,000,000 or the sum of 85% of eligible accounts receivable
plus the lesser of 75% of eligible inventory or 90% of orderly liquidation
value. Interest is payable at a rate equivalent to the Chase Manhattan Bank
Rate ("Bank Rate") plus one quarter of one percent (0.25%) per annum or LIBOR
plus two and one half percent (2.50%) per annum (8.75% and 8.19% at August 29,
1998, respectively). The Company can lower its interest spread up to a
maximum of 0.25% and 0.50% on its Bank Rate and LIBOR borrowings respectively,
provided it achieves a certain fixed charge coverage ratio, as defined,
measured on a monthly rolling twelve month basis. Included in this facility
is a $7,000,000 letter of credit sub-facility. The Company s Credit Facility
contains various restrictions on the payment of cash dividends, incurrence of
additional indebtedness, acquisitions, investments, loans, merger or
consolidation and disposition of assets. The covenants also require the
Company to meet a minimum net worth requirement at anytime the borrowing
availability is less than $5,000,000. The Company was in compliance with the
covenants at August 29, 1998. The Credit Facility is for an initial term of
three years with automatic annual renewals thereafter.
Page 9
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STROUDS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(5) LONG-TERM DEBT (Continued)
At August 29, 1998, the Company had outstanding borrowings of $29,043,000
under its $50,000,000 Credit Facility and $2,000,000 in outstanding letters of
credit for purchase commitments to foreign suppliers under this sub-facility.
On September 11, 1998, the Company entered into an Interest Rate Swap
Agreement (the "New Agreement") with a financial institution. The New
Agreement was entered into for the purpose of converting a portion of its
borrowing to a long-term fixed base rate of interest. The Company converted
$10,000,000 to a weighted average fixed base interest rate of 6.03% plus 2.50%
until this New Agreement expires on March 1, 2001. In connection with the New
Agreement, the Company has issued a standby letter of credit in the amount of
$175,000 to secure the interest rate risk associated with this agreement.
Concurrently, the Company terminated its existing International Swap Dealers
Association Master Agreement which covered $20,000,000 at a weighted average
fixed base interest rate of 7.00% plus 2.50%. As a result of terminating the
Old Agreement, the Company incurred termination fees of $200,000.
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 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 certain
underperforming stores, elimination of underperforming merchandise categories
and implementation of cost reduction measures, including workforce reductions,
to more closely align the Company s cost structure with future expected
revenues. As part of its restructuring efforts, during fiscal 1997, the
Company closed 2 stores in its Midwest market, 1 store in California and 1
store in Nevada. In the second quarter of fiscal 1998, the Company closed 3
additional stores (1 in Southern California, 1 in Chicago and 1 in greater
Washington, D.C.). In addition, the Company may close up to 3 additional
stores as part of its restructuring efforts. The Company plans to continue to
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operate these stores, where appropriate, in the current format or, if
circumstances warrant, convert to an outlet format in order to improve cash
flow and minimize the ultimate cost of disposition. The estimated cost of
closure, disposition and/or liquidation and the time involved is subject to
continuing evaluation of these stores and merchandise categories by
management.
During 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 cash flows from the related asset. 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 August 29, 1998 Compared to the 13 Weeks Ended August 30, 1997
- -----------------------------------------------------------------------------
Net sales for the thirteen weeks ended August 29, 1998 increased $0.4 million,
or 0.7%, to $54.2 million versus $53.8 million in the same period last year.
Comparable store sales increased $0.4 million, or 0.9%, for the period. Sales
from new stores and expanded or replacement stores increased by $0.7 million.
Sales were reduced by $0.7 million due to 4 store closures.
Management believes the increase in comparable store sales over the same
period a year ago can be attributable to a stronger California economic
environment where the majority of the Company's stores are located and a
favorable impact related to competitive openings. Approximately 13% of the
comparable stores were affected by new competitive openings for the second
quarter of 1998 compared to approximately 21% for the same period last year.
Cost of sales, buying and occupancy for the 13 weeks ended August 29, 1998
were $39.2 million versus $39.6 million for the same period a year ago, a $0.4
million decrease. As a percent of net sales, cost of sales, buying and
occupancy decreased to 72.3% from 73.5% for the same period a year ago. The
improvement was primarily due to the decrease of occupancy costs from the
closure of 4 stores and lower distribution costs.
Selling and administrative expenses for the 13 weeks ended August 29, 1998
increased $0.2 million to $14.6 million versus $14.4 million for the same
period in fiscal 1997 and increased as a percentage of net sales from 26.7% to
26.9%. General and administrative expense as a percent of sales was 6.0%
versus 5.2% a year ago. The increases were primarily the result of increased
labor staffing and expenses associated employee incentive plans.
As a result of the factors noted above, the Company had operating income for
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the 13 weeks ended August 29, 1998 of $0.4 million versus an operating loss of
$0.2 million for the same period a year ago, a $0.6 million increase.
Interest expense, net, decreased $0.2 million to $0.8 million for the 13 weeks
ended August 29, 1998 versus $1.0 million for the same period in fiscal 1997.
The decrease was primarily the result of lower average borrowings and the
related cost of borrowing this year.
The Company recorded no income tax benefit associated with its losses for the
13 week periods ended August 29, 1998 and August 30, 1997 due to the
uncertainty of the Company's future taxable earnings. The estimated effective
tax rate is subject to continuing evaluation and modification by management.
26 Weeks Ended August 29, 1998 Compared to the 26 Weeks Ended August 30, 1997
- -----------------------------------------------------------------------------
Net sales for the 26 weeks ended August 29, 1998 increased $5.0 million, or
4.8%, to $109.2 million versus $104.2 million in the same period last year.
Comparable store sales increased $4.3 million, or 4.4%, for the period. Sales
from new stores and expanded or replacement stores increased by $3.0 million.
Sales were reduced by $2.3 million due to 5 store closures.
Management believes the increase in comparable store sales over the same
period a year ago can be attributable to the Company's increased promotional
efforts with more frequent advertising, a strong California economy where the
majority of the Company's stores are located and a favorable impact related to
competitive openings. Approximately 15% of the comparable stores were
affected by new competitive openings for the first half of 1998 compared to
approximately 21% for the same period last year.
Cost of sales, buying and occupancy for the 26 weeks ended August 29, 1998
were $79.5 million versus $77.1 million for the same period a year ago, a $2.4
million increase. This dollar increase was attributable, primarily, to the
increased sales volume over last year. As a percent of net sales, cost of
sales, buying and occupancy decreased to 72.8% from 74.0% for the same period
a year ago. The improved gross margin points were primarily due to the
favorable impact of increased sales volume on occupancy and the decrease of
occupancy costs from the closure of 5 stores.
Selling and administrative expenses for the 26 weeks ended August 29, 1998
decreased $0.3 million to $29.1 million versus $29.4 million for the same
period in fiscal 1997 and decreased as a percentage of net sales from 28.2% to
26.6%. The dollar decrease was primarily due to the reduction in net
advertising expenditures and lower store labor expense. The decrease as a
percent of net sales was primarily due to the combined effect of increased
sales volume and the lower expenditures for advertising and store labor.
General and administrative expense as a percent of sales was 6.0% versus 5.5%
a year ago. The increase as a percent of sales was primarily the result of
increased labor staffing and expense recognition for newly established
employee incentive plans.
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The Company had operating income for the 26 weeks ended August 29, 1998 of
$0.5 million versus an operating loss of $2.4 million for the same period a
year ago, a $2.9 million increase, as a result of the factors noted above.
Interest expense, net, decreased $0.2 million to $1.6 million for the 26 weeks
ended August 29, 1998 versus $1.8 million for the same period in fiscal 1997.
The decrease was primarily the result of lower average borrowings and the
related cost of borrowing this year.
The Company recorded no income tax benefit associated with its losses for the
26 week periods ended August 29, 1998 and August 30, 1997 due to the
uncertainty of the Company's future taxable earnings. The estimated effective
tax rate is subject to continuing evaluation and modification by management.
LIQUIDITY AND CAPITAL RESOURCES
On March 27, 1998, the Company entered into a new revolving credit agreement
with a new lender (the "Credit Facility"). The borrowing limit under this
Credit Facility is the lesser of $50.0 million or the sum of 85% of eligible
accounts receivable plus the lesser of 75% of eligible inventory or 90% of
appraised net liquidation value of inventory.
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 August 29, 1998, the Company's working capital
was $36.6 million, while advances from its Credit Facility were $29.0 million.
The Company had $14.4 million available for borrowings under its Credit
Facility as determined by the Company's eligible "borrowing base" at August
29, 1998.
Cash provided by operating activities for the 26 weeks ended August 29, 1998
was $1.2 million. In the first half of fiscal 1998, the Company conducted
going out of business sales at 3 locations which closed in the second quarter
of fiscal 1998. Cash used in restructuring payments was $0.7 million.
Net cash used in investing activities for the 26 weeks ended August 29, 1998
was $2.7 million. These funds were used for capital expenditures for
improvements to its distribution and warehouse facility, management
information systems development and existing store refurbishments.
Cash provided by financing activities for the 26 weeks ended August 29, 1998
was $1.8 million.
The Company's capital expenditures for the remainder of fiscal 1998 are
currently expected to be approximately $2.5 million and will relate primarily
to the conversion and enhancement of its management information systems, new
store development and existing store expansions and refurbishments.
Management believes that funds generated from operations, its Credit Facility
Page 13
<PAGE>
and use of trade credit will be sufficient to satisfy the Company's working
capital requirements and commitments for capital expenditures through the end
of fiscal 1998.
YEAR 2000
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and has
developed an implementation plan to resolve the issue. The Year 2000 problem
is the result of computer programs being written using two digits rather than
four to define the applicable year. Any of the Company's programs that have
time-sensitive software may recognize a date using "00" as the year 1900
rather then the year 2000. This could result in a major system failure or
miscalculations. The Company anticipates spending approximately $1.0 million
in fiscal 1998 and $0.4 million in fiscal 1999 for the purpose of installing
new merchandise, distribution and financial software. This investment is the
major component of the Company's Year 2000 implementation plan. The Company
presently believes that, with modifications to existing software and
converting to new software, the Year 2000 problem will not pose significant
operational problems for the Company's computer systems as so modified and
converted. The conversion is estimated to be completed by March 1999.
However, if such modifications and conversions are not completed in a timely
manner, unknown risks regarding the Year 2000 problem may have a material
impact on the operations of the Company. Although the Company has been
working with third party companies to insure Year 2000 compliance, there can
be no assurance that the systems of these companies on which the Company's
systems rely also will be converted in a timely manner or that any such
failure to convert by another company would not have an adverse effect on the
Company's systems. The Company does not currently have a contingency plan for
unknown risks regarding the Year 2000 conversion, but estimates a contingency
plan will be completed by May 1999.
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
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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 February 28, 1998.
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PART II. OTHER INFORMATION
- -----------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on July 1, 1998, the
following individuals were elected to the Board of Directors:
Votes For Votes Against
--------- -------------
Charles R. Chinni 6,950,541 554,229
Wilfred C. Stroud 6,950,541 554,229
Joseph A. Imbrogulio (1) 6,950,279 554,491
Larry R. Bemis 6,950,541 554,229
Dale D. Achabal 6,950,541 554,229
Marco F. Weiss 6,950,272 554,498
Richard F. Clayton 6,950,541 554,229
(1) Mr. Imbrogulio resigned from his position on the Board of Directors
July 24, 1998.
The following proposal was approved at the Company's Annual Meeting:
Votes Votes Votes Broker
For Against Abstain Non-votes
--------- ------- ------- ---------
Approve certain amendments to
the Company's Amended and
Restated 1994 Equity Participation
Plan to, among other things (i)
increase the number of shares of
the Company's Common Stock
available for issuance thereunder
from 1,250,000 to 1,680,000, (ii)
amend the formula grant provisions
to provide for an annual grant of
5,000 options to the Company's
non-employee directors, (iii)
increase the Award Limit of the
number of shares subject to options
which may be granted to any
individual employee in any one year
to 500,000 shares, (iv) require all
options to be granted at an
exercise price of not less than
Fair Market Value (as defined)and
(v) prohibit the granting of
certain types of awards presently
allowed under the 1994 Plan. 4,268,878 1,307,241 33,519 1,895,132
Page 16
<PAGE>
The following proposal was approved at the Company's Annual Meeting:
Votes For Votes Against Votes Abstain
--------- ------------- -------------
Ratify the appointment of KPMG
Peat Marwick LLP as the Company's
independent public accountants
for the fiscal year ending on
February 27, 1999. 7,503,170 657 943
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.
Page 17
<PAGE>
Exhibit No. Description
- ----------- -----------
10.4 (First) Amendment to the Amended and Restated 1994 Equity
Participation Plan dated July 6, 1995.
Incorporated herein by reference to the Company s
Form S-8, Registration No. 333-58539, as filed with
the Commission on July 6, 1998.
10.5 (Second) Amendment to the Amended and Restated 1994 Equity
Participation Plan dated May 14, 1997.
Incorporated herein by reference to the Company s
Form S-8, Registration No. 333-58539, as filed with
the Commission on July 6, 1998.
10.6 Third Amendment to the Amended and Restated 1994 Equity
Participation Plan dated May 20, 1998.
Incorporated herein by reference to the Company s
Form S-8, Registration No. 333-58539, as filed with
the Commission on July 6, 1998.
10.7 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.
10.8 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.
10.9 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.
10.10 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.
10.11 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.
10.12 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.
10.13 Financing Agreement between The CIT Group/Business Credit,
Inc. and Strouds, Inc. dated March 27, 1998.
Incorporated herein by reference to the Company s Form
10-K for the fiscal year ended February 28, 1998, as
filed with the Commission on May 27, 1998.
Page 18
<PAGE>
Exhibit No. Description
- ----------- -----------
* 10.14 Interest Rate Swap Agreement between Wells Fargo Bank,
National Association and Strouds, Inc. dated September 11,
1998.
* 10.15 Amended and Restated Employment Agreement between Charles
Chinni and Strouds, Inc., dated May 20, 1998.
* 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
August 29, 1998.
Page 19
<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: October 2, 1998
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)
Page 20
<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 (First) Amendment to the Amended and Restated 1994 Equity
Participation Plan dated July 6, 1995.
Incorporated herein by reference to the Company s
Form S-8, Registration No. 333-58539, as filed with
the Commission on July 6, 1998.
10.5 (Second) Amendment to the Amended and Restated 1994 Equity
Participation Plan dated May 14, 1997.
Incorporated herein by reference to the Company s
Form S-8, Registration No. 333-58539, as filed with
the Commission on July 6, 1998.
10.6 Third Amendment to the Amended and Restated 1994 Equity
Participation Plan dated May 20, 1998.
Incorporated herein by reference to the Company s
Form S-8, Registration No. 333-58539, as filed with
the Commission on July 6, 1998.
10.7 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.
<PAGE>
Exhibit No. Description
- ----------- -----------
10.8 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.
10.9 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.
10.10 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.
10.11 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.
10.12 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.
10.13 Financing Agreement between The CIT Group/Business Credit,
Inc. and Strouds, Inc. dated March 27, 1998.
Incorporated herein by reference to the Company s Form
10-K for the fiscal year ended February 28, 1998, as
filed with the Commission on May 27, 1998.
* 10.14 Interest Rate Swap Agreement between Wells Fargo Bank,
National Association and Strouds, Inc. dated September 11,
1998.
* 10.15 Amended and Restated Employment Agreement between Charles
Chinni and Strouds, Inc., dated May 20, 1998.
* 27 Financial Data Schedule
- ------------------------------
* Filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED BALANCE SHEETS AND STATEMENTS OF OPERATIONS FROM THE COMPANY'S FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> FEB-27-1999 FEB-27-1999
<PERIOD-START> MAY-31-1998 MAR-01-1998
<PERIOD-END> AUG-29-1998 AUG-29-1998
<CASH> 811 811
<SECURITIES> 0 0
<RECEIVABLES> 1,976 1,976
<ALLOWANCES> 0 0
<INVENTORY> 60,726 60,726
<CURRENT-ASSETS> 68,259 68,259
<PP&E> 51,410 51,410
<DEPRECIATION> 29,644 29,644
<TOTAL-ASSETS> 98,399 98,399
<CURRENT-LIABILITIES> 34,827 31,706
<BONDS> 0 0
0 0
0 0
<COMMON> 1 1
<OTHER-SE> 28,908 28,908
<TOTAL-LIABILITY-AND-EQUITY> 98,399 98,399
<SALES> 54,190 109,205
<TOTAL-REVENUES> 54,190 109,205
<CGS> 39,190 79,527
<TOTAL-COSTS> 14,642 29,214
<OTHER-EXPENSES> (65) (125)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 789 1,551
<INCOME-PRETAX> (366) (962)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (366) (962)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (366) (962)
<EPS-PRIMARY> (0.04) (0.11)
<EPS-DILUTED> (0.04) (0.11)
</TABLE>
<PAGE>
INTEREST RATE SWAP AGREEMENT
THIS AGREEMENT ("Agreement") is entered into as of the 11th day of
September, 1998, by and between STROUDS, INC. ("Fixed Rate Payer"), and WELLS
FARGO BANK, NATIONAL ASSOCIATION ("Floating Rate Payer").
WHEREAS, both Fixed Rate Payer and Floating Rate Payer seek to reduce
actual or expected exposure to changes in interest rates or to lower costs of
actual or expected borrowings.
WHEREAS, the Fixed Rate Payer is willing to make the payments based on a
fixed rate of interest as provided herein; and
WHEREAS, the Floating Rate Payer is willing to make the payments based
on a floating rate of interest as provided herein;
NOW THEREFORE, in consideration of their mutual covenants, Fixed Rate
Payer and Floating Rate Payer agree as follows:
1. DEFINITIONS. The capitalized terms, "Effective Date", "Fixed
Rate", "Floating Rate", "Floating Rate Maturity", "Net Swap Settlement Payment
Dates", "Reset Dates", "Swap Amount", "Termination Date" and "Trade Date"
shall each be as specified in the Swap Confirmation. All other capitalized
terms shall have the meanings set forth below or otherwise as set forth in
this Agreement:
(a) "BUSINESS DAY" means a day (other than Saturday, Sunday or
holiday) on which Bank is open and conducting its customary banking
transactions in the State of California.
(b) "BUSINESS DAY CONVENTION" means, for purposes of determining
each Calculation Period, that convention specified in the Swap Confirmation
for adjusting any relevant date if it would otherwise fall on a day that is
not a Business Day, so that:
(i) if "following" is specified, that date will be the
first following day that is a Business Day;
(ii) if "modified following" is specified, that date will
be the first following day that is a Business Day unless that day falls in the
next calendar month, in which case that date will be the first preceding day
that is a Business Day; and
(iii) if "preceding" is specified, that date will be the
first preceding day that is a Business Day.
Page 1
<PAGE>
(c) "CALCULATION PERIOD" means, subject to the Business Day
Convention, each consecutive period designated in the Swap Confirmation, the
first of which will commence on, and include, the Effective Date and extend
to, but exclude, the first Reset Date. Each subsequent Calculation Period will
commence on, and include, the Reset Date and extend to, but exclude the next
Reset Date. The final Calculation Period will end on, but exclude, the
Completion Date.
(d) "SWAP CONFIRMATION" means a document, substantially in the
form of Exhibit A hereto, with the information required in each blank space
completed.
(e) "COMPLETION DATE" shall mean the Termination Date unless an
Early Termination Date has occurred, in which case the Completion Date shall
be the Early Termination Date.
(f) "DAY COUNT CONVENTION" means that the calculation of each
Net Swap Settlement will be based on the actual number of days in the
Calculation Period divided by a 360-day year.
(g) "EARLY TERMINATION DATE" means the date, if any, prior to
the Termination Date upon which this Agreement is terminated pursuant to
Paragraph 3(a) below.
(h) "LIBOR" means, with respect to each Calculation Period, the
rate for deposits in U.S. Dollars for a period equal to the Floating Rate
Maturity, as such rate appears on Telerate Page 3750 as of 11:00 AM, London
Time, on the Reset Date (or the Effective Date in the case of the initial
Period). If such rate does not appear on Telerate Page 3750, the rate for that
Reset Date will be the arithmetic mean of the rates quoted by major Banks in
London, selected by Floating Rate Payer, for a period equal to the Floating
Rate Maturity, as of 11:00 AM, London Time, on the Reset Date.
(i) "TELERATE PAGE 3750" means the display designated as "Page
3750" on the Dow Jones Telerate Service (or such other page as may replace
Page 3750 on that service or such other service as may be nominated by the
British Bankers Association as the information vendor for the purpose of
displaying British Bankers Association Interest Settlement Rates for U.S.
Dollar Deposits).
2. DETERMINATION; NET SWAP SETTLEMENT PAYMENTS.
(a) On the first Business Day following the end of each
Calculation Period, Floating Rate Payer will send Fixed Rate Payer a written
notice ("Settlement Notice") specifying:
(i) the amount of interest which would have accrued on the
Swap Amount during the Calculation Period at a rate per annum equal to the
Floating Rate ("Floating Rate Payment").
Page 2
<PAGE>
(ii) the amount of interest which would have accrued on the
Swap Amount during the Calculation Period at a rate per annum equal to the
Fixed Rate ("Fixed Rate Payment"); and
(iii) the difference, if any, between the Floating Rate
Payment and the Fixed Rate Payment ("Net Swap Settlement Payment").
(b) All calculations under Paragraph 2(a) above will be made on
the basis of the Day Count Convention.
(c) On each Net Swap Settlement Payment Date:
(i) if the Fixed Rate Payment exceeds the Floating Rate
Payment, Fixed Rate Payer shall pay Floating Rate Payer the amount of the Net
Swap Settlement Payment by, at Floating Rate Payer s option, Floating Rate
Payer s debiting Fixed Rate Payer's demand deposit account with Floating Rate
Payer, or by wiring funds to Floating Rate Payer; or
(ii) if the Floating Rate Payment exceeds the Fixed Rate
Payment, Floating Rate Payer shall pay Fixed Rate Payer the amount of the Net
Swap Settlement Payment by, at Floating Rate Payer s option, crediting Fixed
Rate Payer's demand deposit account with Floating Rate Payer, or by wiring
funds to a designated Fixed Rate Payer account.
3. EARLY TERMINATION.
(a) This Agreement shall expire on the Termination Date and
neither party may terminate this Agreement prior thereto; provided, however
that in the event that either Floating Rate Payer or Fixed Rate Payer fail to
make any payment when due hereunder or otherwise fail to perform any of their
obligations hereunder, unless such default is cured within five Business Days
of the defaulting party's receipt of written notice thereof, the
non-defaulting party may, so long as such default in then continuing, upon
five Business Days written notice terminate this Agreement.
(b) In the event of an early termination of this Agreement
pursuant to Paragraph 3(a), the defaulting party shall promptly pay the
non-defaulting party, on demand, an amount equal to the Termination Amount.
Each party hereto acknowledges the Termination Amount to be a reasonable
estimate of the value, costs and loss of compensation incurred by the other
party as a result of the early termination of this Agreement.
(c) "Termination Amount" means the amount in U.S. Dollars equal
to the arithmetic mean of the respective one-time all-in fees (including
documentation costs) communicated to the non-defaulting party on the earliest
practicable Business Day following the Early Termination Date by each of three
leading commercial banks or investment banking firms in San Francisco, Los
Angeles or New York selected in good faith by the non-defaulting party as the
fee that it would charge to assume, as of the Early Termination Date, all of
the rights and obligations of the defaulting party. However, if one or more
Page 3
<PAGE>
such entities fail so to communicate such a fee, the Termination Amount shall
be determined on the basis of those fees so communicated by the other
entities.
4. LIMITATIONS OF LIABILITY. In no event shall either party hereto
be liable to the other for loss of profit or indirect, special, consequential,
punitive or exemplary damages, arising out of any default under this
Agreement.
5. NOTICES. All notices and other communications required or
permitted to be given hereunder shall be in writing and shall be deemed served
when personally delivered or, if mailed, upon the first to occur of receipt or
the expiration of seventy-two hours after deposit in the United States Postal
Service, certified mail, or if sent by overnight courier service, upon the
first to occur of receipt or 3:00 p.m. (local time at place of delivery) the
next Business Day, addressed to Floating Rate Payer or Fixed Rate Payer at
their respective addresses set forth in the Swap Confirmation.
6. SUCCESSORS; ASSIGNS. This Agreement shall be binding on and inure
to the benefit of the successors and assigns of the parties; provided,
however, that Fixed Rate Payer shall not, without the prior written consent of
Floating Rate Payer, assign (whether by operation of law or otherwise) its
rights and obligations under this Agreement or any interest herein and any
such attempted assignment shall be void and without force or effect.
7. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of California, without giving effect
to any choice of law doctrine.
8. NO THIRD PARTY BENEFICIARY. This Agreement and the payments to be
made by the parties hereunder are solely for the benefit of the parties hereto
for the purposes stated herein and no other person or entity shall have any
rights hereunder or be a beneficiary of either party's obligations under this
Agreement.
9. COUNTERPARTS. This Agreement and the Swap Confirmation may be
executed in any number of counterparts and by each party hereto on separate
counterparts, each of which when executed and delivered shall constitute an
original, but all the counterparts shall together constitute but one and the
same instrument.
10. AMENDMENTS; WAIVERS. Any amendment or waiver of any right under
any provision of this Agreement shall be in writing and, in the case of an
amendment, signed by both parties hereto, or in the case of a waiver, signed
by the party waiving such right. No failure or delay by either party hereto
in exercising any right, power or privilege hereunder shall operate as a
waiver thereof.
11. TRADE DATE; INTEREST AGREEMENT NOT CREDIT COMMITMENT. This
Agreement shall be effective at, and as of, 12:01 a.m., California time, on
the Trade Date. Nothing in this Agreement shall be construed to (i) mean that
Page 4
<PAGE>
Floating Rate Payer is committed to make a loan or extend any other credit to
Fixed Rate Payer, or (ii) amend or modify any contract, instrument or document
executed in connection with the Loan Facility.
12. COSTS, EXPENSES AND ATTORNEYS' FEES. In the event of any dispute
or litigation between the parties hereto, the prevailing party shall be
entitled to recover from the other party, immediately upon demand, all costs
and expenses, including reasonable attorneys' fees, incurred by the prevailing
party in connection with the enforcement of its rights and/or the collection
of any amounts which become due to it under this Agreement, and the
prosecution or defense of any action in any way related to this Agreement,
including any of the foregoing incurred in connection with any bankruptcy
proceeding relating to such other party.
13. ENTIRE AGREEMENT. This Agreement and the Swap Confirmation
constitute the entire agreement and understanding of the parties with respect
to its subject matter and supersedes all oral communications and prior
writings with respect thereto.
14. SECURITY. All obligations of Fixed Rate Payer are secured by a
Standby Letter of Credit issued by Chase Manhattan Bank in the amount of
$175,000 expiring on March 1, 2001 - and referencing Swap #1267.
15. NO RELIANCE. In connection with the negotiation of and entering
into this Agreement, (i) Fixed Rate Payer acknowledges that the Floating Rate
Payer is not acting as a fiduciary or a financial or investment advisor for
it; (ii) Fixed Rate Payer is not relying upon any advice, counsel or
representations (whether written or oral) of the Floating Rate Payer hereto
other than the representations expressly set forth in this Agreement, and in
any Confirmation; (iii) the Floating Rate Payer has not given Fixed Rate
Payer any advice or counsel as to the expected or projected success, return,
performance, result, consequence or benefit (either legal, regulatory, tax,
financial, accounting, or otherwise) of this Agreement; (iv) Fixed Rate
Payer has consulted with its own legal, regulatory, tax, business, investment,
financial and accounting advisors to the extent is has deemed necessary and
has made its own investment, hedging, and trading decisions (including
decisions regarding suitability of any Transaction pursuant to this Agreement)
based upon its own judgment and upon any advice from such advisors as it has
deemed necessary and not upon any view expressed by the other party hereto;
(v) Fixed Rate Payer has determined that the rates, prices, or amounts and
other terms of each Transaction in the indicative quotations (if any) provided
by Floating Rate Payer hereto reflect those in the relevant market for similar
Transactions, and all trading decisions have been the result of arms length
negotiations between the parties; (vi) Fixed Rate Payer is entering into this
Agreement with a full understanding of all of the terms, conditions and risks
thereof (economic and otherwise), and Fixed Rate Payer is capable of assuming
and willing to assume (financially and otherwise) those risks; and (vii) Fixed
Rate Payer is a sophisticated investor.
Page 5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first written above.
Floating Rate Payer: Fixed Rate Payer:
WELLS FARGO BANK, STROUDS, INC.
NATIONAL ASSOCIATION
By: /s/Steven D. Berg By: /s/ Douglas C. Felderman
----------------- ------------------------
Name: Steven D. Berg Name: Douglas C. Felderman
--------------------
Its: Vice President Its: Sr. Vice President - CFO
Page 6
<PAGE>
EMPLOYMENT AGREEMENT WITH CHARLES CHINNI
Amended and Restated Employment Agreement With Charles Chinni
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (this "Agreement")
is made and entered into this 20th day of May, 1998, 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 28, 2001.
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) for fiscal year 1997. Commencing on March 1, 1998,
Employee s salary shall be $390,000.00 per year ($15,000 bi-weekly).
Commencing on March 1, 1999, employee s salary shall be $425,000 per year
($16,346.15 bi-weekly). Employee s compensation is 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
March 31, 2000. Employee understands and agrees that Employer has no
obligation to increase his base salary as a result of such evaluation.
<PAGE>
5. CONTRACT REVIEW. Strouds will reimburse Employee for his
reasonable attorneys fees incurred in drafting and reviewing this Amended and
Restated Employment Agreement, up to Two Thousand Dollars ($2,000.00).
Alternatively, at Employee's request, such payment will be made directly to
Employee's counsel.
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) In recognition of the significant contribution made to
the financial performance of Strouds, Inc. by employee during the 1997 fiscal
year, Employer shall pay Employee a cash bonus of $175,000.00.
(b) Employer shall pay Employee a cash bonus for fiscal
year 1998 in the amount of Ninety-Seven Thousand Five Hundred Dollars
($97,500.00) if Strouds, Inc. achieves a favorable variance in the Adjusted
Net Income (Loss) of One Million Dollars ($1,000,000.00) from the Adjusted Net
Income (Loss) approved by the Board for the Financial Plan for fiscal year
1998. Employer shall pay Employee a cash bonus for fiscal 1998 in the amount
of One Hundred Ninety-Five Thousand Dollars ($195,000.00) if Strouds, Inc.
achieves a favorable variance in the Adjusted Net Income (Loss) of Two
Million Dollars ($2,000,000.00) from the Adjusted Net Income (Loss) approved
by the Board for the Financial Plan for fiscal year 1998. In no event shall
Employee's cash bonus for fiscal year 1998 exceed $195,000.00.
(c) Employer shall pay Employee a cash bonus for fiscal
year 1999 in the amount of One Hundred Six Thousand Two Hundred Fifty Dollars
($106,250.00) if Strouds, Inc. achieves a favorable variance in the Adjusted
Net Income (Loss) of One Million Dollars ($1,000,000.00) from the Adjusted Net
Income (Loss) approved by the Board for the Financial Plan for fiscal year
1999. Employer shall pay Employee a cash bonus for fiscal 1999 in the amount
of Two Hundred-Twelve Thousand Five Hundred Dollars ($212,500.00) if Strouds,
Inc. achieves a favorable variance in the Adjusted Net Income (Loss) of two
million dollars ($2,000,000.00) from the Adjusted Net Income (Loss) approved
by the Board for the Financial Plan for fiscal year 1999. In no event shall
Employee s cash bonus for fiscal year 1999 exceed $212,500.00.
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(d) Adjusted Net Income (Loss) means Income or (Loss)
before any tax benefit and after any bonus expense.
(e) 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.
(f) 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
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) In recognition of the significant contribution made to
the financial performance of Strouds, Inc. by Employee during the 1997 fiscal
year, Employee shall be granted a nonqualified stock option pursuant to the
Plan to purchase 100,000 shares of common stock on the date that Employee
receives the bonus described in paragraph 7 (a).
(c) (i) At the conclusion of the 1998 fiscal year,
employee shall be granted, subject to the provisions of Paragraph 8 (f), a
nonqualified stock option under the Plan to purchase 50,000 shares of Common
Stock. (ii) If employee receives a $97,500 cash bonus for fiscal year 1998,
at the time of payment of the cash bonus, Employee shall be granted, subject
to the provisions of Paragraph 8 (f), a nonqualified stock option under the
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Plan to purchase 125,000 shares of the Common Stock in addition to the 50,000
shares set forth in Paragraph 8(c)(i). (iii) If Employee receives a cash
bonus of $195,000 for fiscal year 1998, at the time of payment of the cash
bonus, Employee shall be granted, subject to the provisions of Paragraph 8
(f), a nonqualified stock option under the Plan to purchase 175,000 shares of
the Common Stock in addition to the 50,000 shares set forth in Paragraph
(8)(c)(i). (iv) 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 in
addition to the shares granted in Paragraph 8(c)(i)) if it determines, in its
sole discretion, that it is nonetheless appropriate to make such grant upon
review of all of the circumstances leading to the fiscal result for the year
and the margin by which the goal was not attained. In no event will Employee
receive an option to purchase more than 225,000 shares, as described in
Paragraph 8(c)(iii).
(d) (i) At the conclusion of the 1999 fiscal year,
employee shall be granted, subject to the provisions of Paragraph 8 (f), a
nonqualified stock option under the Plan to purchase 50,000 shares of Common
Stock. (ii) If employee receives a $106,250.00 cash bonus for fiscal year
1999, at the time of payment of the cash bonus, Employee shall be granted,
subject to the provisions of Paragraph 8 (f), a nonqualified stock option
under the Plan to purchase 125,000 shares of the Common Stock in addition to
the 50,000 shares set forth in Paragraph 8(c)(i). (iii) If Employee receives
a cash bonus of $212,500.00 for fiscal year 1999, at the time of payment of
the cash bonus, Employee shall be granted, subject to the provisions of
Paragraph 8 (f), a nonqualified stock option under the Plan to purchase
175,000 shares of the Common Stock in addition to the 50,000 shares set forth
in Paragraph (8)(c)(i). (iv) In the event Strouds, Inc. does not achieve the
established goal for the 1999 fiscal year, the Board of Directors may
nonetheless grant additional stock options under the Plan (up to a maximum of
50,000 shares in addition to the shares granted in Paragraph 8(c)(i)) if it
determines, in its sole discretion, that it is nonetheless appropriate to make
such grant upon review of all of the circumstances leading to the fiscal
result for the year and the margin by which the goal was not attained. In no
event will Employee receive an option to purchase more than 225,000 shares, as
described in Paragraph 8(c)(iii).
(e) 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, as long as Employee remains employed by Strouds on
the anniversary date of the granting of such options. If Employee is
terminated pursuant to paragraph 15(g), any options which have been granted to
Employee shall vest immediately, except to the extent prohibited by the Plan.
(f) If stock options would otherwise be granted to
Employee under any of the provisions of either paragraph 8(c) or paragraph 8
(d), the Board of Directors may elect to provide a lump sum cash payment in
lieu of the stock options. The dollar amount of the lump sum cash payment
shall be established by the Board of Directors based on its good faith
determination as to the value of the stock options that would have otherwise
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been granted, taking into consideration all of the circumstances existing at
the time, including, but not limited to, the fact that the options, if
granted, would not have vested immediately, but would have been subject to a
vesting schedule. The determination of the Board of Directors as to the value
of the options and, hence, the amount of the cash payment, shall be final and
binding on all parties.
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.
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
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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 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.
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(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 Employer 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:
(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;
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(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
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
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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 60 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.
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.
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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
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.
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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 1, 1998 STROUDS, INC.
By /s/ Wilfred C. Stroud
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Date: July 1, 1998 /s/ Charles Chinni
------------------
Charles Chinni
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