<PAGE>
As filed with the Securities and Exchange Commission on October 12, 1999
_____________________________________________________________________________
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 28, 1999
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 6, 1999: 7,080,500
<PAGE>
STROUDS, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Balance Sheets as of August 28, 1999
(Unaudited) and February 27, 1999 3
Condensed Statements of Operations for the
Thirteen and Twenty-Six Weeks Ended August 28,
1999 and August 29, 1998 (Unaudited) 4
Condensed Statements of Cash Flows for the
Twenty-Six Weeks Ended August 28, 1999
and August 29, 1998 (Unaudited) 5
Notes to Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 16
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
- ---------------------------------
ITEM 1. FINANCIAL STATEMENTS
STROUDS, INC.
CONDENSED BALANCE SHEETS
AUGUST 28, FEBRUARY 27,
(in thousands, except share data) 1999 1999
- --------------------------------- -------- --------
ASSETS (Unaudited)
Current assets:
Cash $ 1,001 $ 269
Accounts receivable 1,433 1,763
Inventory 56,330 60,632
Other 4,508 3,993
-------- --------
Total current assets 63,272 66,657
Property and equipment - at cost, net of accumulated
depreciation and amortization 19,977 21,354
Excess of cost over net assets acquired, net of
accumulated amortization 7,144 7,273
Other assets 974 959
-------- --------
Total assets $ 91,367 $ 96,243
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 597 $ 624
Accounts payable 7,927 15,565
Accrued expenses 12,051 16,027
Restructuring and store closure reserves 2,388 3,829
-------- --------
Total current liabilities 22,963 36,045
Long-term debt 38,129 26,887
Other non-current liabilities 3,163 3,194
-------- --------
Total liabilities 64,255 66,126
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 28, 1999, 7,064,520; and February 27, 1999,
8,624,131 shares 1 1
Treasury stock at cost; August 28, 1999, 1,800,000
shares (1,890) --
Additional paid-in capital 39,182 39,146
Accumulated deficit (10,181) (9,030)
-------- --------
Total stockholders' equity 27,112 30,117
-------- --------
Total liabilities and stockholders' equity $ 91,367 $ 96,243
======== ========
See accompanying notes to condensed financial statements.
Page 3
<PAGE>
STROUDS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
13 WEEKS ENDED 26 WEEKS ENDED
---------------------- ----------------------
August 28, August 29, August 28, August 29,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 53,399 $ 54,190 $107,004 $109,205
Costs and expenses:
Cost of sales, buying and occupancy 37,734 39,190 76,612 79,527
Selling and administrative expenses 14,854 14,578 30,044 29,085
Amortization of excess of cost over
net assets acquired 64 64 129 129
--------- --------- --------- ---------
52,652 53,832 106,785 108,741
--------- --------- --------- ---------
Operating income 747 358 219 464
Other income 151 65 181 125
Interest expense, net (867) (789) (1,551) (1,551)
--------- --------- --------- ---------
Net income (loss) $ 31 $ (366) $ (1,151) $ (962)
========= ========= ========= =========
Basic and Diluted:
Net income (loss) per share $ 0.00 $ (0.04) $ (0.16) $ (0.11)
========= ========= ========= =========
Weighted average shares outstanding 7,055 8,593 7,395 8,586
========= ========= ========= =========
See accompanying notes to condensed financial statements.
</TABLE>
Page 4
<PAGE>
STROUDS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
26 WEEKS ENDED
---------------------
AUGUST 28, AUGUST 29,
1999 1998
--------- ---------
Cash flows from operating activities:
Net loss $ (1,151) $ (962)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization of property
and equipment 2,600 2,340
Amortization of excess of cost over net
assets acquired 129 129
(Increase) decrease in assets:
Accounts receivable 330 (326)
Merchandise inventory 4,002 3,276
(Decrease) increase in accounts payable and
accrued expenses (7,244) 959
Decrease in restructuring reserve (970) (4,566)
Other (559) 306
--------- ---------
Net cash provided by (used in) operating
activities (2,863) 1,156
--------- ---------
Cash flows from investing activities:
Capital expenditures (1,684) (2,684)
--------- ---------
Net cash used in investing activities (1,684) (2,684)
--------- ---------
Cash flows from financing activities:
Net borrowings under long-term debt 11,215 981
(Increase) decrease in overdraft (4,082) 808
Repurchase of stock (1,890) ---
Other equity transactions 36 32
--------- ---------
Net cash provided by financing activities 5,279 1,821
--------- ---------
Net increase in cash 732 293
Cash at beginning of period 269 518
--------- ---------
Cash at end of period $ 1,001 $ 811
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 1,398 $ 1,596
========= =========
See accompanying notes to condensed financial statements.
Page 5
<PAGE>
STROUDS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(1) INTERIM FINANCIAL STATEMENTS
The accompanying Condensed Balance Sheet as of August 28, 1999 and the related
Condensed Statements of Operations for the 13 and 26 weeks ended August 28,
1999 and August 29, 1998 and Condensed Statements of Cash Flows for the 26
weeks ended August 28, 1999 and August 29, 1998 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 27, 1999 is
derived from the audited financial statements included in the Company's 1998
Annual Report on Form 10-K/A. 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 1998 Annual Report filed with the Securities and
Exchange Commission on Form 10-K/A. The results of operations for the 13 and
26 weeks ended August 28, 1999 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.
Segment Information
Effective March 1, 1998, the Company adopted 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. The
Company operates in two business segments, superstores and outlet stores. See
note 6.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
requires disclosure of the fair value of certain financial instruments. Cash
and cash equivalents, accounts receivable, accounts payable and accrued
expenses are reflected in the financial statements at carrying value which
approximates fair value due to the short-term nature of these instruments.
The carrying value of the Company's borrowings approximates the fair value
based on the current rates available to the Company for similar instruments.
Reclassifications
Certain reclassifications have been made to the February 27, 1999 and August
29, 1998 amounts to conform to the August 28, 1999 presentation.
Page 6
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STROUDS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(3) PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
AUGUST 28, FEBRUARY 27,
(in thousands) 1999 1999
- -------------- --------- ---------
Furniture, fixtures and equipment $ 44,369 $ 44,351
Leasehold improvements 8,356 8,205
--------- ---------
52,725 52,556
Accumulated depreciation and amortization (32,748) (31,202)
--------- ---------
$ 19,977 $ 21,354
========= =========
(4) RESTRUCTURING
The Company initiated a comprehensive restructuring and cost reduction plan
(the "Restructuring Plan"), resulting in pretax restructuring and asset
impairment charges of $16,250,000 in fiscal 1996 ($3.2 million related to
write-downs of merchandise inventory was included in cost of sales). The
write-down of merchandise inventory was based on management's estimate of
markdowns necessary to liquidate underperforming merchandise categories. In
determining the restructuring charge for impairment, the Company evaluated the
fair market value of the impaired assets based on historical experience of the
liquidation value of such assets. 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. The Restructuring Plan included the
closure of 9 stores which were to be closed by not renewing leases upon
expiration and negotiating settlements with landlords for stores with
unexpired leases at dates of anticipated closure. As of February 27, 1999,
the Company had closed 7 stores related to its restructuring efforts.
In June 1999, the Company closed 1 store in the Washington, D.C. market. The
Company plans to close 1 more store related to its Restructuring Plan. As of
August 28, 1999, no changes have been made to the estimated Restructuring Plan
costs and no additional charges were recorded to operations. During the first
half of fiscal 1999, cash used related to the Restructuring Plan totaled
$432,000, relating primarily to workforce reductions and consulting and
advisory fees associated with the Company's restructuring and cost reduction
efforts. The Company anticipates the closure of the final store, and
therefore, its Restructuring Plan by the end of its third quarter.
Page 7
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STROUDS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(4) RESTRUCTURING (Continued)
The following table summarizes the original restructuring charge:
(in thousands)
- ---------------------------------------
Occupancy, lease termination and other
costs related to store closures $ 7,375
Asset write-down 4,015
Merchandise inventory reserves 3,200
Employee severance and related costs 1,660
---------
$ 16,250
=========
The asset write-downs have been recorded as a permanent reduction in the cost
basis of the related assets. The merchandise inventory write-down has been
recorded as a reserve against inventories and the employee severance has been
recorded in accrued expenses in the accompanying balance sheet. The
components of the changes in the occupancy and lease costs is as follows:
(in thousands)
- -----------------------------------------
1996 Provision, March 1, 1997 $ 7,375
Fiscal 1997 payment and asset write-downs 2,176
---------
Reserve balance, February 28, 1998 5,199
Fiscal 1998 payment and asset write-downs 703
Adjustment ** (667)
---------
Reserve balance, February 27, 1999 3,829
Fiscal 1999 payment and asset write-downs
through August 28, 1999 268
Adjustment ** (1,173)
---------
Reserve balance, August 28, 1999 $ 2,388
=========
** The adjustments made to the reserve result from a periodic reassessment of
the Company's position with respect to its outstanding retail store leases.
The reductions in the reserve have been reflected in the statement of
operations during the period in which the adjustments were recorded.
Also, during fiscal 1998 and during the second quarter of fiscal 1999, the
Company recorded increases to its merchandise inventory reserves related to
the retail stores included in the Restructuring Plan of $780,000 and
$1,353,000, respectively. These charges were recorded in cost of sales during
the respective periods.
Page 8
<PAGE>
STROUDS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(4) RESTRUCTURING (Continued)
The total revenue and operating losses related to the 9 stores identified in
the Restructuring Plan is summarized as follows:
February 27, February 28, March 1,
(in thousands) 1999 1998 1997
- -------------- ----------- ----------- ---------
Revenues $ 9,283 $12,995 $15,232
=========== =========== =========
Operating Loss $ 3,038 $ 4,658 $ 5,026
=========== =========== =========
(5) LONG-TERM DEBT
At August 28, 1999, the Company had outstanding borrowings of $37,352,000
under its $50,000,000 revolving credit agreement (the "Credit 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 28, 1999.
Included in the Credit Facility is a $7,000,000 letter of credit sub-facility.
As of August 28, 1999, the Company had outstanding letters of credit amounting
to $1,758,000 for purchase commitments to foreign suppliers under this sub-
facility.
On September 11, 1998, the Company entered into an Interest Rate Swap
Agreement (the "Agreement") with a financial institution. The 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 6.0% plus 2.5% until this
Agreement expires on March 1, 2001. The Company has accounted for this hybrid
derivative instrument at fair value. As of August 28, 1999, the fair value of
the agreement was $38,000 and is recorded as a component of other assets on
the accompanying balance sheet.
(6) SEGMENT INFORMATION
In accordance with the requirements of SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," the Company's reportable
business segments and respective accounting policies, policies of the segments
are the same as those described in note 2. Management evaluates segment
performance based primarily on net sales and earnings (losses) from
operations. Interest income and expense is evaluated on an aggregate basis
and not allocated to the Company's business segments.
Page 9
<PAGE>
STROUDS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(6) SEGMENT INFORMATION (Continued)
Segment information is summarized as follows:
13 WEEKS ENDED 26 WEEKS ENDED
----------------------- -----------------------
August 28, August 29, August 28, August 29,
IN THOUSANDS 1999 1998 1999 1998
- ----------------------- ----------- ---------- ----------- -----------
Net sales:
Superstores $ 44,437 $ 45,500 $ 89,126 $ 91,590
Outlet stores 8,962 8,690 17,878 17,615
---------- ---------- ---------- ----------
$ 53,399 $ 54,190 $ 107,004 $ 109,205
========== ========== ========== ==========
Operating income:
Superstores $ 690 $ 342 $ 101 $ 263
Outlet stores 57 16 118 201
---------- ---------- ---------- ----------
$ 747 $ 358 $ 219 $ 464
========== ========== ========== ==========
August 28, February 27,
IN THOUSANDS 1999 1998
- ------------------------------- ----------- -----------
Total assets:
Superstores $ 62,201 $ 65,515
Outlet stores 7,611 7,330
Other (1) 21,555 23,398
---------- ----------
$ 91,367 $ 96,243
========== ==========
- -----------------------------------------------------------------------------
(1) Other includes corporate and distribution center property, equipment and
assets which are not attributed to a business segment.
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. The Company defines its fiscal year as
the period in which most of the business activity occurs (e.g., the year ended
February 27, 1999 is referred to as fiscal 1998).
Page 10
<PAGE>
Restructuring
The Company initiated a comprehensive restructuring and cost reduction plan
(the "Restructuring Plan"), resulting in pretax restructuring and asset
impairment charges of $16,250,000 in fiscal 1996 ($3.2 million related to
write-downs of merchandise inventory was included in cost of sales). The
write-down of merchandise inventory was based on management's estimate of
markdowns necessary to liquidate underperforming merchandise categories. In
determining the restructuring charge for impairment, the Company evaluated the
fair market value of the impaired assets based on historical experience of the
liquidation value of such assets. 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. The Restructuring Plan included the
closure of 9 stores which were to be closed by not renewing leases upon
expiration and negotiating settlements with landlords for stores with
unexpired leases at dates of anticipated closure. As of February 27, 1999,
the Company had closed 7 stores related to its restructuring efforts.
In June 1999, the Company closed 1 store in the Washington, D.C. market. The
Company plans to close 1 more store related to its Restructuring Plan. As of
August 28, 1999, no changes have been made to the estimated Restructuring Plan
costs and no additional charges were recorded to operations. The Company
anticipates the closure of the final store, and therefore, its Restructuring
Plan by the end of its third quarter.
RESULTS OF OPERATIONS
13 Weeks Ended August 28, 1999 Compared to the 13 Weeks Ended August 29, 1998
- -----------------------------------------------------------------------------
Net sales for the thirteen weeks ended August 28, 1999 decreased $0.8 million,
or 1.5%, to $53.4 million versus $54.2 million in the same period last year.
Comparable store sales decreased $0.5 million, or 1.1%, for the period. Sales
from new stores and expanded or replacement stores increased by $1.1 million.
Sales were reduced by $1.4 million due to 4 store closures.
Net sales for superstores for the 13 weeks ended August 28, 1999 decreased
$1.1 million, or 2.3%, to $44.4 million versus $45.5 million in the same
period last year. Comparable superstore sales decreased $0.8 million, or
1.9%, for the period. Outlet store net sales for the 13 weeks ended August
28, 1999 increased $0.3 million, or 3.2%, to $9.0 million versus $8.7 million
in the same period last year. Comparable outlet store sales increased $0.3
million, or 3.2%, for the period.
Management believes that the decrease in superstore sales is attributable to
the fact that there were no intense promotional sales for inventory
liquidation this year as there were last year for the closure of two
superstores and to eliminate underperforming merchandise categories as stated
in the Company's Restructuring Plan. Approximately 18% of the comparable
stores were affected by new competitive openings for the second quarter of
1999 compared to approximately 13% for the same period last year.
Cost of sales, buying and occupancy for the 13 weeks ended August 28, 1999
were $37.7 million versus $39.2 million for the same period a year ago, a $1.5
million decrease. This dollar decrease was attributable, primarily, to the
decline in sales volume versus last year. As a percent of net sales, cost of
sales, buying and occupancy decreased to 70.7% from 72.3% for the same period
Page 11
<PAGE>
a year ago. The improved gross margin points were primarily due to a lower
level of markdown volume versus the prior year when large markdowns were taken
to liquidate inventory of two stores for closure and to eliminate
underperforming merchandise categories as stated in the Company's
Restructuring Plan.
Selling and administrative expenses for the 13 weeks ended August 28, 1999
increased $0.3 million to $14.9 million versus $14.6 million for the same
period in fiscal 1998 and increased as a percentage of net sales from 26.9% to
27.8%. The increase was primarily due to increased labor staffing and higher
credit card fees due to increased consumer credit card usage.
As a result of the factors noted above, the Company had operating income for
the 13 weeks ended August 28, 1999 of $0.7 million versus $0.4 million for the
same period a year ago, a $0.3 million increase.
The operating income for superstores for the 13 weeks ended August 28, 1999
was $0.7 million versus $0.3 million for the same period a year ago. The
operating income for the outlet stores for the 13 weeks ended August 28, 1999
was $0.1 million versus $0.0 million for the same period a year ago. The
increases in operating profit for the segments were a result of the various
factors discussed above.
Interest expense, net, increased $0.1 million to $0.9 million for the 13 weeks
ended August 28, 1999 versus $0.8 million for the same period in fiscal 1998.
The increase was primarily the result of slightly higher average borrowings
this year.
The Company recorded no income tax expense associated with its income for the
13 week period ended August 28, 1999 or income tax benefit associated with its
loss for the 13 week period ended August 29, 1998 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 28, 1999 Compared to the 26 Weeks Ended August 29, 1998
- -----------------------------------------------------------------------------
Net sales for the 26 weeks ended August 28, 1999 decreased $2.2 million, or
2.0%, to $107.0 million versus $109.2 million in the same period last year.
Comparable store sales decreased $0.8 million, or 0.7%, for the period. Sales
from new stores and expanded or replacement stores increased by $2.4 million.
Sales were reduced by $3.8 million due to 4 store closures.
Net sales for superstores for the 26 weeks ended August 28, 1999 decreased
$2.5 million, or 2.7%, to $89.1 million versus $91.6 million in the same
period last year. Comparable superstore sales decreased $0.8 million, or
0.9%, for the period. Outlet store net sales for the 26 weeks ended August
28, 1999 increased $0.3 million, or 1.5%, to $17.9 million versus $17.6
million in the same period last year. Comparable outlet store sales remained
the same for the 26 weeks ended August 28, 1999 as for the period ended August
29, 1998.
Management believes that the decrease in superstore sales is attributable to
the fact that there were no intense promotional sales for inventory
liquidation this year as there were last year for the closure of two
superstores and to eliminate underperforming merchandise categories as stated
in the Company's Restructuring Plan. The increase in outlet store sales was
due to one more store at the end of August 28, 1999 over the same period last
year.
Page 12
<PAGE>
Cost of sales, buying and occupancy for the 26 weeks ended August 28, 1999
were $76.6 million versus $79.5 million for the same period a year ago, a $2.9
million decrease. This dollar decrease was attributable, primarily, to the
decline in sales volume versus last year. As a percent of net sales, cost of
sales, buying and occupancy decreased to 71.6% from 72.8% for the same period
a year ago. The improved gross margin points were primarily due to a lower
level of markdown volume versus the prior year when large markdowns were taken
to liquidate inventory of two stores for closure and to eliminate
underperforming merchandise categories as stated in the Company's
Restructuring Plan.
Selling and administrative expenses for the 26 weeks ended August 28, 1999
increased $0.9 million to $30.0 million versus $29.1 million for the same
period in fiscal 1998 and increased as a percentage of net sales from 26.6% to
28.1%. The increase was primarily due to increased labor staffing and higher
credit card fees due to increased consumer credit card usage.
The Company had operating income for the 26 weeks ended August 28, 1999 of
$0.2 million versus $0.5 million for the same period a year ago, a $0.3
million decrease, as a result of the factors noted above.
The operating income for superstores for the 26 weeks ended August 28, 1999
was $0.1 million versus $0.3 million for the same period a year ago. The
operating income for the outlet stores for the 26 weeks ended August 28, 1999
was $0.1 million versus $0.2 million for the same period a year ago. The
decreases in operating profit for the segments were a result of the various
factors discussed above.
Interest expense, net, remained the same at $1.6 million for the 26 weeks
ended August 28, 1999 and August 29, 1998.
The Company recorded no income tax benefit associated with its losses for the
26 week periods ended August 28, 1999 and August 29, 1998 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
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 essentially with internally generated
funds and its credit facilities. At August 28, 1999, the Company's working
capital was $40.3 million, while advances from its Credit Facility were $37.4
million. The Company had $7.4 million available for borrowings under its
Credit Facility as determined by the Company's eligible "borrowing base" at
August 28, 1999.
Cash used in operating activities for the 26 weeks ended August 28, 1999 was
$2.9 million. During the 26 week period ended August 28, 1999, accounts
payable and accrued expenses decreased $7.2 million. In the first half of
fiscal 1999, the Company conducted going out of business sales at 2 locations,
1 store closed in May 1999 and 1 store closed in June 1999. Cash used in
restructuring payments was $0.4 million.
Net cash used in investing activities for the 26 weeks ended August 28, 1999
was $1.7 million. These funds were primarily used for capital expenditures
for improvements to the Company's management information systems development,
1 new superstore in southern California and existing store refurbishments.
Page 13
<PAGE>
Cash provided by financing activities for the 26 weeks ended August 28, 1999
was $5.3 million. The Company had net borrowings of $11.2 million primarily
to meet working capital needs and to repurchase 1,800,000 shares of its
outstanding Common Stock in a private transaction for total consideration of
$1.9 million.
The Company's capital expenditures for the remainder of fiscal 1999 are
currently expected to be approximately $3.3 million and will be related
primarily to new store development, existing store expansions and
refurbishments and improvements to its management information systems.
Management believes that funds generated from operations, its Credit Facility
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 1999.
YEAR 2000
The Company has conducted a comprehensive review of its computer systems to
identify those systems that could be affected by the "Year 2000" (or "Y2K")
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. The Year 2000 issue is
believed to affect virtually all companies and organizations, including the
Company. Any of the Company's programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system failure or miscalculations.
The Company is reliant on computer-based technology and utilizes a variety of
proprietary and third-party applications. The Company's retail functions, such
as merchandise procurement and distribution, inventory control and
point-of-sale transactions, generally use third-party applications, with
proprietary additions to fit unique business requirements. Failure in these
key areas could impact the Company's ability to transact business in an
efficient manner. The Company is also dependent on a number of key vendors
using similar technology for ongoing timely and consistent delivery of
merchandise to support retail operations. A significant disruption in the
flow of key items into stores could also negatively impact results. To a much
lesser degree, the Company also relies on certain "imbedded processor" systems
for communications, security and other basic process control functions, the
complete failure of which could also impact operations.
In fiscal 1998, the Company spent approximately $1.4 million for the purpose
of installing new merchandise, distribution and financial software. This
major effort included complete replacement of the previously used mainframe
computer systems and modified third-party software with Y2K-certified hardware
and software in fiscal 1998 as well as upgrading all in-store point-of-sale
computer systems to be Y2K-compliant. These efforts have been substantially
completed with installation and testing of the mainframe systems for
merchandising, accounting, distribution and inventory control prior to the end
of fiscal 1998. The in-store system upgrades have been completed and were
installed in every retail store in the first quarter of fiscal 1999. The
Company anticipates spending approximately $0.2 million in fiscal 1999 for
additional upgrades to these systems. A compliant third-party provider for
payroll software will be implemented in October 1999. Voice communications
have been upgraded to compatible systems in the first quarter of fiscal 1999.
Data communications, credit card and check processing and non-critical
software packages were tested to assure Y2K compatibility in the second
quarter of fiscal 1999. The Company has successfully completed an integrated
test of all critical internal systems in September 1999. Based upon this
Page 14
<PAGE>
simulation, all business areas confirmed readiness to transact business
through the Year 2000 transition. However, if the modifications to the
Company's computer systems should fail in the last hours, the Year 2000
problem may have a material impact on the operations of the Company. Such
material impacts could require the Company to manually record sales, issue
purchases orders to suppliers, pay invoices from vendors and maintain its
books and records for a period of time.
By September 1999, the majority of the Company's key vendors' electronic data
interchange systems have been converted to be Y2K compliant. Testing of the
final few vendors for compliance will be completed by December 1999. The
Company expects to deal with any remaining "at-risk" systems or supplier
issues and develop appropriate contingency plans in the third quarter of
fiscal 1999. These contingency plans may include such actions as making
alternate supplier arrangements, rescheduling deliveries, or utilizing
alternate methods of operation during this critical period.
Notwithstanding that the Company has been proceeding diligently with the
implementation of its own compliance program, including aspects thereof
directed to ascertaining Year 2000 compliance by third-parties, there can be
no assurance that the Company's operations will not experience disruptions due
to the failure of third parties (including software, data processing, and
other vendors) with which the Company has commercial relationships to become
fully Year 2000 compliant in a timely manner. In the worst case, the Company
may experience extensive delays in merchandise shipments from suppliers and
therefore experience high levels of out-of-stock goods in its stores. Such
out-of stock scenarios could have a material impact on sales and related
profits for an unspecified period of time and accordingly, cause an adverse
change in the Company's stock price to occur.
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/A for the Fiscal
Year Ended February 27, 1999.
Page 15
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's $50 million Credit Facility has interest payable at a rate
equivalent to the Chase Manhattan Bank Rate plus 0.25% per annum or LIBOR plus
2.50% per annum (8.3% and 7.6% at August 28, 1999, respectively). Changes in
interest rates which dramatically increase the interest rate on the credit
facility would make it more costly to borrow proceeds under that facility and
may impede the Company's growth strategies if management determines that the
costs associated with borrowing funds are too high to implement these
strategies.
The Company does not hold derivative investments and does not earn foreign-
source income. All of the Company's net sales are realized in dollars and
almost all of the revenues are from customers in the United States.
Therefore, the Company does not believe that it has any significant direct
foreign currency exchange risk.
Page 16
<PAGE>
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 June 30, 1999, the
following individuals were elected to the Board of Directors:
Votes For Votes Against
--------- -------------
Charles R. Chinni 5,303,450 585,722
Wilfred C. Stroud 5,303,493 585,679
Larry R. Bemis 5,303,493 585,679
Dale D. Achabal 5,303,224 585,948
Marco F. Weiss 5,296,812 592,360
Richard F. Clayton 5,303,493 585,679
Marshall S. Geller 5,303,493 585,679
The following proposal was approved at the Company's Annual Meeting:
Votes For Votes Against Votes Abstain
--------- ------------- -------------
Ratify the appointment of KPMG LLP
as the Company's independent
public accountants for the fiscal
year ending on February 26, 2000. 5,303,388 5,905 544,679
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
The following exhibits are filed as part of, or incorporated by reference
into, this report.
Exhibit No. Description
- ----------- -----------
10 Fourth Amendment to the Amended and Restated 1994 Equity
Participation Plan dated June 30, 1999.
27 Financial Data Schedule
b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the quarter ended
August 28, 1999.
Page 17
<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 6, 1999
STROUDS, INC.
(Registrant)
/s/ Charles Chinni
---------------------
Charles Chinni
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Gary A. Van Wagner
------------------------
Gary A. Van Wagner
Corporate Controller
(Principal Accounting Officer)
Page 18
<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-26-2000 FEB-26-2000
<PERIOD-START> MAY-30-1999 FEB-28-1999
<PERIOD-END> AUG-28-1999 AUG-28-1999
<CASH> 1,001 1,001
<SECURITIES> 0 0
<RECEIVABLES> 1,433 1,433
<ALLOWANCES> 0 0
<INVENTORY> 56,330 56,330
<CURRENT-ASSETS> 63,272 63,272
<PP&E> 52,725 52,725
<DEPRECIATION> 32,748 32,748
<TOTAL-ASSETS> 91,367 91,367
<CURRENT-LIABILITIES> 22,963 22,963
<BONDS> 0 0
0 0
0 0
<COMMON> 1 1
<OTHER-SE> 27,111 27,111
<TOTAL-LIABILITY-AND-EQUITY> 91,367 91,367
<SALES> 53,399 107,004
<TOTAL-REVENUES> 53,399 107,004
<CGS> 37,734 76,612
<TOTAL-COSTS> 37,734 76,612
<OTHER-EXPENSES> 14,918 30,173
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 867 1,551
<INCOME-PRETAX> 31 (1,151)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 31 (1,151)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 31 (1,151)
<EPS-BASIC> 0.00 (0.16)
<EPS-DILUTED> 0.00 (0.16)
</TABLE>
FOURTH AMENDMENT TO
THE AMENDED AND RESTATED 1994 EQUITY PARTICIPATION PLAN
OF STROUDS, INC.
This Fourth Amendment to the Amended and Restated 1994 Equity Participation
Plan of Strouds, Inc. is adopted as of June 30, 1999 by the Board of Directors
(the "Board') of Strouds, Inc., a Delaware corporation (the "Company").
RECITALS
WHEREAS, the Company maintains the Amended and Restated 1994 Equity
Participation Plan of the Company, effective as of September 1, 1994,
(hereinafter the "Plan"); and
WHEREAS, pursuant to Section 10.2 of the Plan, the Board may amend the Plan
from time to time;
NOW THEREFORE, BE IT RESOLVED, that the Plan be amended as follows,
effective June 30, 1999:
1. Section 3.4(d) shall be amended and restated in its entirety as
follows:
(d) During the term of the Plan, each person who is an
Independent Director as of the date of the initial public
offering of Common Stock automatically shall be granted an
option to purchase ten thousand (10,000) shares of Common
Stock (subject to adjustment as provided in Section 10.3)
on the date of such initial public offering. When a person
is initially elected to the Board following the date of the
initial public offering of Common Stock and is then an
Independent Director, each such new Independent Director
automatically shall (i) be granted an Option to purchase ten
thousand (10,000) shares of Common Stock (subject to
adjustment as provided in Section 10.3) on the date of his
or her election to the Board, and (ii) an Option to
purchase 10,000 shares of Common Stock (subject to
adjustment as provided in Section 10.3) on the date of each
annual meeting of stockholders after such initial election
at which the Independent Director is re-elected to the
Board. Members of the Board who are Employees who
subsequently retire from the Company and remain on the Board
will not receive an Option grant pursuant to Section 3.4(d)
(i) of the preceding sentence, but to the extent that they
are otherwise eligible, will receive, after retirement from
the Company, Options as described in clause (ii) of the
preceding sentence. All of the foregoing Option grants
authorized by this Section 3.4(d) are subject to stockholder
approval of the Plan.
2. Section 10.2 shall be amended by deleting the third sentence of the
paragraph.
I hereby certify that the foregoing Fourth Amendment to the Plan was duly
adopted by the Board of Directors of Strouds, Inc. on June 30, 1999.
By /s/Linda McNamara
-----------------
Linda McNamara
ASSISTANT SECRETARY
