<PAGE>
As filed with the Securities and Exchange Commission on January 11, 2000
_____________________________________________________________________________
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 November 27, 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 December 31, 1999: 7,080,500
<PAGE>
STROUDS, INC.
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Balance Sheets as of November 27, 1999
(Unaudited) and February 27, 1999 3
Condensed Statements of Operations for the
Thirteen and Thirty-Nine Weeks Ended November 27,
1999 and November 28, 1998 (Unaudited) 4
Condensed Statements of Cash Flows for the
Thirty-Nine Weeks Ended November 27, 1999
and November 28, 1998 (Unaudited) 5
Notes to Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 20
Page 2
<PAGE>
PART I. FINANCIAL INFORMATION
- ---------------------------------
ITEM 1. FINANCIAL STATEMENTS
STROUDS, INC.
CONDENSED BALANCE SHEETS
NOVEMBER 27, FEBRUARY 27,
(in thousands, except share data) 1999 1999
- --------------------------------- -------- --------
ASSETS (Unaudited)
Current assets:
Cash $ 316 $ 269
Accounts receivable 3,400 1,763
Inventory 66,699 60,632
Other 3,865 3,993
-------- --------
Total current assets 74,280 66,657
Property and equipment - at cost, net of accumulated
depreciation and amortization 19,232 21,354
Excess of cost over net assets acquired, net of
accumulated amortization 7,079 7,273
Other assets 1,033 959
-------- --------
Total assets $101,624 $ 96,243
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 612 $ 624
Accounts payable 17,468 15,565
Accrued expenses 16,551 16,027
Restructuring reserve -- 3,829
-------- --------
Total current liabilities 34,631 36,045
Long-term debt 36,495 26,887
Other non-current liabilities 3,108 3,194
-------- --------
Total liabilities 74,234 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
November 27, 1999, 7,080,500 shares; and
February 27, 1999, 8,624,131 shares 1 1
Treasury stock at cost; November 27, 1999,
1,800,000 shares (1,890) --
Additional paid-in capital 39,212 39,146
Accumulated deficit (9,933) (9,030)
-------- --------
Net stockholders' equity 27,390 30,117
-------- --------
Total liabilities and stockholders' equity $101,624 $ 96,243
======== ========
See accompanying notes to condensed financial statements.
Page 3
<PAGE>
STROUDS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
----------------------- -----------------------
November 27, November 28, November 27, November 28,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 57,192 $ 59,162 $164,196 $168,367
Costs and expenses:
Cost of sales, buying and occupancy 40,143 41,751 116,755 121,278
Selling and administrative expenses 15,928 16,150 45,972 45,235
Amortization of excess of cost over
net assets acquired 65 65 194 194
--------- --------- --------- ---------
56,136 57,966 162,921 166,707
--------- --------- --------- ---------
Operating income 1,056 1,196 1,275 1,660
Other income 61 63 242 188
Interest expense, net (869) (753) (2,420) (2,304)
--------- --------- --------- ---------
Net income (loss) $ 248 $ 506 $ (903) $ (456)
========= ========= ========= =========
Earnings Per Share:
Basic:
Net income (loss) per share $ 0.04 $ 0.06 $ (0.12) $ (0.05)
========= ========= ========= =========
Weighted average shares outstanding 7,080 8,600 7,290 8,591
========= ========= ========= =========
Diluted:
Net income (loss) per share $ 0.03 $ 0.06 $ (0.12) $ (0.05)
========= ========= ========= =========
Weighted average shares outstanding 7,316 8,813 7,290 8,591
========= ========= ========= =========
See accompanying notes to condensed financial statements.
</TABLE>
Page 4
<PAGE>
STROUDS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
39 WEEKS ENDED
---------------------
November 27, November 28,
1999 1998
--------- ---------
Cash flows from operating activities:
Net loss $ (903) $ (456)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of property
and equipment 3,939 3,493
Amortization of excess of cost over net
assets acquired 194 194
Increase in assets:
Accounts receivable (1,637) (919)
Merchandise inventory (6,067) (2,377)
Increase in accounts payable and
accrued expenses 1,823 3,389
Decrease in restructuring reserve (3,367) (6,409)
Other (32) 994
--------- ---------
Net cash used in operating activities (6,050) (2,091)
--------- ---------
Cash flows from investing activities:
Capital expenditures (2,279) (3,841)
--------- ---------
Net cash used in investing activities (2,279) (3,841)
--------- ---------
Cash flows from financing activities:
Net borrowings under long-term debt 9,596 2,000
Increase in overdraft 604 4,252
Repurchase of common stock (1,890) ---
Other equity transactions 66 32
--------- ---------
Net cash provided by financing activities 8,376 6,284
--------- ---------
Net increase in cash 47 352
Cash at beginning of period 269 518
--------- ---------
Cash at end of period $ 316 $ 870
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 2,235 $ 2,301
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 November 27, 1999 and the
related Condensed Statements of Operations for the 13 and 39 weeks ended
November 27, 1999 and November 28, 1998 and Condensed Statements of Cash Flows
for the 39 weeks ended November 27, 1999 and November 28, 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 39 weeks ended November 27, 1999 may not be indicative of the
results to be expected for the entire fiscal year.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Advertising Costs
Advertising production costs are expensed the first time an advertisement is
run. Media (TV and print) placement costs are expensed in the month the
advertising appears.
Income Taxes
Provision for income taxes are 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 interim financial statements and selected information
in the notes thereto. Operating segments, as defined, are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision makers in deciding how to
allocate resources in assessing performance. The Company operates in two
business segments, superstores and outlet stores. See note 6.
Page 6
<PAGE>
STROUDS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
Store Closure Reserves
Management of the Company periodically determines the need to close certain
underperforming stores. At the time such a decision is made, a store closure
reserve is provided for representing lease termination costs, severance, tear
down costs and other items. As of November 27, 1999, the reserve balance was
approximately $2,000,000. The Company anticipates all of these costs to be
incurred within the next twelve to twenty four months. The reserve includes
estimated future lease termination costs, tear down and asset transfer costs
and employee separation and termination costs. The Company is continuing to
evaluate its store closure reserve and make periodic adjustments as necessary.
Reclassifications
Certain reclassifications have been made to the February 27, 1999 and November
28, 1998 amounts to conform to the November 27, 1999 presentation.
(3) PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
NOVEMBER 27, FEBRUARY 27,
(in thousands) 1999 1999
- -------------- --------- ---------
Furniture, fixtures and equipment $ 44,783 $ 44,351
Leasehold improvements 8,536 8,205
--------- ---------
53,319 52,556
Accumulated depreciation and amortization (34,087) (31,202)
--------- ---------
$ 19,232 $ 21,354
========= =========
Page 7
<PAGE>
STROUDS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(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
estimated lease termination expenses are included in the store closure reserve
(see Note 2). In November 1999, the Company executed a Lease Surrender and
Termination Agreement (the "Agreement") to close a store in the Chicago
market. In accordance with the Agreement, the store will closed in February
2000. All costs associated with the Agreement and estimated additional costs
associated with closing the are included in the store closure reserve at
November 27, 1999. For the quarter ended November 27, 1999, no changes have
been made to the estimated Restructuring Plan costs and no additional charges
were recorded to operations. As of November 27, 1999, the Company
substantially completed the Restructuring Plan and the only remaining actions
are the dispositions of the aforementioned stores. As a result, the remaining
liability has been reclassified to a store closure reserve. The store closure
reserve is reviewed periodically by management and adjusted as necessary based
upon management's store operations plans.
During the first three quarters of fiscal 1999, cash used related to the
Restructuring Plan totaled $668,000, related primarily to lease termination
costs, workforce reductions and consulting and advisory fees associated with
the Company's restructuring and cost reduction efforts.
Page 8
<PAGE>
STROUDS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(4) RESTRUCTURING (Continued)
The following table summarizes the original Restructuring Plan 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 lease termination and
employee severance costs have been recorded the restructuring reserve. The
following table summarizes the Restructuring Plan activity:
<TABLE>
<CAPTION>
Occupancy, lease Asset write-down;
termination and merchandise
subsidy costs inventory,
associated with leasehold improve- Employee
the closure or ments, furniture severance and
disposition of and fixtures other related
(in thousands) stores and equipment costs Total
- ------------------- ---------------- ------------------ ------------- -------
<S> <C> <C> <C> <C>
1996 Provision,
March 1, 1997 $ 7,375 $ 7,215 $ 1,660 $16,250
Fiscal 1997 payments 2,176 1,444 1,262 4,882
-------- -------- -------- --------
Reserve balance,
February 28, 1998 5,199 5,771 398 11,368
Fiscal 1998 payments 703 6,238 97 7,038
Adjustment ** (667) 667 -- --
-------- -------- -------- --------
Reserve balance,
February 27, 1999 3,829 200 301 4,330
Fiscal 1999 payments
through
November 27, 1999 642 1,053 107 1,802
Adjustment ** (1,173) 1,353 (180) --
-------- -------- -------- --------
Reserve balance,
May 29, 1999 $ 2,014 $ 500 $ 14 $ 2,528
======== ======== ======== ========
<?Table>
Page 9
<PAGE>
STROUDS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(4) RESTRUCTURING (Continued)
** 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.
The remaining balance of the restructuring reserve was transferred to the
store closure reserves in conjunction with the Company's substantial
completion of the Restructuring Plan at November 27, 1999.
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.
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 November 27, 1999, the Company had outstanding borrowings of $35,891,000
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 November 27, 1999.
Included in the Credit Facility is a $7,000,000 letter of credit sub-facility.
As of November 27, 1999, the Company had outstanding letters of credit
amounting to $779,000 for purchase commitments to foreign suppliers under this
sub-facility.
Page 10
<PAGE>
STROUDS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(5) LONG-TERM DEBT (Continued)
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 November 27, 1999, the fair value
of the agreement was $8,300 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.
Segment information is summarized as follows:
13 WEEKS ENDED 39 WEEKS ENDED
----------------------- -----------------------
November 27, November 28, November 27, November 28,
IN THOUSANDS 1999 1998 1999 1998
- ----------------------- ----------- ---------- ----------- -----------
Net sales:
Superstores $ 47,103 $ 49,729 $ 136,229 $ 141,319
Outlet stores 10,089 9,433 27,967 27,048
---------- ---------- ---------- ----------
$ 57,192 $ 59,162 $ 164,196 $ 168,367
========== ========== ========== ==========
Operating income:
Superstores $ 863 $ 1,103 $ 964 $ 1,366
Outlet stores 193 93 311 294
---------- ---------- ---------- ----------
$ 1,056 $ 1,196 $ 1,275 $ 1,660
========== ========== ========== ==========
Page 11
<PAGE>
STROUDS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(6) SEGMENT INFORMATION (Continued)
November 27, February 27,
IN THOUSANDS 1999 1999
- ------------------------------- ----------- -----------
Total assets:
Superstores $ 70,215 $ 65,515
Outlet stores 8,730 7,330
Other (1) 22,679 23,398
---------- ----------
$ 101,624 $ 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).
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
Page 12
<PAGE>
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 and is
currently negotiating the lease termination. The estimated lease termination
costs are included in the store closure reserve (see Note 2). In November
1999, the Company executed a Lease Surrender and Termination Agreement (the
"Agreement") to close the final store in the Chicago market. In accordance
with the Agreement, the store will closed in February 2000. All costs
associated with the Agreement and estimated additional costs associated with
closing are included in the store closure reserve at November 27, 1999. As of
November 27, 1999, no changes have been made to the estimated Restructuring
Plan costs and no additional charges were recorded to operations. During the
first three quarters of fiscal 1999, cash used related to the Restructuring
Plan totaled $668,000, related primarily to lease termination costs, workforce
reductions and consulting and advisory fees associated with the Company's
restructuring and cost reduction efforts. The Company has effectively
completed its Restructuring Plan as of November 27, 1999.
RESULTS OF OPERATIONS
13 Weeks Ended November 27, 1999 Compared to the 13 Weeks Ended November 28,
1998
- -----------------------------------------------------------------------------
Net sales for the 13 weeks ended November 27, 1999 decreased $2.0 million, or
3.3%, to $57.2 million versus $59.2 million in the same period last year.
Comparable store sales decreased $2.0 million, or 3.5%, for the period. Sales
from new stores and expanded or replacement stores increased by $2.3 million.
Sales were reduced by $2.3 million due to 3 store closures.
Net sales for superstores for the 13 weeks ended November 27, 1999 decreased
$2.6 million, or 5.2%, to $47.1 million versus $49.7 million in the same
period last year. Comparable superstore sales decreased $2.1 million, or
4.5%, for the period. Outlet store net sales for the 13 weeks ended November
27, 1999 increased $0.7 million, or 7.0%, to $10.1 million versus $9.4 million
in the same period last year. Comparable outlet store sales increased $0.1
million, or 1.5%, for the period.
Management believes that the decrease in superstore sales is attributable to
the fact that there was one less superstore than last year and there were no
intense promotional sales campaign in the current year designed to eliminate
underperforming merchandise categories as identified in the Company's
Restructuring Plan. Unseasonably warm weather in many of our markets,
especially California, also adversely effected sales. Approximately 26% of
the comparable stores were affected by new competitive openings for the third
quarter of 1999 compared to approximately 6% for the same period last year.
Cost of sales, buying and occupancy for the 13 weeks ended November 27, 1999
were $40.1 million versus $41.8 million for the same period a year ago, a $1.7
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
Page 13
<PAGE>
sales, buying and occupancy decreased to 70.2% from 70.6% for the same period
a year ago. The improved gross margin points were primarily the result of the
Company's intensive restructuring program which resulted in better inventory
management and fewer markdowns and sales of inventory in underperforming
merchandise categories.
Selling and administrative expenses for the 13 weeks ended November 27, 1999
decreased $0.3 million to $15.9 million versus $16.2 million for the same
period in fiscal 1998 and increased as a percentage of net sales from 27.3% to
27.9%. The dollar decrease was primarily due to less advertising expenditures
due to a change in the advertising media mix.
As a result of the factors noted above, the Company had operating income for
the 13 weeks ended November 27, 1999 of $1.1 million versus $1.2 million for
the same period a year ago, a $0.1 million decrease.
The operating income for superstores for the 13 weeks ended November 27, 1999
was $0.9 million versus $1.1 million for the same period a year ago. The
operating income for the outlet stores for the 13 weeks ended November 27,
1999 was $0.2 million versus $0.1 million for the same period a year ago. The
net decrease in operating profit for the segments were the result of the
various factors discussed above.
Interest expense, net, increased $0.1 million to $0.9 million for the 13 weeks
ended November 27, 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 November 27, 1999 or income tax benefit associated with
its loss for the 13 week period ended November 28, 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.
39 Weeks Ended November 27, 1999 Compared to the 39 Weeks Ended November 28,
1998
- -----------------------------------------------------------------------------
Net sales for the 39 weeks ended November 27, 1999 decreased $4.2 million, or
2.5%, to $164.2 million versus $168.4 million in the same period last year.
Comparable store sales decreased $2.8 million, or 1.7%, for the same period.
Sales from new stores and expanded or replacement stores increased by $4.9
million. Sales were reduced by $6.3 million due to 5 store closures.
Net sales for superstores for the 39 weeks ended November 27, 1999 decreased
$5.1 million, or 3.6%, to $136.2 million versus $141.3 million in the same
period last year. Comparable superstore sales decreased $3.0 million, or
2.2%, for the period. Outlet store net sales for the 39 weeks ended November
27, 1999 increased $0.9 million, or 3.3%, to $28.0 million versus $27.1
million in the same period last year. Comparable outlet store sales increased
$0.2 million, or 0.6%, for the period.
Page 14
<PAGE>
Management believes that the decrease in superstore sales is attributable to
the fact that there were no intense promotional sales campaigns in the current
year designed for inventory liquidation this year as there were last year for
the closure of two superstores and to eliminate underperforming merchandise
categories as identified in the Company's Restructuring Plan. The increase in
outlet store sales was due to a heavier promotional calendar compared to the
same period last year. Approximately 18% of the comparable stores were
affected by new competitive openings for the first three quarters of 1999
compared to approximately 12% for the same period last year.
Cost of sales, buying and occupancy for the 39 weeks ended November 27, 1999
were $116.8 million versus $121.3 million for the same period a year ago, a
$4.5 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 71.1% from 72.0% for the same
period a year ago. The improved gross margin points were primarily the result
of the Company's intensive restructuring program which resulted in better
inventory management and fewer markdowns and sales of inventory in
underperforming merchandise categories.
Selling and administrative expenses for the 39 weeks ended November 27, 1999
increased $0.8 million to $46.0 million versus $45.2 million for the same
period in fiscal 1998 and increased as a percentage of net sales from 26.9% to
28.0%. 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 39 weeks ended November 27, 1999 of
$1.3 million versus $1.7 million for the same period a year ago, a $0.4
million decrease, as a result of the factors noted above.
The operating income for superstores for the 39 weeks ended November 27, 1999
was $1.0 million versus $1.4 million for the same period a year ago. The
decrease in superstores operating profit were a result of the various factors
discussed above. The operating income for the outlet stores remained the
same, $0.3 million, for the 39 week periods ended November 27, 1999 and
November 28, 1998.
Interest expense, net, increased $0.1 million to $2.4 million for the 39 weeks
ended November 27, 1999 versus $2.3 million for the same period in fiscal
1997. The increase was primarily the result of slightly higher average
borrowings this year.
The Company recorded no income tax benefit associated with its losses for the
39 week periods ended November 27, 1999 and November 28, 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
Page 15
<PAGE>
funds and its credit facilities. At November 27, 1999, the Company's working
capital was $39.6 million, while advances from its Credit Facility were $35.9
million. The Company had $11.0 million available for borrowings under its
Credit Facility as determined by the Company's eligible "borrowing base" at
November 27, 1999.
Cash used in operating activities for the 39 weeks ended November 27, 1999 was
$6.1 million. During the 39 week period ended November 27, 1999, inventory
increased $6.1 million. In the first three quarters 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 $0.7 million.
Net cash used in investing activities for the 39 weeks ended November 27, 1999
was $2.3 million. These funds were primarily used for capital expenditures
for 1 new superstore in southern California that opened in July 1999, 1 new
outlet in southern California that opened in December 1999, existing store
refurbishments and improvements to the Company's management information
systems development.
Cash provided by financing activities for the 39 weeks ended November 27, 1999
was $8.4 million. The Company had net borrowings of $9.6 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 $2.8 million and will be related
primarily to new store development, existing store expansions and
refurbishments and improvements to its management information systems.
The Company plans to open approximately one superstore and five outlet stores
in the remainder of fiscal 1999. 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 conducted a comprehensive review of its computer systems to
identify those systems that could have been affected by the "Year 2000" (or
"Y2K") issue and developed an implementation plan to resolve the issue. The
Year 2000 problem was the result of computer programs being written using two
digits rather than four to define the applicable year. The Year 2000 issue
was believed to affect virtually all companies and organizations, including
the Company. Any of the Company's programs that have time-sensitive software
might have recognized a date using "00" as the year 1900 rather than the year
2000. This could have resulted 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
Page 16
<PAGE>
point-of-sale transactions, generally use third-party applications, with
proprietary additions to fit unique business requirements. Failure in these
key areas could have impacted 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 were 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 were installed in every retail
store in the first quarter of fiscal 1999. The Company spent approximately
$0.3 million in fiscal 1999 for additional upgrades to these systems. A
compliant third-party provider for payroll software was implemented in October
1999. Voice communications were 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 successfully completed an
integrated test of all critical internal systems in September 1999. Based
upon this simulation, all business areas confirmed readiness to transact
business through the Year 2000 transition. However, if the modifications to
the Company's computer systems had failed in the last hours, the Year 2000
problem could have had a material impact on the operations of the Company.
Such material impacts could have required 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. Through the first week
of January 2000, the Company has not experienced any problems in regards to
the Year 2000. All internal Company operations have continued to run as
programmed.
By December 1999, substantially all of the Company's key vendors' electronic
data interchange systems were verified to be Y2K compliant. Through the first
week of January 2000, the Company has not yet experienced any problems with
Year 2000 orders but has developed a contingency plan for supplier issues.
These contingency plans include such actions as making alternate supplier
arrangements, rescheduling deliveries, or utilizing alternate methods of
operation during this critical period, if required.
Notwithstanding that the Company proceeded 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
Page 17
<PAGE>
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.
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 8.1% at November 27, 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 18
<PAGE>
PART II. OTHER INFORMATION
- -----------------------------
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
- ----------- -----------
10.1 Fourth Amendment to the Amended and Restated 1994 Equity
Participation Plan dated June 30, 1999.
Incorporated herein by reference to the Company s
Form S-8, Registration No. 333-91515, as filed with
the Commission on November 23, 1999.
* 10.2 Employment Agreement between Charles Chinni and Strouds,
Inc., dated October 20, 1999.
* 10.3 Employment Agreement between Robert M. Menar and Strouds,
Inc., dated August 9, 1999.
* 10.4 Employment Agreement between Harry Brown and Strouds,
Inc., dated November 1, 1999.
* 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
November 27, 1999.
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: January 7, 1999
STROUDS, INC.
(Registrant)
/s/ Charles Chinni
---------------------
Charles Chinni
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Robert M. Menar
------------------------
Robert M. Menar
Chief Operating Officer
/s/ Gary A. Van Wagner
------------------------
Gary A. Van Wagner
Vice President, Chief Financial Officer
(Principal Financial Officer)
Page 20
</TABLE>
<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 9-MOS
<FISCAL-YEAR-END> FEB-26-2000 FEB-26-2000
<PERIOD-START> AUG-29-1999 FEB-28-1999
<PERIOD-END> NOV-27-1999 NOV-27-1999
<CASH> 316 316
<SECURITIES> 0 0
<RECEIVABLES> 3,400 3,400
<ALLOWANCES> 0 0
<INVENTORY> 66,699 66,699
<CURRENT-ASSETS> 74,280 74,280
<PP&E> 53,319 53,319
<DEPRECIATION> 34,087 34,087
<TOTAL-ASSETS> 101,624 101,624
<CURRENT-LIABILITIES> 34,631 34,631
<BONDS> 0 0
0 0
0 0
<COMMON> 1 1
<OTHER-SE> 27,389 27,389
<TOTAL-LIABILITY-AND-EQUITY> 101,624 101,624
<SALES> 57,192 164,196
<TOTAL-REVENUES> 57,192 164,196
<CGS> 40,143 116,755
<TOTAL-COSTS> 15,993 46,166
<OTHER-EXPENSES> (61) (242)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 869 2,420
<INCOME-PRETAX> 248 (903)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 248 (903)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 248 (903)
<EPS-BASIC> 0.04 (0.12)
<EPS-DILUTED> 0.03 (0.12)
</TABLE>
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into this
20th day of October, 1999, by and between Strouds, Inc. ("Employer") and
Charles Chinni ("Employee").
WHEREAS, Employer and Employee have entered into that certain Amended and
Restated Employment Agreement, dated as of May 20, 1998 (the "Original
Agreement");
WHEREAS, Employer and Employee desire to (i) enter into a new employment
agreement upon the terms set forth in this Agreement and (ii) terminate the
Original Agreement;
WHEREAS, from the Commencement Date (as defined below), the parties hereby
intend that the Original Agreement shall automatically terminate and be of no
further force and effect, and neither parties have any further rights or
obligations thereunder; and
WHEREAS, the provisions of this Agreement shall be effective as of October 20,
1999 (the "Commencement Date").
NOW, THEREFORE, in consideration of the mutual covenants herein contained and
other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto do hereby agree as follows:
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 from the Commencement
Date, subject to termination as provided in Paragraph 14 hereof, and
continuing in effect until February 28, 2003; PROVIDED, HOWEVER, that
commencing on February 28, 2003 and on each February 28 thereafter, the term
of this Agreement shall automatically be extended for one additional year
unless, not later than 90 days before the expiration of the term of this
Agreement, either party shall have given notice to the other that it or he
does not desire to extend this Agreement.
2. DUTIES. Employee shall be employed by Employer as Chairman, President and
Chief Executive Officer of Strouds, Inc. reporting to the Board of Directors
of Strouds, Inc. (the "Board"). 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 and the Chairman of the
Board as of the Commencement Date pursuant to his election by the stockholders
at the June 1999 meeting, and continue as a member and the Chairman of the
<PAGE>
Board thereafter during the term of the Agreement, subject to Employer's by-
laws and to nomination and election by Employer's stockholders in fiscal years
after 1999.
4. BASE SALARY. Employer shall pay Employee, and Employee hereby agrees to
accept, as compensation for services rendered hereunder, a salary of Six
Hundred Thousand Dollars ($600,000.00) per year ($23,076.92 bi-weekly)
effective as of July 1, 1999, subject to an upward adjustment at the sole
discretion of Employer. 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 14 and
15 hereof. Employer will reevaluate Employee's base salary on each
anniversary of the Commencement Date. Employee understands and agrees that
Employer has no obligation to increase his base salary as a result of such
evaluation. However, once Employee's salary is increased, it will not be
subject to reduction without the consent of Employee (except for across-the-
board salary reductions similarly affecting all management personnel of
Employer).
5. CONTRACT REVIEW. Strouds will reimburse Employee for his reasonable
attorneys fees incurred in drafting and reviewing this Agreement, up to Five
Thousand Dollars ($5,000.00). Alternatively, at Employees request, such
payment will be made directly to Employees counsel.
6. ANNUAL BONUS.
(a) The Compensation Committee of the Board shall establish, monitor and
oversee an incentive bonus program for Employee.
(b) 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 year 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 Two Hundred-Twelve Thousand
Five Hundred Dollars ($212,500.00). For purposes of this Section 6(b),
Adjusted Net Income (Loss) means income or loss before any tax benefit and
after any bonus expense.
(c) Effective as of March 1, 2000, within 90 days of the beginning of
each fiscal year, the Compensation Committee, after consultation with
Employee, will establish certain performance objectives (such as specified
targets of growth in revenues and earnings per share) and will provide for
payment of a cash bonus to Employee for each fiscal year in an amount at least
50% of Employee's then current base annual salary if such performance
objectives established by the Compensation Committee for Employee are
achieved.
Page 2
<PAGE>
(d) Cash bonus shall be paid as soon as practicable, but not more than
14 days, after Employer's independent public accounting firm, currently KPMG
LLP, delivers its audit of Strouds, Inc. fiscal year end.
(e) No cash bonus shall be paid to Employee with respect to a fiscal
year during which this Agreement terminates pursuant to Paragraphs 14(b), (c),
(d), (e) or (g) hereof.
(f) To the extent any bonus payments (or portion thereof) to Employee
would cause Employer's federal income tax deduction to be disallowed pursuant
to Section 162(m) of the Code, or any successor thereto, the payment of such
bonuses (or portion thereof) shall be deferred until such time as the payment
of the bonuses is no longer subject to the limitations of Section 162(m) of
the Code. During such deferral period, Employer shall credit interest on the
deferred amounts at the rate of one percent (1%) above the Bank prime rate, as
it may be adjusted from time to time. At such time as the aggregate amount of
any deferred bonuses and accrued interest and any deferred compensation
(pursuant to Paragraph 7) exceed One Hundred Thousand Dollars ($100,000),
Employer, at Employee's written request, shall fund such amounts in a "rabbi
trust" pursuant to the Internal Revenue Service's Revenue Procedure 92-64.
7. DEFERRED COMPENSATION. Employee shall be entitled to defer a portion of
his compensation pursuant to a salary reduction agreement, whereby he may
specify, on an annual basis, the amount of salary deferred, as well as the
time of deferred payment. During such deferral period, Employer shall credit
interest on the deferred amounts at the rate of one percent (1%) above the
Bank prime rate, as it may be adjusted from time to time. At such time as the
aggregate amount of any deferred compensation and any deferred bonuses and
accrued interest (pursuant to Paragraph 6(f)) exceed One Hundred Thousand
Dollars ($100,000), Employer, at Employee's written request, shall fund such
amounts in a rabbi trust pursuant to the Internal Revenue Service's Revenue
Procedure 92-64. Employee shall have a right to demand an immediate cash lump
sum payment at any time, subject to an early withdrawal penalty (to avoid
constructive receipt) of the lesser of 5% of the withdrawal or $50,000.
8. STOCK OPTIONS.
(a) On the Commencement Date, Employer shall grant Employee an option to
purchase 1,000,000 shares of common stock (subject to adjustment as provided
under the Plan) in Strouds, Inc. (the "Common Stock"). The exercise price (i)
with respect to 100,000 shares of Common Stock shall not to exceed the fair
market value of the Common Stock as of the Commencement Date and (ii) with
respect to the remaining 900,000 shares of Common Stock shall not exceed the
fair market value of the Common Stock as of the date Employer's stockholders
approve of an amendment to the Amended and Restated 1994 Equity Participation
Plan (the "Plan") to increase the number of shares available for issuance
thereunder. To the extent not inconsistent with the terms of this Agreement,
the options shall be subject to the terms of stock option agreements in
substantially the form attached hereto as Exhibit A and Exhibit B.
Page 3
<PAGE>
(b) With respect to the 1,000,000 shares of Common Stock granted to
Employee pursuant to Paragraph 8(a), 100,000 shares shall vest immediately as
of the date hereof and the remaining 900,000 shall vest in three cumulative
installments of 300,000 shares on each of July 1, 2000, July 1, 2001 and July
1, 2002, as long as Employee remains employed by Employer on the date of the
vesting of such options.
9. 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 four 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.
10. INDEMNIFICATION. During the term of this Agreement and for six (6) years
following the termination of Employee's employment, Employer shall extend to
Employee the same indemnification arrangements and maintain directors' and
officers' liability insurance as are generally provided to other similarly
situated management personnel of Employer. Notwithstanding anything to the
contrary, the provisions of this Paragraph 10 shall survive the termination of
this Agreement and the termination of Employee's employment.
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 critical
importance to Employer in order to protect Employer from unfair competition
and irreparable harm. To protect Employer from such harm, Employee therefore
agrees to make the promises set forth in this Paragraph.
Page 4
<PAGE>
(a) PROMISE NOT TO DISCLOSE. Employee promises never to use or disclose
any Confidential Information before it has become generally known within the
relevant industry through no fault of Employee. Employee agrees that this
promise shall never expire.
(b) PROMISE NOT TO SOLICIT. To prevent Employee from inevitably
breaking this promise, Employee further agrees that, while this Agreement is
in effect and for 24 months after its termination: (i) as to any customer or
supplier of Employer with whom Employee had dealings or about whom Employee
acquired proprietary information during his employment, Employee will not
solicit or attempt to solicit the customer or supplier to do business with any
person or entity other than Employer; and (ii) Employee will not solicit for
employment any person who is, or within the preceding 6 months was, an
officer, manager, employee or consultant of Employer.
(c) PROMISE NOT TO ENGAGE IN CERTAIN EMPLOYMENT. Employee agrees that,
while this Agreement is in effect and for 24 months after its termination,
Employee will not accept any employment or engage in any activity in the
retail industry where the sale of bed and bath products exceeds twenty-five
percent (25%) of the business, without the written consent of the Executive
Committee of the Board, excluding Employee (the "Executive Committee"), if the
loyal and complete fulfillment of Employee's duties would inevitably require
Employee to reveal or utilize any Confidential Information that Employee has
promised in this Paragraph 12 not to disclose, as reasonably determined by the
Executive Committee. Notwithstanding any provision to the contrary in this
Agreement, this promise shall only be enforceable while Employee is receiving
payments pursuant to Paragraph 15(b).
(d) RETURN OF CONFIDENTIAL INFORMATION. When Employee's employment
with Employer ends, Employee will promptly deliver to Employer or, at its
written instruction, destroy all documents, data, drawings, manuals, letters,
notes, reports, electronic mail, recordings and copies thereof relating to any
Confidential Information in Employee's possession or control.
(e) PROMISE TO DISCUSS PROPOSED ACTIONS IN ADVANCE. To prevent the
inevitable use or disclosure of Confidential Information, Employee promises
that, before Employee discloses or uses information and before Employee
commences employment, solicitations or any other activity that could possibly
violate the promises made by Employee in this Paragraph 12, Employee will
discuss his proposed actions with the Executive Committee, who will advise
Employee whether his proposed actions would violate these promises.
13. RELIEF. It is recognized that in the event of Employee's breach of
Paragraph 12, 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.
Page 5
<PAGE>
14. 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, without Good Reason (as
defined below), by giving Employer at least 60 days written notice of
termination;
(d) Employee's disability, subject to the Employee's right to receive a
disability benefit as provided in Paragraph 9 hereof, if any;
(e) the election of Employer to terminate Employee's employment for
Cause. For purposes of this Agreement, "Cause" shall mean (i) a determination
by Employer or the Board in its sole discretion exercised in good faith that
there has been (A) willful and continued failure by Employee to substantially
perform his duties with Employer (other than any such failure resulting from
Employee's incapacity due to physical or mental illness or any such actual or
anticipated failure after Employee s issuance of a notice of termination for
Good Reason), after a written demand for substantial performance is delivered
to Employee by the Board, which demand specifically identifies the manner in
which the Board believes that Employee has not substantially performed his
duties, or (B) willful and continued failure by Employee to substantially
follow and comply with the specific and lawful directives of the Board, as
reasonably determined by the Board (other than any such failure resulting from
Employee's incapacity due to physical or mental illness or any such actual or
anticipated failure after Employee's issuance of a notice of termination for
Good Reason), after a written demand for substantial performance is delivered
to Employee by the Board, which demand specifically identifies the manner in
which the Board believes that Employee has not substantially performed his
duties; (ii) Employee's willful commission of an act of fraud or dishonesty
resulting in material economic or financial injury to Employer; or (iii)
Employee's willful engagement in illegal conduct or gross misconduct, in each
case which is materially and demonstrably injurious to Employer; provided
that, in each case of (i), (ii) or (iii), Employee has received written notice
of the described activity, has been afforded a reasonable opportunity to cure,
or correct the activity described in the notice (provided such circumstances
are curable or capable of correction), and has failed to substantially cure,
correct or cease the activity, as appropriate. No act, or failure to act, on
Employee's part shall be deemed "willful" unless done, or omitted to be done,
by Employee not in good faith;
(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;
Page 6
<PAGE>
(g) rejection by the stockholders 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 14(g);
(h) the election of Employee to terminate for Good Reason at any time by
giving Employer written notice of termination. For purposes of this
Agreement, "Good Reason" shall mean, without Employee's express consent, the
occurrence of any of the following circumstances unless, in the case of
subparagraphs 14(j)(i), (iii) or (iv), such circumstances are fully corrected
(provided such circumstances are capable of correction) prior to the date of
Employee's termination of this Agreement:
(i) the assignment to Employee of any duties which are materially
inconsistent with the position in Strouds, Inc. that Employee held on the
Commencement Date, a significant alteration in the nature or status of
Employee's responsibilities or the conditions of Employee's employment or any
other action by Employer that results in a material diminution in Employee's
position, authority, title, duties or responsibilities;
(ii) the relocation of Employer's offices at which Employee is
principally employed on the Commencement Date to a location outside the
greater Los Angeles metropolitan area;
(iii) Employer's material breach of the provisions in this
Agreement;
(iv) Employer's reduction of Employee's base salary as provided in
Paragraph 4 (except for across-the-board salary reductions similarly affecting
all management personnel of Employer);
(v) the removal of Employee from the position of President or Chief
Executive Officer;
(vi) the failure of Employee to be elected to the Board, as
Chairman; or
(vii) the removal of Employee from the position of Chairman of the
Board once he is elected to such office.
(i) the election of Employer to terminate Employee's employment without
Cause.
(j) 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), (h) or (i) shall be effective
immediately upon delivery of notice of termination to Employee or Employer, as
the case may be. In the case of termination pursuant to Paragraph 14(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 Employer.
Page 7
<PAGE>
For purposes of this Agreement, the term "disability" shall mean a physical or
mental illness or injury of a permanent nature which prevents Employee from
performing his essential duties and other services which he is employed to
perform, even with reasonable accommodation. Employer and Employee will
cooperate with each other and comply with all reasonable requests to determine
whether a disability exists and, if so, whether there is a reasonable
accommodation that does not produce undue hardship to Employer's operation.
It is the parties' intent to comply with the Americans with Disabilities Act
and the California Fair Employment and Housing Act with respect to disability.
Employee shall be deemed to have terminated his employment on account of
disability as of the date he is determined by Employer to be disabled as
defined herein.
15. 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 Paragraph 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 14(a),
(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 14 (a),
(f), (h), or (i), Employer shall be obligated to pay to Employee, in addition
to the obligations set forth in subparagraph 15(a): (i) Employee's base salary
and targeted bonus, in effect at the time of termination, for the greater of
the remaining term of the Agreement or a period of 24 months, which shall be
paid in equal installments at the same intervals as Employee has been paid
during his employment by Employer; and (ii) continuation of any health
insurance benefits in effect at the time of termination for the greater of the
remaining term of the Agreement or a period of 24 months. Employee shall
not be restricted from seeking or accepting employment, except as limited by
Paragraph 12(c).
(c) If this Agreement is terminated pursuant to subparagraph 14(i), in
addition to the obligations set forth in subparagraphs 15(a) and (b), any
options which have been granted to Employee prior to the Commencement Date
shall vest immediately, except to the extent prohibited by the Plan.
(d) If by reason of Section 280G of the Internal Revenue Code of 1986,
as amended (the "Code") any payment or benefit received or to be received by
Employee (whether payable pursuant to the terms of this Agreement ("Contract
Page 8
<PAGE>
Payments") or any other plan, arrangements or agreement with Employer or
Affiliate (as defined below) (collectively with the Contract payments, "Total
Payments") would not be deductible (in whole or part) by Employer, an
Affiliate or other person making such payment or providing such benefit, then
any payment, benefit or distribution by Employer to the Employee (or
acceleration thereof) pursuant to this subparagraph (the "Severance
Payments") shall be reduced (to zero if necessary) and if the Severance
Payments are reduced to zero, other Contract Payments shall be reduced (to
zero if necessary) and, if Contract Payments are reduced to zero, other Total
Payments shall be reduced (to zero if necessary) until no portion of the Total
Payments is not deductible by Employer by reason of Section 280G of the Code.
For purposes of this limitation, (1) no portion of the Total Payments the
receipt or enjoyment of which Employee has effectively waived in writing prior
to the date of payment of the Severance Payments shall be taken into account;
(2) no portion of the Total Payments shall be taken into account which in the
opinion of tax counsel selected by Employer's independent auditors and
acceptable to Employee does not constitute a "parachute payment" within the
meaning of Section 280G(b)(2) of the Code; (3) the Severance Payments (and,
thereafter, other Contract Payments and other Total Payments) shall be reduced
only to the extent necessary so that the Total Payments in their entirety
constitute reasonable compensation for services actually rendered within the
meaning of section 280G(b)(4) of the Code, in the opinion of the tax counsel
referred to in clause (2), and (4) the value of any noncash benefit or any
deferred payment or benefit included in the Total Payments shall be determined
by Employer's independent auditors in accordance with the principles of
Sections 280G(d)(3) and (4) of the Code. For purposes of this subparagraph
(d), the term "Affiliate" means Employer s successors, any Person whose
actions result in a Change in Control or any corporation affiliated (or which,
as a result of the completion of the transactions causing a Change in Control
shall become affiliated) with Employer within the meaning of Section 1504 of
the Code.
(e) The respective rights and obligations of Employer and Employee
pursuant to Paragraphs 12 and 13 hereof, shall survive the expiration or
earlier termination of this Agreement.
16. INVESTMENT OPPORTUNITIES. Subject to Board approval, Employer shall
provide Employee and other management personnel of Employer with the
opportunity to acquire at the time of formation of any internet joint venture
by Employer not more than an aggregate amount of 10% of the equity interest in
such joint venture upon such terms and conditions as the Board may determine.
17. 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.
18. 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
Page 9
<PAGE>
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.
19. 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.
20. 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.
21. 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 13 hereof and Employee shall
reimburse Employer for all reasonable costs and expenses (including attorneys'
fees) incurred by Employer, if successful, in connection therewith.
22. 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.
23. EMPLOYEE S WARRANTY. Employee represents and warrants to Employer that
Employee is not bound by any asgreement or subject to any restriction which
would interfere with or prevent Employee from entering into and carrying out
this Agreement.
Page 10
<PAGE>
24. 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.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
Date: STROUDS, INC.
________ By: Marco Weiss
Title: Chairman Compensation Committee
Date: 11/02/99 /s/ Charles Chinni
Charles Chinni
Page 11
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into this 9th
day of August, 1999, by and between Strouds, Inc. ("Employer") and Robert M.
Menar ("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 the
date hereof, subject to termination as provided in Paragraph 13 hereof, and
continuing in effect until after the third anniversary of the date hereof;
PROVIDED, HOWEVER, that commencing on August 9, 2002 and on each August 9
thereafter, the term of this Agreement shall automatically be extended for one
additional year unless, not later than 90 days before the expiration of the
term of this Agreement, either party shall have given notice to the other that
it or he does not desire to extend this Agreement.
2. DUTIES. Employee shall be employed by Employer as Chief Operating Officer
of Strouds, Inc. reporting to the Chief Executive Officer of Employer.
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 Chief Executive Officer of Employer, and Employee
shall perform such other duties as the Chief Executive Officer 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. 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)
effective as of August 9, 1999, subject to an upward adjustment at the sole
discretion of Employer; PROVIDED, HOWEVER, on the first anniversary from the
date hereof, Employer shall increase Executive s annual base salary by
$25,000. Employer shall reevaluate Employee s base salary each year
thereafter. Employee understands and agrees that Employer has no obligation
to increase his base salary as a result of such evaluation. However, once
Employee's salary is increased, it will not be subject to reduction without
the consent of Employee (except for across-the-board salary reductions
affecting all management personnel of Employer). 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 13 and 14 hereof.
4. CONTRACT REVIEW. Strouds will reimburse Employee for his reasonable
attorneys fees incurred in drafting and reviewing this Agreement, up to Five
Thousand Dollars ($5,000.00). Alternatively, at Employee's request, such
payment will be made directly to Employee's counsel.
5. ANNUAL BONUS.
<PAGE>
(a) Employer shall pay Employee a cash bonus for fiscal year 1999 in the
amount of 50% of Employee's base annual salary from the date hereof through
February 29, 2000, 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 of Directors of Employer (the
"Board") for the Financial Plan for fiscal year 1999. For purposes of this
Paragraph 5(b), Adjusted Net Income (Loss) means income or loss before any tax
benefit and after any bonus expense.
(b) Effective as of March 1, 2000 and during the term of this Agreement,
Employee shall participate in Employer's bonus plans, such as the Strouds,
Inc. Corporate Exempt Employee Incentive Plan 1998, as may be in effect from
time to time in accordance with Employer s compensation practices and the
terms and provisions of such plan as in effect from time to time.
(c) Any bonus payments shall be paid as soon as practicable, but not
more than 14 days, after Employer's independent public accounting firm,
currently KPMG LLP, delivers its audit of Strouds, Inc. fiscal year end.
(d) No bonus payments shall be paid to Employee with respect to a fiscal
year during which this Agreement terminates pursuant to Paragraphs 13 (a),
(b), (c), (d), or (e) hereof.
(e) To the extent any bonus payments (or portion thereof) to Employee
would cause Employer's federal income tax deduction to be disallowed pursuant
to Section 162(m) of the Code, or any successor thereto, the payment of such
bonuses (or portion thereof) shall be deferred until such time as the payment
of the bonuses is no longer subject to the limitations of Section 162(m) of
the Code. During such deferral period, Employer shall credit interest on the
deferred amounts at the rate of one percent (1%) above the Bank prime rate, as
it may be adjusted from time to time. At such time as the aggregate amount of
any deferred bonuses and accrued interest and any deferred compensation
(pursuant to Paragraph 6) exceed One Hundred Thousand Dollars ($100,000),
Employer, at Employee's written request, shall fund such amounts in a "rabbi
trust" pursuant to the Internal Revenue Service's Revenue Procedure 92-64.
6. DEFERRED COMPENSATION. Employee shall be entitled to defer a portion of
his compensation pursuant to a salary reduction agreement, whereby he may
specify, on an annual basis, the amount of salary deferred, as well as the
time of deferred payment. During such deferral period, Employer shall credit
interest on the deferred amounts at the rate of one percent (1%) above the
Bank prime rate, as it may be adjusted from time to time. At such time as the
aggregate amount of any deferred compensation and any deferred bonuses and
accrued interest (pursuant to Paragraph 5(d)) exceed One Hundred Thousand
Dollars ($100,000), Employer, at Employee's written request, shall fund such
amounts in a rabbi trust pursuant to the Internal Revenue Service's Revenue
Procedure 92-64. Employee shall have a right to demand an immediate cash lump
sum payment at any time, subject to an early withdrawal penalty (to avoid
constructive receipt) of the lesser of 5% of the withdrawal or $50,000.
Page 2
<PAGE>
7. STOCK OPTIONS.
(a) As an inducement for Employee to enter into this Agreement, Employer
shall grant Employee an option to purchase 250,000 shares of common stock
(subject to adjustment as provided under any applicable stock option plans of
Employer (the "Plan")) in Strouds, Inc. (the "Common Stock") with an exercise
price equal to the fair market value of the Common Stock on such date
("Initial Grant"). On each of the first and second anniversaries of such date
of Initial Grant during the term of this Agreement while Employee is employed
by Employer, Employer shall grant Employee an option to purchase an additional
150,000 shares of Common Stock with an exercise price equal to the fair market
value of the Common Stock on such date; PROVIDED, HOWEVER, that upon a Change
in Control or a termination of Employee's employment by Employer without Cause
pursuant to Sections 13(f) or 13(h) or by Employee for Good Reason pursuant to
Section 13(g), such additional options shall be immediately granted and the
exercise price of the shares covered by such options shall be the average
price of Employer's Common Stock for the ninety (90) day period immediately
preceding the date of a Change in Control or the termination of employment by
Employer without Cause or by Employee for Good Reason, as applicable. To the
extent not inconsistent with the terms of this Agreement, the options shall be
subject to the terms of a stock option agreement in substantially the form
attached hereto as Exhibit A.
(b) All options granted pursuant to the above provision shall vest at the
rate of 25% per year on the day immediately before each anniversary date of
the date of the grant of such options, as long as Employee remains employed by
Employer on the day immediately before the anniversary date of the granting of
such options. Notwithstanding any other provision in this Agreement, in the
event of (i) a Change in Control (as defined in the stock option agreement in
Exhibit A) or a termination of Employee's employment by Employer without Cause
pursuant to Sections 13(f) or 13(h) or by Employee for Good Reason pursuant to
Section 13(g), all outstanding options and all options granted to Employee
upon a Change in Control or a termination of Employee's employment by Employer
without Cause or by Employee for Good Reason shall be immediately and fully
vested and exercisable; and (ii) a termination of Employee's employment by
reason of Employee's death or disability before a Change in Control, all
outstanding options shall be immediately and fully vested and exercisable.
8. 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 four 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.
Page 3
<PAGE>
9. INDEMNIFICATION. During the term of this Agreement and for six (6) years
following the termination of Employee's employment, Employer shall extend to
Employee the same indemnification arrangements and maintain directors' and
officers' liability insurance as are generally provided to other similarly
situated management personnel of Employer. Notwithstanding anything to the
contrary, the provisions of this Paragraph 9 shall survive the termination of
this Agreement and the termination of Employee s employment.
10. 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.
11. CONFIDENTIALITY. Employee recognizes and acknowledges that in the course
of Employee's employment by Employer pursuant to this Agreement, Employee will
have access to or may obtain information of a secret, special and unique value
to Employer concerning customers, customer lists, marketing strategies,
business plans, contracts, personnel information, financial information,
relationships between Employer and those persons, entities, and others with
which Employer has contracted and others who have business dealings with
Employer, processes, products, formulas, devices, designs, inventions,
discoveries and methods of operation (collectively and individually
"Confidential Information"). Employee further recognizes and acknowledges
that all Confidential Information which is now or may hereafter be in
Employee's possession is the property of Employer and that protection of the
Confidential Information against unauthorized disclosure or use is of critical
importance to Employer in order to protect Employer from unfair competition
and irreparable harm. To protect Employer from such harm, Employee therefore
agrees to make the promises set forth in this Paragraph.
(a) PROMISE NOT TO DISCLOSE. Employee promises never to use or disclose
any Confidential Information before it has become generally known within the
relevant industry through no fault of Employee. Employee agrees that this
promise shall never expire.
(b) PROMISE NOT TO SOLICIT. To prevent Employee from inevitably
breaking this promise, Employee further agrees that, while this Agreement is
in effect and for 24 months after its termination: (i) as to any customer or
supplier of Employer with whom Employee had dealings or about whom Employee
acquired proprietary information during his employment, Employee will not
solicit or attempt to solicit the customer or supplier to do business with any
person or entity other than Employer; and (ii) Employee will not solicit for
employment any person who is, or within the preceding 6 months was, an
officer, manager, employee or consultant of Employer.
(c) PROMISE NOT TO ENGAGE IN CERTAIN EMPLOYMENT. Employee agrees that,
while this Agreement is in effect and for 24 months after its termination,
Employee will not accept any employment or engage in any activity in the
Page 4
<PAGE>
retail industry where the sale of bed and bath products exceeds twenty-five
percent (25%) of the business, without the written consent of the Executive
Committee of the Board, excluding Employee (the "Executive Committee"), if the
loyal and complete fulfillment of Employee's duties would inevitably require
Employee to reveal or utilize any Confidential Information that Employee has
promised in this Paragraph 11 not to disclose, as reasonably determined by the
Executive Committee. Notwithstanding any provision to the contrary in this
Agreement, this promise shall only be enforceable while Employee is receiving
payments pursuant to Paragraph 14(b).
(d) RETURN OF CONFIDENTIAL INFORMATION. When Employee's employment
with Employer ends, Employee will promptly deliver to Employer or, at its
written instruction, destroy all documents, data, drawings, manuals, letters,
notes, reports, electronic mail, recordings and copies thereof relating to any
Confidential Information in Employee's possession or control.
(e) PROMISE TO DISCUSS PROPOSED ACTIONS IN ADVANCE. To prevent the
inevitable use or disclosure of Confidential Information, Employee promises
that, before Employee discloses or uses information and before Employee
commences employment, solicitations or any other activity that could possibly
violate the promises made by Employee in this Paragraph 11, Employee will
discuss his proposed actions with the Executive Committee, who will advise
Employee whether his proposed actions would violate these promises.
12. RELIEF. It is recognized that in the event of Employee's breach of
Paragraph 11, 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.
13. 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, without Good Reason (as
defined below), by giving Employer at least 60 days written notice of
termination;
(d) Employee's disability, subject to the Employee's right to receive a
disability benefit as provided in Paragraph 8 hereof, if any;
Page 5
<PAGE>
(e) the election of Employer to terminate Employee's employment for
Cause. For purposes of this Agreement, "Cause" shall mean (i) a determination
by Employer or the Board in its sole discretion exercised in good faith that
there has been (A) willful and continued failure by Employee to substantially
perform his duties with Employer (other than any such failure resulting from
Employee's incapacity due to physical or mental illness or any such actual or
anticipated failure after Employee's issuance of a notice of termination for
Good Reason), after a written demand for substantial performance is delivered
to Employee by the Board, which demand specifically identifies the manner in
which the Board believes that Employee has not substantially performed his
duties, or (B) willful and continued failure by Employee to substantially
follow and comply with the specific and lawful directives of the Board, as
reasonably determined by the Board (other than any such failure resulting from
Employee's incapacity due to physical or mental illness or any such actual or
anticipated failure after Employee's issuance of a notice of termination for
Good Reason), after a written demand for substantial performance is delivered
to Employee by the Board, which demand specifically identifies the manner in
which the Board believes that Employee has not substantially performed his
duties; (ii) Employee's willful commission of an act of fraud or dishonesty
resulting in material economic or financial injury to Employer; or (iii)
Employee's willful engagement in illegal conduct or gross misconduct, in each
case which is materially and demonstrably injurious to Employer; provided
that, in each case of (i), (ii) or (iii), Employee has received written notice
of the described activity, has been afforded a reasonable opportunity to cure,
or correct the activity described in the notice (provided such circumstances
are curable or capable of correction), and has failed to substantially cure,
correct or cease the activity, as appropriate. No act, or failure to act, on
Employee's part shall be deemed "willful" unless done, or omitted to be done,
by Employee not in good faith;
(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 Employee to terminate for Good Reason at any time by
giving Employer written notice of termination. For purposes of this
Agreement, "Good Reason" shall mean, without Employee's express consent, the
occurrence of any of the following circumstances unless, in the case of
subparagraphs 13(g)(i), (iii) or (iv), such circumstances are fully corrected
(provided such circumstances are capable of correction) prior to the date of
Employee's termination of this Agreement:
(i) the assignment to Employee of any duties which are materially
inconsistent with the position in Strouds, Inc. that Employee held on the date
hereof, a significant alteration in the nature or status of Employee's
responsibilities or the conditions of Employee's employment or any other
action by Employer that results in a material diminution in Employee's
position, authority, title, duties or responsibilities;
Page 6
<PAGE>
(ii) the relocation of Employer's offices at which Employee is
principally employed on the date hereof to a location outside the greater Los
Angeles metropolitan area;
(iii) Employer's material breach of the provisions in this
Agreement;
(iv) Employer's reduction of Employee s base salary as provided in
Paragraph 3 (except for across-the-board salary reductions similarly affecting
all management personnel of Employer); or
(v) the removal of Employee from the position of Chief Operating
Officer.
(h) the election of Employer to terminate Employee's employment without
Cause.
(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 or Employer, as
the case may be. 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.
14. 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 Paragraph 10
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 14(b),
(c), (d), (e), (f), (g), or (h) Employer shall be obligated to pay Employee's
salary and earned but unused vacation, prorated on a daily basis, through the
date of termination.
Page 7
<PAGE>
(b) If this Agreement is terminated pursuant to subparagraphs 13(f), (g)
or (h), Employer shall be obligated to pay to Employee, in addition to the
obligations set forth in subparagraph 14(a), (i) Employee's base salary and
targeted bonus, in effect at the time of termination, for the greater of the
remaining term of the Agreement or a period of 18 months, which shall be paid
in equal installments at the same intervals as Employee has been paid during
his employment by Employer; (ii) all outstanding stock options of Employee
shall immediately vest and become exercisable in full; and (iii) all options
granted to Employee upon a Change in Control or a termination of Employee's
employment pursuant to subparagraphs 13(f), (g), or (h) shall immediately vest
and become exercisable in full. Employee shall not be restricted from seeking
or accepting employment, except as limited by Paragraph 11(c).
(c) If by reason of Section 280G of the Internal Revenue Code of 1986,
as amended (the "Code") any payment or benefit received or to be received by
Employee (whether payable pursuant to the terms of this Agreement ("Contract
Payments") or any other plan, arrangements or agreement with Employer or
Affiliate (as defined below) (collectively with the Contract payments, "Total
Payments") would not be deductible (in whole or part) by Employer, an
Affiliate or other person making such payment or providing such benefit, then
any payment, benefit or distribution by Employer to the Employee (or
acceleration thereof) pursuant to this subparagraph (the "Severance
Payments") shall be reduced (to zero if necessary) and if the Severance
Payments are reduced to zero, other Contract Payments shall be reduced (to
zero if necessary) and, if Contract Payments are reduced to zero, other Total
Payments shall be reduced (to zero if necessary) until no portion of the Total
Payments is not deductible by Employer by reason of Section 280G of the Code.
For purposes of this limitation, (1) no portion of the Total Payments the
receipt or enjoyment of which Employee has effectively waived in writing prior
to the date of payment of the Severance Payments shall be taken into account;
(2) no portion of the Total Payments shall be taken into account which in the
opinion of tax counsel selected by Employer's independent auditors and
acceptable to Employee does not constitute a "parachute payment" within the
meaning of Section 280G(b)(2) of the Code; (3) the Severance Payments (and,
thereafter, other Contract Payments and other Total Payments) shall be reduced
only to the extent necessary so that the Total Payments in their entirety
constitute reasonable compensation for services actually rendered within the
meaning of section 280G(b)(4) of the Code, in the opinion of the tax counsel
referred to in clause (2), and (4) the value of any noncash benefit or any
deferred payment or benefit included in the Total Payments shall be determined
by Employer's independent auditors in accordance with the principles of
Sections 280G(d)(3) and (4) of the Code. For purposes of this subparagraph
(c), the term "Affiliate" means Employer's successors, any Person whose
actions result in a Change in Control or any corporation affiliated (or which,
as a result of the completion of the transactions causing a Change in Control
shall become affiliated) with Employer within the meaning of Section 1504 of
the Code. In the event there arises an audit or other controversy with the
Internal Revenue Service with respect to the application of Section 280G of
the Code to Employee's Total Payments, Employer shall inform Employee of such
audit or controversy and provide Employee the opportunity to participate in
the negotiations and resolution of such audit or controversy.
Page 8
<PAGE>
(d) The respective rights and obligations of Employer and Employee
pursuant to Paragraphs 11 and 12 hereof, shall survive the expiration or
earlier termination of this Agreement.
15. 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.
16. INVESTMENT OPPORTUNITIES. Subject to Board approval, Employer shall
provide Employee and other management personnel of Employer with the
opportunity to acquire at the time of formation of any internet joint venture
by Employer not more than an aggregate amount of 10% of the equity interest in
such joint venture upon such terms and conditions as the Board may determine;
provided, that Employee shall receive no less than one-half of the equity
interest allocated to the Chief Executive Officer of Employer.
17. 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.
18. 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.
19. 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.
20. 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
Page 9
<PAGE>
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 12 hereof and Employee shall
reimburse Employer for all reasonable costs and expenses (including attorneys'
fees) incurred by Employer, if successful, in connection therewith.
21. 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.
22. 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.
23. 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.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
Date: 12-10-99 STROUDS, INC.
By: /s/ Charles Chinni
Title: CEO
Date: 12-10-99 /s/ R. Menar
----------------
Robert M . Menar
Page 10
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered
into this 1st day of November, 1999, by and between Strouds, Inc. ("Employer")
and Harry Brown ("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 the date
hereof, subject to termination as provided in Paragraph 12 hereof, and
continuing in effect until after the second anniversary of the date hereof.
2. DUTIES. Employee shall be employed by Employer as Executive Vice
President, Merchandising and Marketing of Strouds, Inc. reporting to the Chief
Executive Officer of Employer. 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 Chief Executive
Officer of Employer, and Employee shall perform such other duties as the Chief
Executive Officer 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. BASE SALARY. Employer shall pay Employee, and Employee hereby agrees to
accept, as compensation for services rendered hereunder, a salary of Three
Hundred Thousand Dollars ($300,000.00) per year ($11,538.46 bi-weekly)
effective as of November 1, 1999, subject to an upward adjustment at the sole
discretion of Employer. Employer shall reevaluate Employee's base salary each
year. Employee understands and agrees that Employer has no obligation to
increase his base salary as a result of such evaluation. However, once
Employee's salary is increased, it shall not be subject to reduction without
the consent of Employee (except for across-the-board salary reductions
affecting all management personnel of Employer). 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 12 and 13 hereof.
4. ANNUAL BONUS.
(a) Employer shall pay to Employee a cash bonus for fiscal year 1999 in
the amount of $75,000 to be paid May 1, 2000, subject to Employee being
employed by Employer on February 29, 2000.
(b) Effective as of March 1, 2000 and during the term of this Agreement,
Employee shall participate in Employer's bonus plans, such as Strouds, Inc.
Corporate Exempt Employee Incentive Plan 1998, as may be in effect from time
to time in accordance with Employer's compensation practices and the terms and
provisions of such plan as in effect from time to time.
(c) Any bonus payments shall be paid as soon as practicable, but not
<PAGE>
more than 14 days, after Employer s independent public accounting firm,
currently KPMG LLP, delivers its audit of Strouds, Inc. fiscal year end.
(d) No bonus payments shall be paid to Employee with respect to a fiscal
year during which this Agreement terminates pursuant to Paragraphs 12 (a),
(b), (c), (d), or (e) hereof.
(e) To the extent any bonus payments (or portion thereof) to Employee
would cause Employer's federal income tax deduction to be disallowed pursuant
to Section 162(m) of the Code, or any successor thereto, the payment of such
bonuses (or portion thereof) shall be deferred until such time as the payment
of the bonuses is no longer subject to the limitations of Section 162(m) of
the Code. During such deferral period, Employer shall credit interest on the
deferred amounts at the rate of one percent (1%) above the Bank prime rate, as
it may be adjusted from time to time. At such time as the aggregate amount of
any deferred bonuses and accrued interest exceed One Hundred Thousand Dollars
($100,000), Employer, at Employee s written request, shall fund such amounts
in a "rabbi trust" pursuant to the Internal Revenue Service's Revenue
Procedure 92-64.
5. STOCK OPTIONS.
(a) As an inducement for Employee to enter into this Agreement, Employer
shall grant Employee an option to purchase 200,000 shares of common stock
(subject to adjustment as provided under any applicable stock option plans of
Employer (the "Plan")) in Strouds, Inc. (the "Common Stock") with an exercise
price equal to the fair market value of the Common Stock on November 1, 1999
("Initial Grant"). On the first anniversary of such date of Initial Grant
during the term of this Agreement while Employee is employed by Employer,
Employer shall grant Employee an option to purchase an additional 100,000
shares of Common Stock with an exercise price equal to the fair market value
of the Common Stock on such date. To the extent not inconsistent with the
terms of this Agreement, the options shall be subject to the terms of a stock
option agreement in substantially the form attached hereto as Exhibit A.
(b) 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 Employer on the
anniversary date of the granting of such options. In the event of a Change in
Control (as defined in the stock option agreement in Exhibit A), any
outstanding options shall be immediately and fully vested and exercisable.
6. 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 four 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.
Page 2
<PAGE>
7. RELOCATION EXPENSES.
(a) Employer (i) shall reimburse Employee for all normal and reasonable
expenses (including closing costs on the sale of Employee s home in Houston,
Texas such as brokers fees (not to exceed 6%), documentary stamps, transfer
taxes and title insurance premiums (excluding any loss on the sale of such
home) and the closing costs on the purchase of Employee's new home in southern
California such as title search fees, attorney's fees, recording/notary fees,
credit report, mortgage origination fees, mortgage placement fees, loan points
(not to exceed 1.65%), title examination, home inspection, and other
miscellaneous closing costs normally paid by the buyer) incurred by Employee
in relocating his family and personal effects to California; (ii) for a period
of ninety (90) days from the date hereof, shall reimburse Employee for
reasonable temporary living expenses and rental costs incurred by Employee in
maintaining a temporary residence near Employer's headquarters; and (iii)
shall provide a relocation service to assist Employee in locating a new home
in southern California.
(b) With respect to the reimbursements set forth in Paragraph 7(a),
Employer shall reimburse Employee for the amount of any federal and state
income tax liabilities with respect to Employee's receipt of such
reimbursements from Employer, after taking into account any deductions or
other tax benefits attributable to such reimbursements.
8. INDEMNIFICATION. During the term of this Agreement and for six (6) years
following the termination of Employee's employment, Employer shall extend to
Employee the same indemnification arrangements and maintain directors' and
officers' liability insurance as are generally provided to other similarly
situated management personnel of Employer. Notwithstanding anything to the
contrary, the provisions of this Paragraph 8 shall survive the termination of
this Agreement and the termination of Employee's employment.
9. 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. Air travel for business will be by coach class for domestic flights
and international flights not exceeding six (6) hours. For international
flights exceeding six (6) hours, air travel for business may be by business
class.
10. 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
Page 3
<PAGE>
"Confidential Information"). Employee further recognizes and acknowledges
that all Confidential Information which is now or may hereafter be in
Employee's possession is the property of Employer and that protection of the
Confidential Information against unauthorized disclosure or use is of critical
importance to Employer in order to protect Employer from unfair competition
and irreparable harm. To protect Employer from such harm, Employee therefore
agrees to make the promises set forth in this Paragraph.
(a) PROMISE NOT TO DISCLOSE. Employee promises never to use or disclose
any Confidential Information before it has become generally known within the
relevant industry through no fault of Employee. Employee agrees that this
promise shall never expire.
(b) PROMISE NOT TO SOLICIT. To prevent Employee from inevitably
breaking this promise, Employee further agrees that, while this Agreement is
in effect and for 24 months after its termination: (i) as to any customer or
supplier of Employer with whom Employee had dealings or about whom Employee
acquired proprietary information during his employment, Employee will not
solicit or attempt to solicit the customer or supplier to do business with any
person or entity other than Employer; and (ii) Employee will not solicit for
employment any person who is, or within the preceding 6 months was, an
officer, manager, employee or consultant of Employer.
(c) PROMISE NOT TO ENGAGE IN CERTAIN EMPLOYMENT. Employee agrees that,
while this Agreement is in effect and for 24 months after its termination,
Employee will not accept any employment or engage in any activity in the
retail industry where the sale of bed and bath products exceeds twenty-five
percent (25%) of the business, without the written consent of the Executive
Committee of the Board, excluding Employee (the "Executive Committee"), if the
loyal and complete fulfillment of Employee's duties would inevitably require
Employee to reveal or utilize any Confidential Information that Employee has
promised in this Paragraph 10 not to disclose, as reasonably determined by the
Executive Committee. Notwithstanding any provision to the contrary in this
Agreement, this promise shall only be enforceable while Employee is receiving
payments pursuant to Paragraph 13(b).
(d) RETURN OF CONFIDENTIAL INFORMATION. When Employee's employment
with Employer ends, Employee will promptly deliver to Employer or, at its
written instruction, destroy all documents, data, drawings, manuals, letters,
notes, reports, electronic mail, recordings and copies thereof relating to any
Confidential Information in Employee's possession or control.
(e) PROMISE TO DISCUSS PROPOSED ACTIONS IN ADVANCE. To prevent the
inevitable use or disclosure of Confidential Information, Employee promises
that, before Employee discloses or uses information and before Employee
commences employment, solicitations or any other activity that could possibly
violate the promises made by Employee in this Paragraph 10, Employee will
discuss his proposed actions with the Executive Committee, who will advise
Employee whether his proposed actions would violate these promises.
Page 4
<PAGE>
11. RELIEF. It is recognized that in the event of Employee's breach of
Paragraph 10, 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.
12. 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, without Good Reason (as
defined below), by giving Employer at least 60 days written notice of
termination;
(d) Employee s disability, subject to the Employee's right to receive a
disability benefit as provided in Paragraph 6 hereof, if any;
(e) the election of Employer to terminate Employee's employment for
Cause. For purposes of this Agreement, "Cause" shall mean (i) a determination
by Employer or the Board in its sole discretion exercised in good faith that
there has been (A) willful and continued failure by Employee to substantially
perform his duties with Employer (other than any such failure resulting from
Employee's incapacity due to physical or mental illness or any such actual or
anticipated failure after Employee's issuance of a notice of termination for
Good Reason), after a written demand for substantial performance is delivered
to Employee by the Board, which demand specifically identifies the manner in
which the Board believes that Employee has not substantially performed his
duties, or (B) willful and continued failure by Employee to substantially
follow and comply with the specific and lawful directives of the Board, as
reasonably determined by the Board (other than any such failure resulting from
Employee's incapacity due to physical or mental illness or any such actual or
anticipated failure after Employee's issuance of a notice of termination for
Good Reason), after a written demand for substantial performance is delivered
to Employee by the Board, which demand specifically identifies the manner in
which the Board believes that Employee has not substantially performed his
duties; (ii) Employee's willful commission of an act of fraud or dishonesty
resulting in material economic or financial injury to Employer; or (iii)
Employee's willful engagement in illegal conduct or gross misconduct, in each
case which is materially and demonstrably injurious to Employer; provided
that, in each case of (i), (ii) or (iii), Employee has received written notice
of the described activity, has been afforded a reasonable opportunity to cure,
or correct the activity described in the notice (provided such circumstances
Page 5
<PAGE>
are curable or capable of correction), and has failed to substantially cure,
correct or cease the activity, as appropriate. No act, or failure to act, on
Employee's part shall be deemed "willful" unless done, or omitted to be done,
by Employee not in good faith;
(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 Employee to terminate for Good Reason at any time by
giving Employer written notice of termination. For purposes of this
Agreement, "Good Reason" shall mean, without Employee's express consent, the
occurrence of any of the following circumstances unless, in the case of
subparagraphs 12(g)(i), (iii) or (iv), such circumstances are fully corrected
(provided such circumstances are capable of correction) prior to the date of
Employee's termination of this Agreement:
(i) the assignment to Employee of any duties which are materially
inconsistent with the position in Strouds, Inc. that Employee held on the date
hereof, a significant alteration in the nature or status of Employee's
responsibilities or the conditions of Employee's employment or any other
action by Employer that results in a material diminution in Employee's
position, authority, title, duties or responsibilities;
(ii) the relocation of Employer's offices at which Employee is
principally employed on the date hereof to a location outside the greater Los
Angeles metropolitan area;
(iii) Employer's material breach of the provisions in this
Agreement;
(iv) Employer's reduction of Employee's base salary as provided in
Paragraph 3 (except for across-the-board salary reductions similarly affecting
all management personnel of Employer); or
(v) the removal of Employee from the position of Executive Vice
President, Merchandising and Marketing.
(h) the election of Employer to terminate Employee's employment without
Cause.
(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 or Employer, as
the case may be. 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
Page 6
<PAGE>
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.
13. 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 Paragraph 9
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 12(b),
(c), (d), (e), (f), (g), or (h) 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 12 (f),
(g) or (h), Employer shall be obligated to pay to Employee, in addition to the
obligations set forth in subparagraph 13(a), Employee's base salary and
targeted bonus in effect at the time of termination, for a period of 12 months
(the "Severance Period"), which shall be paid in equal installments at the
same intervals as Employee has been paid during his employment by Employer;
PROVIDED, HOWEVER, that Employee shall be required to seek reasonably
comparable employment or self-employment during the Severance Period and any
compensation or other benefits received by Employee from such employment or
self-employment during the Severance Period shall offset the obligations of
Employer pursuant to this subparagraph 13(b). Employee shall promptly notify
Employer of any employment or self-employment after the termination of
Employee's employment with Employer and any compensation or other benefits
received from such employment or self-employment during the Severance Period.
Employee shall not be restricted from seeking or accepting employment, except
as limited by Paragraph 10(c).
(c) If by reason of Section 280G of the Internal Revenue Code of 1986,
as amended (the "Code") any payment or benefit received or to be received by
Employee (whether payable pursuant to the terms of this Agreement ("Contract
Payments") or any other plan, arrangements or agreement with Employer or
Affiliate (as defined below) (collectively with the Contract payments, "Total
Payments") would not be deductible (in whole or part) by Employer, an
Affiliate or other person making such payment or providing such benefit, then
any payment, benefit or distribution by Employer to the Employee (or
acceleration thereof) pursuant to this subparagraph (the "Severance
Payments") shall be reduced (to zero if necessary) and if the Severance
Page 7
<PAGE>
Payments are reduced to zero, other Contract Payments shall be reduced (to
zero if necessary) and, if Contract Payments are reduced to zero, other Total
Payments shall be reduced (to zero if necessary) until no portion of the Total
Payments is not deductible by Employer by reason of Section 280G of the Code.
For purposes of this limitation, (1) no portion of the Total Payments the
receipt or enjoyment of which Employee has effectively waived in writing prior
to the date of payment of the Severance Payments shall be taken into account;
(2) no portion of the Total Payments shall be taken into account which in the
opinion of tax counsel selected by Employer's independent auditors and
acceptable to Employee does not constitute a "parachute payment" within the
meaning of Section 280G(b)(2) of the Code; (3) the Severance Payments (and,
thereafter, other Contract Payments and other Total Payments) shall be reduced
only to the extent necessary so that the Total Payments in their entirety
constitute reasonable compensation for services actually rendered within the
meaning of section 280G(b)(4) of the Code, in the opinion of the tax counsel
referred to in clause (2), and (4) the value of any noncash benefit or any
deferred payment or benefit included in the Total Payments shall be determined
by Employer s independent auditors in accordance with the principles of
Sections 280G(d)(3) and (4) of the Code. For purposes of this subparagraph
(c), the term "Affiliate" means Employer's successors, any Person whose
actions result in a Change in Control or any corporation affiliated (or which,
as a result of the completion of the transactions causing a Change in Control
shall become affiliated) with Employer within the meaning of Section 1504 of
the Code.
(d) The respective rights and obligations of Employer and Employee
pursuant to Paragraphs 10 and 11 hereof, shall survive the expiration or
earlier termination of this Agreement.
14. INVESTMENT OPPORTUNITIES. Subject to Board approval, Employer shall
provide Employee and other management personnel of Employer with the
opportunity to acquire at the time of formation of any internet joint venture
by Employer not more than an aggregate amount of 10% of the equity interest in
such joint venture upon such terms and conditions as the Board may determine.
15. 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.
16. 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.
17. 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
Page 8
<PAGE>
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.
18. 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.
19. 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 11 hereof and Employee shall
reimburse Employer for all reasonable costs and expenses (including attorneys'
fees) incurred by Employer, if successful, in connection therewith.
20. 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.
21. 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.
22. 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.
Page 9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
Date: 12/10/99 STROUDS, INC.
-------- By: /s/ Charles Chinni
Title: CEO
Date: /s/ Harry Brown
-------- ---------------
Harry Brown
Page 10
