<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 24, 2000
______________________________________________________________________________
SECURITY AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
--------------------------
(Mark One)
[X] ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 26, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE 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 Number)
780 SOUTH NOGALES STREET
CITY OF INDUSTRY, CA 91748
(Address of principal executive offices)
(626) 912-2866
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
Common stock, par value $0.0001
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
------- -------
(Page 1 of 2 Page Cover Page)
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sales price of the Common Stock on May 19,
2000 as reported on the Nasdaq Stock Market, was approximately $10,577,768.
Number of shares of common stock, par value $0.0001 per share, outstanding at
May 19, 2000: 7,146,221
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 2000 Annual Meeting of
Stockholders are incorporated by reference into Part III, to be filed no later
than June 12, 2000.
(Page 2 of 2 Page Cover Page)
<PAGE>
PART I
------
ITEM 1. BUSINESS
- ---------------------
Strouds, Inc. ("Strouds" or the "Company") is a leading specialty retailer of
better quality bed, bath, tabletop and other home textiles products, decorative
accessories, window treatments, furniture and area rugs.
The Company was founded in July 1979 by Wilfred C. Stroud, Jr., currently
serving as the Founder, Chairman Emeritus and a director of the Company's Board
of Directors. The first store opened in Pasadena, California in November 1979
under the name of "Strouds Linen Warehouse." As of February 26, 2000, the end
to the Company's fiscal year, the Company operated 68 retail stores in
California, Illinois, Minnesota, Nevada and Arizona. The Company defines its
fiscal year as the period in which most of the business activity occurs (e.g.,
the year ending February 26, 2000 is referred to as fiscal 1999).
MERCHANDISING
Strouds carries three primary product groupings: bedding, bath, and tabletop.
Bedding merchandise consists of sheets, comforters, bedding accessories, bed
pillows, comforter covers, mattress pads, blankets, decorative pillows and
bedspreads. Bath merchandise consists of towels, bath accessories, bath rugs,
shower curtains and organization items. Tabletop merchandise consists of
tablecloths, placemats, kitchen textiles and napkin rings. Strouds also carries
a limited assortment of home decorating accessories in a number of its stores.
The Company's merchandising strategy is to carry a full line of quality
merchandise to appeal to a broad range of customers, with an emphasis on higher
quality products found in better department and specialty home textile stores.
Strouds' merchandise assortment includes popular brand names and a wide
assortment of more fashion-oriented upscale lines and designer collections, some
of which are not available at certain of its department and specialty store
competitors. The Company also maintains and continues to develop its own
private label lines of merchandise. Its private label line, Strouds Essentials,
for pillows, down comforters and mattress pads augments its brand name linen
lines offering a wide assortment at value prices. The Company believes that the
breadth and depth of its selection exceeds what is generally available in
department stores and is greater than most other specialty home textile stores.
The Company's pricing strategy is to maintain everyday low prices that are
substantially below department store regular prices, and consistently at or
below department store "sale" prices and competitive with prices at its
specialty retail competitors for like merchandise. As one of the leading
participants in the home textiles market, the Company believes that it benefits
from volume purchasing advantages that support its competitive pricing policy.
Page 3
<PAGE>
CUSTOMER SERVICE
Exceptional customer service has always been a key element of the Company's
business strategy. To maintain this service level, the Company continually
invests in customer service training of all management, sales and support staff
within each of its stores. For store management a comprehensive training
program called LEAD (Leadership, Education And Development) is constantly
updated to provide the most current tools available for effective in-store
management, associate training and customer service. The Company employs its
Linen Experts program for sale associates so customers receive the best
information possible on its linen products. The Linen Experts program takes all
sales associates from an initial full-day orientation through a series of
activities including product study, computer education and customer service
training. The program culminates in the Linen Expert Challenge - a formal
examination given twice yearly that, when successfully completed, entitles the
sales associate to wear the Linen Expert badge.
The Company has also taken steps to improve the customer shopping experience at
the point-of-sale ("POS"). This includes developing more efficient "cash wrap"
areas and enhanced POS systems. The Company has upgraded its existing POS
system to provide faster credit card authorization, customer returns and
improved customer receipt information regarding their purchases.
The continual investment in customer service and its liberal return policy, the
Company believes, has allowed it to sustain a superior position to its
competitors. This exceptional customer service position has always been a point
of difference for Strouds.
STORE FORMAT
Full-line Stores
In 1988, the Company changed from its original format, which included stores
ranging from 5,000 to 10,000 square feet, to a larger full-line store format
averaging 17,300 square feet (excluding a 50,000 square foot full-line store in
Irvine, CA) as of fiscal year-end 1998. The primary purpose of the Company's
shift to the full-line store format has been to meet the demands of an
increasingly competitive environment. These stores feature improved merchandise
presentations, new merchandise categories, higher quality fixtures and an
overall ambiance that management believes substantially improves the Strouds
shopping experience. These full-line stores, on average, have experienced
higher sales volume but lower sales per square foot than the Company's original
format stores. As a result, although occupancy costs per square foot have not
risen significantly, occupancy costs as a percentage of net sales have
increased. This has had a negative effect on the Company's gross profit margin
percentage, which includes buying, occupancy and distribution expenses. Because
of the impact of the shift in store format on average store-level performance,
results in different periods may not be comparable.
All of the Company's original format stores have either been converted to the
full-line store or outlet store format. Strouds currently operates 46 full-line
stores averaging approximately 17,300 square feet. The full-line stores that
were open for the full twelve months ended February 26, 2000 generated average
sales of approximately $4.0 million and average sales per square foot of
approximately $222 (excluding the full-line store in Irvine, CA).
Page 4
<PAGE>
Outlet Stores
In 1987, the Company developed, initially through the conversion of original
format and selected full-line stores, an outlet business utilizing the name
and brand development of the Strouds full-line store format. The outlet
format averages 8,300 square feet and targets a more bargain-oriented
customer. The outlet store carries a similar breadth of merchandise like the
Company's full-line stores and consists of direct purchases, manufacturers'
close-outs, overruns and irregular product. Currently, the Company operates
22 outlet stores in California and Arizona.
Comparable outlet stores averaged approximately $2.0 million of sales and
produced average sales per square foot of approximately $252 for the twelve
months ended February 26, 2000 (excluding one outlet store which had sales of
approximately $6.0 million and sales per square foot of approximately $482).
Boutique Stores
In May 2000, the Company opened a new retail concept store, approximately 5,000
square feet, called "Pure Linens" in the upscale community of Rolling Hills
Estates, California. The Pure Linens concept targets the high-end consumer,
offering an array of the finest affordable linens and accessories in an intimate
boutique setting. Approximately 70% of the store's merchandise will overlap the
upper end of Strouds' full-line store product; the other 30% will be a
completely new assortment of even higher-end merchandise, among the finest
luxury linens available anywhere.
The following table shows, by store format, the number of stores in operation at
the end of each of the following fiscal years and the number of stores opened,
closed or converted during each year.
<TABLE>
<CAPTION>
FULL-LINE TOTAL
STORES OUTLET ORIGINAL STORES
------- ------- -------- -------
<S> <C> <C> <C> <C>
1996 ending store count 51 14 2 67
------- ------- ------- -------
1997
- ----
Stores opened 2 --- --- 2
Stores closed (2) (1) --- (3)
Store conversions (2) 4 (2) ---
------- ------- ------- -------
Ending store count 49 17 0 66
------- ------- ------- -------
1998
- ----
Stores opened 1 1 --- 2
Stores closed (2) (1) --- (3)
------- ------- ------- -------
Ending store count 48 17 0 65
------- ------- ------- -------
1999
- ----
Stores opened 1 5 --- 6
Stores closed (3) --- --- (3)
------- ------- ------- -------
Ending store count 46 22 0 68
======= ======= ======= =======
Average square feet per
store February 26, 2000 17,300 8,300 --- 14,900
======= ======= ======= =======
</TABLE>
Page 5
<PAGE>
INTERNET BUSINESS
The Company introduced its internet business in May 1999 on a relatively small
scale. Internet customers are from all 50 states and make higher average
purchases than store customers. California-based purchases represent only 36%
of all internet sales. Since 80% of Strouds stores are located in California,
this means that cannibalization of the Company's own store business is minimal.
The 64% of customers from outside of California make purchasing decisions with
virtually no help from the traditional impetus of advertising, direct mail or
name recognition. Since the initial investment was small, limited marketing
activities have been undertaken in these markets.
The rapid success of the internet business has necessitated some changes that
will allow the site more flexibility and equip it to handle increasing volume.
The Company is working with a leading web site designer to launch a fully
developed, technologically competitive web site in the fall of 2000.
Recognizing that fulfillment will be crucial to the success of the internet
business, the Company invested in a new 85,000 square foot warehouse facility
near its corporate headquarters that will house pick, pack and ship operations
to support internet sales.
MARKETING AND SALES PROMOTION
The Company employs an aggressive advertising program to build brand awareness
and communicate its extensive selection of exceptional values. The Company
utilizes an everyday low price strategy and frequently runs sales events
inconnection with this strategy. The Company primarily uses full color inserts
and direct mail pieces to reach existing and new customers. In addition, the
Company periodically uses television during peak seasonal periods and for
clearance events.
MANAGEMENT INFORMATION SYSTEMS
The Company's management information systems ("MIS") are designed to provide its
management and other personnel with timely and easily accessible information to
control and manage their businesses effectively. The Company has integrated
sales activity in its stores, inventory, purchasing, planning and replenishment,
distribution and financial systems. The Company's point-of sale system provides
price and inventory look-up, promotional pricing as well as a number of
back-office administrative features.
The Company continually invests in its MIS in order to improve customer service
and reduce operating costs. The Company invested heavily in remediation efforts
associated with the year 2000 problem. These efforts resulted in upgrades to
all its mission critical applications and provided a host of new administrative,
data capturing and decision making tools. The Company continues to invest in
supply chain technologies such as carton scanning and advance ship notice
capabilities, faster credit authorization at the point-of-sale and internet
commerce.
Page 6
<PAGE>
PRIOR EXPANSION STRATEGY
Strouds expanded into markets outside of its core California markets during 1994
through 1997. The Company opened 13 full-line stores in the greater Chicago,
Minneapolis and Washington, D.C. markets and Nevada. These stores averaged over
23,000 square feet and were approximately 35% larger than the Company's average
California full-line stores. These new full-line stores carried expanded
product lines and new merchandise categories including housewares. The majority
of these stores experienced high occupancy and operating costs as a result of
low sales volume. Due to the poor operating results of these stores in
particular, the Company suspended its expansion into new markets outside of
California and initiate a restructuring plan, in part, for the purpose of
closing underperforming stores in its expansion markets. As of February 26,
2000, the Company has closed 4 stores in the greater Chicago and Minneapolis
markets, 2 in the Washington, D.C. market and 1 in the Nevada market.
The Company has continued a strategy to expand in its core California markets.
This expansion strategy consists of strategic in-filling with new stores,
relocations of existing stores to adjust to demographic shifts and store
expansions to meet increasing demands. For its fiscal year ended February 26,
2000, the Company opened 1 full-line store in Woodland Hills, California and 2
outlet stores in San Ysidro and Tustin, California. The continued store
development activity in California has from time to time negatively impacted the
sales of existing Strouds stores. Management believes that the benefits of
strengthening its market presence and adjusting to demographic shifts in the
California market have generally outweighed the reduced sales impact experienced
by an existing Strouds store that may share a particular trade area.
In fiscal 1999, January and February 2000, the Company opened 3 new outlet
stores in the Phoenix market. Management believes that Phoenix is an ideal
market for Strouds because of its growth potential and its proximity to
California.
FUTURE EXPANSION
The Company has completed its restructuring efforts, made changes to a number of
merchandise categories which its stores will carry, improved the physical layout
to more visually stimulate the customer, modified the use of advertising media
and increased the frequency of sales events. The combination of these efforts
has resulted in improved operating performance for most of the Company's stores.
Additionally, the revision to the stores' merchandise categories will result in
a scaled down store size which management believes is more economically
efficient. As a result, management believes that it is now positioned to expand
outside of California in a more effective manner than in its previous expansion
efforts. In fiscal 1999, January and February 2000, the Company opened 3 new
outlet stores and in March 2000, opened 1 full-line store in the Phoenix market.
While this name recognition will assist in supporting the introduction of the
Strouds stores, the geographic proximity to California will offer logistical
efficiencies in terms of distribution and management.
Page 7
<PAGE>
COMPETITION
The specialty home textile business is fragmented and highly competitive. The
Company competes with many different types of retail stores that sell many or
most of the products sold by the Company. Such competitors include (i)
department stores, (ii) specialty stores (such as specialty home textile
retailers) and other companies operating full-line stores selling similar
product lines as the Company, (iii) national chain and mass merchandise stores
and (iv) catalog retailers. Many of the Company's competitors have
substantially greater financial and other resources than the Company, including,
in some cases, better name recognition.
The Company believes that the ability to compete successfully in its geographic
markets is determined by several factors, including pricing; breadth and quality
of product selection; in-stock availability of merchandise; effective
merchandise presentation; customer service; and store locations. The Company
believes that it is well-positioned to compete on the basis of these factors.
Nevertheless, there can be no assurance that any or all of the factors that
enable the Company to compete favorably will not be adopted by companies having
greater financial and other resources than the Company. The home textiles
industry is becoming increasingly competitive as several specialty retailers are
expanding into new geographic markets, including opening stores in California.
In addition, as the Company expands into new geographic markets, it will face
new competitors.
SEASONALITY AND QUARTERLY FLUCTUATIONS
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 quarters from year to year. The Company may
encounter different seasonality factors as it enters new markets outside of
California. The timing of new store openings and related preopening expenses,
and the amount of net sales contributed by new and existing stores, may also
cause the Company's quarterly results of operations to fluctuate.
EMPLOYEES
As of February 26, 2000, Strouds employed approximately 1,613 people, of which
1,315 were hourly employees and 298 were salaried. Of these employees, 1,422
were store employees, 47 were distribution center employees and 144 were
corporate level employees. None of the Company's employees is covered by a
collective bargaining agreement. Management believes that the Company enjoys
good employee relations.
TRADEMARKS
The Company has registered in the United States Patent and Trademark Office its
service marks "Strouds," "Strouds, The Linen Experts," "The Linen Experts,"
"Strouds Linen Outlet" and "Strouds Home Compass" for retail services. Strouds
private label merchandise use the registered marks "Essentials" and "Palette"
for bedding, bath and kitchen textile products.
Page 8
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSE OF "SAFE HARBOR PROVISIONS" OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in this Form 10-K (including the information
incorporated herein by reference) that are not related to historical results are
forward-looking statements. The statements are made a number of times
throughout the document and may be identified by such forward-looking
terminology as "believe," "expect," "may," "will," "intend" or similar
statements or variations of such terms. Such forward-looking statements involve
certain risks and uncertainties including levels of sales, store traffic,
acceptance of product offering and fashions, competitive pressures from other
home furnishings retailers, availability of suitable future store locations and
schedules of store expansion plans. These and other important factors that may
cause actual results to differ materially from such forward-looking statements
are included in the "Risk Factors" section of the Company's Registration
Statement on Form S-1 as filed with the Securities and Exchange Commission on
September 13, 1994, and may be contained in subsequent reports filed with the
Securities and Exchange Commission. You are urged to consider such factors.
The Company assumes no obligation for updating any such forward-looking
statements.
Reliance on Key Personnel
The Company is dependent on the services of its Chairman, President and Chief
Executive Officer, Charles R. Chinni and its Chief Operating Officer, Robert M.
Menar. The Company has employment contracts with Mr. Chinni and Mr. Menar
ending on February 28, 2003 and August 8, 2002, respectively. The loss of
services of Mr. Chinni, Mr. Menar or other key officers or employees could have
a material adverse effect on the Company's operations. In addition, there can
be no assurance that the Company will be able to attract and retain additional
key personnel with the skills and expertise to manage its operations.
Business Disruption / Geographic Concentration
The Company's corporate headquarters, principal distribution facility and the
majority of its stores are located in California, a state known for seismic
activity. Operating results could be materially affected by a significant
earthquake if such an event should occur in a geographic area where there is a
concentration of stores. In addition, there can be no assurance that operating
results would not be permanently affected due to such an event.
Anti-Takeover Effect of Certain Provisions of the Company's Certificate of
Incorporation and Bylaws
Certain provisions of the Company's Restated Certificate of Incorporation (the
"Certificate") and Restated Bylaws (the "Bylaws"), as well as Delaware corporate
law, may be deemed to have anti-takeover effects and may delay, defer or prevent
a takeover attempt that a stockholder might consider to be in the stockholder's
best interest. These provisions (i) provide that only the Board of Directors or
Chief Executive Officer of the Company may call special meetings of the
stockholders and that stockholders may not act by written consent, (ii)
establish certain advance notice procedures for nomination of candidates for
election as directors and for stockholder proposals to be considered at
stockholders' meetings and (iii) restrict certain business combinations with
interested stockholders. The Board of Directors of the Company has the
authority to issue preferred stock in one or more series
Page 9
<PAGE>
without the approval of the holders of the Common Stock, par value $0.0001 per
share "Common Stock." In certain circumstances, the fact that provisions are in
place which inhibit or discourage takeover attempts could reduce the market
value of the Common Stock.
Volatility of Stock Price
The Company's Common Stock began trading on the Nasdaq Stock Market on October
12, 1994. The market price of the shares of Common Stock could be subject to
significant fluctuations in response to the Company's operating results and
other factors. In addition, the stock market in recent years has experienced
significant price and volume fluctuations that often have been unrelated or
disproportionate to the operating performance of particular companies. These
fluctuations as well as a shortfall in sales or earnings compared to public
market analysts' expectations, changes in analysts' recommendations or
projections, and general economic and market conditions, may adversely affect
the market price of the Common Stock.
ITEM 2. PROPERTIES
- ----------------------
The Company leases all of its retail stores. The leases expire at various dates
principally between 2001 and 2015. The average new lease is 10 years, and
generally has multiple five-year renewal options. Each store lease is
negotiated individually. Lease terms usually include a fixed minimum rent plus
a percentage of sales in excess of a specified amount. A proportionate share of
certain operating costs such as common area maintenance, utilities, insurance,
and taxes are typically paid by tenants.
The table below sets forth certain information concerning the Company's stores
at the end of fiscal 1999:
<TABLE>
<CAPTION>
State Full-line Store Outlet Total
----- --------------- ------ -----
<S> <C> <C> <C>
California 38 19 57
Illinois 4 -- 4
Minnesota 2 -- 2
Nevada 2 -- 2
Arizona -- 3 3
--- --- ---
Total 46 22 68
=== === ===
</TABLE>
The Company leases its corporate offices (approximately 40,000 square feet) in
City of Industry, California, its distribution center (approximately 100,000
square feet) in Walnut, California and its fulfillment warehouse facility
(approximately 85,000 square feet) in City of Industry, California.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company is not a party to any material legal proceeding and is not aware of
any pending or threatened litigation that, if decided adversely to the Company,
would have a material adverse effect upon the Company's business, results of
operations or financial condition.
Page 10
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
At the Company's Special Meeting of Stockholders held on January 26, 2000, the
following proposal was approved:
<TABLE>
<CAPTION>
Votes Votes Votes Broker
For Against Abstain Non-votes
--------- --------- ------- ---------
<S> <C> <C> <C> <C>
Approve certain amendments to
the Company's Amended and
Restated 1994 Equity Participation
Plan to, among other things (i)
increase the number of shares of
the Company's Common Stock
available for issuance thereunder
from 1,680,000 to 3,680,000 and
(ii) increase the maximum number
of shares that may be granted to
any individual in any calendar year
from 500,000 to 1,000,000, and (iii)
restate the 1994 Plan, as Amended
as the Second Amended and Restated
1994 Equity Participation Plan. 2,516,505 1,494,094 6,899 ---
</TABLE>
Page 11
<PAGE>
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- ------------------------------------------------------------------------------
Stroud's Common Stock is listed on the Nasdaq Stock Market under the symbol
"STRO." On May 19, 2000, there were approximately 1,990 stockholders of the
Company, including beneficial stockholders whose stock is held in nominee or
street name by brokers. The table below sets forth the high and low sales
prices for Strouds' Common Stock as reported by the Nasdaq Stock Market during
the fiscal periods specified:
<TABLE>
<CAPTION>
Fiscal Year 1999 High Low
- ---------------- ------ ------
<S> <C> <C>
First Quarter $ 2.06 $ 1.50
Second Quarter 2.63 1.03
Third Quarter 2.59 1.88
Fourth Quarter 2.94 1.75
<CAPTION>
Fiscal Year 1998 High Low
- ---------------- ------ ------
<S> <C> <C>
First Quarter $ 3.94 $ 1.63
Second Quarter 3.50 2.38
Third Quarter 2.50 1.41
Fourth Quarter 2.13 1.25
</TABLE>
The Company has never declared or paid cash dividends on its Common Stock and
does not anticipate paying cash dividends in the foreseeable future. In
addition, the Credit Facility effectively prohibits the payment of cash
dividends by the Company.
On November 17, 1995, the Board of Directors of the Company declared a dividend
of one preferred stock purchase right (the "Rights") for each share of Common
Stock outstanding at the close of business on November 30, 1995. Each Right
will entitle the registered holder thereof, after the Rights become exercisable
and until November 17, 2005 (or the earlier redemption, exchange or termination
of the Rights), to purchase from the Company one one-hundredth of a share of
Series B Junior Participating Preferred Stock, par value $0.0001 per share
("Preferred Stock"), at a price of $30.00 per one one-hundredth of a Preferred
Share, subject to certain anti-dilution adjustments. The Rights also, under
certain conditions, entitle the holders to purchase $60.00 worth of Common Stock
for $30.00. The Rights expire on November 17, 2005, unless the Company decides
to redeem them earlier at $0.01 per Right or upon the occurrence of certain
events.
The Rights will not be exercisable or transferable apart from the Common Stock
until the earlier to occur of (i) the 10th day after a public announcement that
a Person (broadly defined as any individual or other entity) or group of
affiliated or associated Persons has become an Acquiring Person (a Person or
group of affiliated or associated Persons who has acquired, or obtained the
right to acquire, beneficial ownership of 20% or more of the Common Stock), or
(ii) the 10th day after a Person or group commences, or announces an intention
to commence, a tender or exchange offer, the consummation of which would result
in the beneficial ownership by a Person or group of 20% or more of the Common
Stock. On January 31, 2000, the Company entered into a First Amendment to
Rights Agreement between the Company and American Stock Transfer & Trust, as
Rights Agent, pursuant to which the beneficial ownership threshold that would
trigger the Rights was increased from 15% to 20%.
Page 12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
STROUDS, INC.
SELECTED FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT PER SHARE
AND OPERATING DATA 1999 1998 1997 1996 1995(1)
- ------------------------------ ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
OPERATING STATEMENT DATA:
Net sales $ 223,965 $ 227,571 $ 221,828 $ 209,778 $190,316
Operating income (loss) $ 3,256 $ 2,990 $ (918) $ (22,766) $ 4,754
Net income (loss) $ 1,303 $ 214 $ (3,798) $ (21,968) $ 2,570
Basic
Net income (loss) per share $ 0.18 $ 0.02 $ (0.44) $ (2.58) $ 0.31
Weighted average common shares
outstanding 7,242 8,597 8,553 8,521 8,409
Diluted
Net income (loss) per share $ 0.18 $ 0.02 $ (0.44) $ (2.58) $ 0.30
Weighted average common shares
outstanding(2) 7,335 8,889 8,553 8,521 8,622
OPERATING DATA:
Stores at end of period:
Full-line stores 46 48 49 53 51
Outlet stores 22 17 17 14 10
---------- ---------- ---------- ---------- --------
68 65 66 67 61
========== ========== ========== ========== ========
Total square footage at end of
period 1,012,802 1,012,674 1,042,704 1,050,080 850,858
Comparable store net sales
increase (decrease)(3) (1.7)% 3.3% 0.3% 0.1% (3.4)%
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital $ 47,003 $ 30,612 $ 36,723 $ 44,663 $ 42,879
Total assets $ 101,783 $ 96,443 $ 101,078 $ 112,104 $ 94,007
Long-term debt, including
current maturities $ 45,648 $ 27,511 $ 30,031 $ 32,693 $ 12,683
Stockholder's equity $ 29,632 $ 30,117 $ 29,839 $ 33,573 $ 55,469
</TABLE>
(1) 53 weeks
(2) Includes as common equivalent shares the shares of Common Stock issuable
upon exercise of the warrants and outstanding employee stock options,
unless antidilutive.
(3) A new store or a converted or expanded store becomes comparable after it
has been open under the same format for 13 months. Comparable store net
sales are calculated by comparing new sales for comparable stores on a
fiscal month basis in the respective periods.
Page 13
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
- ------------------------------------------------------------------------
STROUDS, INC.
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 and management believes may 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 ending February 26, 2000 is
referred to as fiscal 1999).
Prior Store Expansion Strategy
Strouds expanded into markets outside of its core California markets during 1994
through 1997. The Company opened 13 full-line stores in the greater Chicago,
Minneapolis and Washington, D.C. markets and Nevada. These stores averaged over
23,000 square feet and were approximately 35% larger than the Company's average
California full-line stores. These new full-line stores carried expanded
product lines and new merchandise categories including housewares. The majority
of these stores experienced high occupancy and operating costs as a result of
low sales volume. As a result of the poor operating results of these stores in
particular, the Company suspended its expansion into new markets outside of
California and announced a restructuring plan, in part, for the purpose of
closing underperforming stores in its expansion markets. As of February 26,
2000, the Company has closed 4 stores in the greater Chicago and Minneapolis
markets, 2 in the Washington, D.C. market and 1 in the Nevada market.
The Company has continued a strategy to expand in its core California markets.
This expansion strategy consists of strategic in-filling with new stores,
relocations of existing stores to adjust to demographic shifts and store
expansions to meet increasing demands. For its fiscal year ended February 26,
2000, the Company opened 1 full-line store in Woodland Hills, California and 2
outlet stores in San Ysidro and Tustin, California. The continued store
development activity in California has from time to time negatively impacted the
sales of existing Strouds stores. Management believes that the benefits of
strengthening its market presence and adjusting to demographic shifts in the
California market have generally outweighed the reduced sales impact experienced
by an existing Strouds store that may share a particular trade area.
In fiscal 1999, January and February 2000, the Company opened 3 new outlet
stores in the Phoenix market. Management believes that Phoenix is an ideal
market for Strouds because of its growth potential and its proximity to
California.
Page 14
<PAGE>
Restructuring Plan
The Company initiated a comprehensive restructuring and cost reduction plan (the
"Restructuring Plan"), resulting in pretax restructuring and asset impairment
charges of $16.3 million in fiscal 1996. The Restructuring Plan included the
closure of 9 stores which were closed by not renewing leases upon expiration and
negotiating settlements with landlords for stores with unexpired leases at dates
of anticipated closure.
In fiscal 1997 and 1998, 7 stores were closed. In June 1999, the Company closed
1 store in the Washington, D.C. market and in February 2000, the Company closed
1 store in the Chicago market. These store closures completed the Company's
Restructuring Plan. The remaining reserve in excess of actual Restructuring
Plan costs in the amount of $0.3 million was reversed in the fourth quarter of
fiscal 1999 and is included in other income on the Statements of Operations.
During fiscal 1999, cash used related to the Restructuring Plan totaled $2.5
million, related primarily to lease termination costs, workforce reductions and
consulting and advisory fees associated with the Company's restructuring and
cost reduction efforts.
The total revenue and operating losses related to the 9 stores identified in
the Restructuring Plan are summarized as follows:
<TABLE>
<CAPTION>
February 26, February 27, February 28,
(in thousands) 2000 1999 1998
- -------------- ----------- ----------- -----------
<S> <C> <C> <C>
Revenues $ 3,263 $ 9,283 $12,995
=========== =========== ===========
Operating Loss $ 926 $ 3,038 $ 4,658
=========== =========== ===========
</TABLE>
Future Expansion
The Company has completed its restructuring efforts, made changes to a number of
merchandise categories its stores will carry, improved the physical layout to
more visually stimulate the customer, modified the use of advertising media and
increased the frequency of sale events. The combination of these efforts has
resulted in improved operating performance for most of the Company's stores.
Additionally, the revision to the stores' merchandise categories will result in
a scaled down store size which management believes is more economically
efficient. As a result, management believes that it is now positioned to expand
outside of California in a more effective manner than in its previous expansion
efforts. In fiscal 1999, January and February 2000, the Company opened 3 new
outlet stores and in March 2000, opened 1 full-line store in the Phoenix market.
While this name recognition will assist in supporting the introduction of the
Strouds stores, the geographic proximity to California will offer logistical
economies in terms of distribution and management.
Page 15
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth selected statements of operations data expressed
as a percentage of net sales for the period indicated:
<TABLE>
<CAPTION>
February 26, February 27, February 28,
Fiscal year ended 2000 1999 1998
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales, buying and occupancy 71.0 71.9 73.6
------ ------ ------
Gross profit 29.0 28.1 26.4
Selling and administrative expenses 27.4 26.7 26.7
Amortization of intangibles 0.1 0.1 0.1
------ ------ ------
Operating income (loss) 1.5 1.3 (0.4)
Other income 0.2 0.1 0.1
Interest expense, net (1.5) (1.3) (1.6)
------ ------ ------
Income (loss) before income taxes 0.2 0.1 (1.9)
Income taxes 0.4 --- 0.2
------ ------ ------
Net income (loss) 0.6% 0.1% (1.7%)
====== ====== ======
</TABLE>
Fiscal 1999 Compared To Fiscal 1998
Net sales for fiscal 1999 decreased $3.6 million, or 1.6%, to $224.0 million
versus $227.6 million in fiscal 1998. Comparable store sales decreased $3.6
million, or 1.7%, for the period. Sales from new stores and expanded or
replacement stores increased by $8.8 million. Sales were reduced by $8.8
million due to 6 store closures, 4 in fiscal 1999 and 2 in fiscal 1998.
Net sales for full-line stores in fiscal 1999 decreased $5.8 million, or 3.0%,
to $184.6 million versus $190.4 million in fiscal 1998. Comparable full-line
store sales decreased $3.6 million, or 2.0%, for the period. Outlet store net
sales in fiscal 1999 increased $2.2 million, or 5.9%, to $39.4 million versus
$37.2 million in fiscal 1998. Comparable outlet store sales remained the same
for the period.
Management believes that the decrease in comparable full-line store 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 to eliminate underperforming merchandise categories as identified in
the Company's Restructuring Plan. The comparable outlet sales remained the same
as there were no material changes in the operations of these stores.
Approximately 21.3% of the comparable stores were affected by new competitive
openings for fiscal 1999 compared to approximately 10.8% for the same period
last year.
Cost of sales, buying and occupancy for fiscal 1999 were $159.1 million versus
$163.6 million for the same period a year ago, a $4.5 million decrease. This
dollar decrease was attributable, primarily, to the decreased sales volume over
fiscal 1998. As a percent of net sales, cost of sales, buying and occupancy
decreased to 71.0% from 71.9% for the same period a year ago. The
Page 16
<PAGE>
improved gross margin points was primarily the result of the Company's
Restructuring Plan which resulted in better inventory management and fewer
markdowns and sales of inventory in underperforming merchandise categories.
Selling and administrative expenses for fiscal 1999 increased $0.6 million to
$61.3 million versus $60.7 million for the same period in fiscal 1998 and
increased as a percentage of net sales from 26.7% to 27.4%. 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 fiscal 1999 of $3.3 million versus $3.0
million for the same period a year ago, a $0.3 million improvement, as a result
of the factors noted above.
Operating income for full-line stores in fiscal 1999 was $2.8 million versus an
operating income of $2.3 million in fiscal 1998. The increase in operating
profit for the full-line stores were a result of the various factors discussed
above. Operating income for the outlet stores was $0.5 million in fiscal 1999
versus $0.7 million in fiscal 1998. The decrease in operating profit for the
outlet stores was primarily due to preopening costs for 5 new outlet stores this
fiscal year.
Interest expense, net, increased $0.5 million to $3.5 million for fiscal 1999
versus $3.0 million in fiscal 1998. The increase was primarily the result of
higher average borrowings and increased interest rates during fiscal 1999.
The Company recorded an income tax benefit of $0.9 million for fiscal 1999
versus no income tax expense or benefit associated with its income for fiscal
1998. The income tax benefit for fiscal 1999 was due to a reduction in the
valuation allowance for certain deferred tax assets.
Fiscal 1998 Compared To Fiscal 1997
Net sales for fiscal 1998 increased $5.8 million, or 2.6%, to $227.6 million
versus $221.8 million in fiscal 1997. Comparable store sales increased $7.1
million, or 3.3%, for the period. Sales from new stores and expanded or
replacement stores increased by $3.9 million. Sales were reduced by $5.2
million due to 6 store closures, 3 in fiscal 1998 and 3 in fiscal 1997.
Net sales for full-line stores in fiscal 1998 increased $3.6 million, or 1.9%,
to $190.4 million versus $186.8 million in fiscal 1997. Comparable full-line
store sales increased $5.7 million, or 3.1%, for the period. Outlet store net
sales in fiscal 1998 increased $2.2 million, or 6.2%, to $37.2 million versus
$35.0 million in fiscal 1997. Comparable outlet store sales increased $1.4
million, or 4.7%, for the period.
Management believes that the increase in comparable full-line store and outlet
store sales over the same period a year ago can be attributable to the Company's
increased promotional efforts, a strong California economy where the majority of
the Company's stores are located and a favorable impact related to fewer
competitive openings. Approximately 10.8% of the comparable stores were
affected by new competitive openings for fiscal 1998 compared to approximately
21.2% for the same period last year.
Cost of sales, buying and occupancy for fiscal 1998 were $163.6 million versus
$163.2 million for the same period a year ago, a $0.4 million increase. This
dollar increase was attributable, primarily, to the increased sales volume
Page 17
<PAGE>
over fiscal 1997. As a percent of net sales, cost of sales, buying and
occupancy decreased to 71.9% from 73.6% for the same period a year ago. The
improved gross profit percentage was primarily due to the favorable impact of
increased sales volume on occupancy costs for existing stores, rent reductions
and the decrease of occupancy costs from the closure of 6 stores over the past
two fiscal years.
Selling and administrative expenses for fiscal 1998 increased $1.4 million to
$60.7 million versus $59.3 million for the same period in fiscal 1997 and
remained constant as a percentage of net sales at 26.7% for the same period a
year ago. The dollar increase was primarily the result of increased
administrative labor staffing and expense recognition for newly established
employee incentive plans. In addition, the Company incurred costs of $0.7
million in fiscal 1998 related to the pursuit of a strategic acquisition
opportunity. The costs primarily consisted of consulting and legal
expenditures.
The Company had operating income for fiscal 1998 of $3.0 million versus an
operating loss of $0.9 million for the same period a year ago, a $3.9 million
improvement, as a result of the factors noted above.
Operating income for full-line stores in fiscal 1998 was $2.3 million versus an
operating loss of $0.9 million in fiscal 1997. Operating income for the outlet
stores was $0.7 million in fiscal 1998 versus no operating income in fiscal
1997. The increases in operating profit for the segments were a result of the
various factors discussed above.
Interest expense, net, decreased $0.6 million to $3.0 million for fiscal 1998
versus $3.6 million in fiscal 1997. The decrease was primarily the result of
lower average borrowings and a lower average interest rate during fiscal 1998.
The Company recorded no income tax expense associated with its income for fiscal
1998. For fiscal 1997, the Company recognized a tax benefit of $0.5 million.
The income tax benefit for fiscal 1997 was due to the carryback of fiscal 1997
tax losses to prior years resulting in a refund of prior years' income taxes.
LIQUIDITY AND CAPITAL RESOURCES
On March 27, 1998, the Company entered into a revolving credit agreement (the
"Credit Facility"). The borrowing limit under this Credit Facility is the
lesser of $50.0 million or the sum of 85% of eligible accounts receivable plus
the lesser of 75% of eligible inventory or 90% of appraised net liquidation
value of inventory.
The Company's capital requirements are primarily for inventory purchases, store
expansion and refurbishment activities and systems development. The Company has
historically financed its operations primarily with internally generated funds
and its credit facility. At February 26, 2000, the Company's working capital
was $47.0 million, while advances from its Credit Facility were $44.6 million.
The Company had $1.8 million available for borrowings under its Credit Facility
as determined by the Company's eligible "borrowing base," as described above, at
February 26, 2000.
Net cash used in operating activities for fiscal 1999 was $7.0 million versus
net cash provided by operating activities $5.6 million in fiscal 1998. Cash
Page 18
<PAGE>
flows from operating activities decreased by $12.6 million primarily due to
increased inventory of $4.6 million, accounts payable and accrued expenses
decreased $5.6 million and the restructuring reserve decreased by $4.0 million.
Net cash used in investing activities for fiscal 1999 was $6.7 million. Net
cash used was for capital expenditures consisting of 6 new store openings, 1
store replacement, improvements to its distribution and warehouse facility,
management information systems development and existing store refurbishments and
remodels.
The Company's capital expenditures for fiscal 2000 are currently expected to be
approximately $5.5 million related primarily to new store development, existing
store expansions, distribution and warehouse expansion and improvements to its
management information systems.
Management believes that funds generated from operations, its Credit Facility
and use of trade credit will be sufficient to satisfy the Company's working
capital requirements and commitments for capital expenditures through fiscal
2000.
Net cash provided by financing activities for fiscal 1999 of $13.7 million. The
Company had net borrowings of $18.1 million primarily to meet working capital
needs. In addition, the Company repurchased 1,800,000 shares of its outstanding
Common Stock in a private transaction for total consideration of $1.9 million.
YEAR 2000
To date, the Company has not experienced any disruptions to its business in
connection with Year 2000 matters. The Company will continue to monitor its
critical systems but does not currently anticipate any significant impacts due
to Year 2000 exposures from its internal systems as well as from the activities
of its suppliers. The Company's costs incurred associated with the Year 2000
issue were approximately $1.6 million over fiscal 1999 and fiscal 1998.
INFLATION
The Company does not believe that inflation has had or will have a material
adverse effect on net sales or results of operations. The Company has generally
been able to pass on increased costs through increases in selling prices.
SEASONALITY AND QUARTERLY FLUCTUATIONS
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 quarters from year to year. The Company may
encounter different seasonality factors as it enters new markets outside of
California. The timing of new store openings and related preopening expenses,
and the amount of net sales contributed by new and existing stores, may also
cause the Company's quarterly results of operations to fluctuate.
Page 19
<PAGE>
NEW PRONOUNCEMENTS BY FINANCIAL ACCOUNTING STANDARDS BOARD
On March 31, 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation - and interpretation of APB Opinion No. 25" (FIN 44). This
interpretation provides guidance for issues that have arisen in applying APB
Opinion No. 25, "Accounting for Stock Issued to Employees." FIN 44 applies
prospectively to new awards, exchanges of award in a business combination,
modifications to outstanding awards, and changes in grantee status that occur on
or after July 1, 2000, except for the provisions related to repricings and the
definition of an employee which apply to awards issued after December 15, 1998.
The provisions related to modifications to fixed stock option awards to add a
reload feature are effective for awards modified after January 12, 2000. The
new interpretation is not expected to have a material impact upon the financial
statements.
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. The statements are made a number of
times throughout the document and may be identified by such forward-looking
terminology as "expect," "believe," "may," "will," "intend" or similar
statements or variations of such terms. 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 including levels of sales, store traffic, acceptance of
product offering and fashions, competitive pressures from other full-line store
retailers and from department stores which carry other products including
certain designer products not carried by the Company's stores, availability of
future store locations and schedule of store expansion plans. These and other
important factors that may cause actual results to differ materially from such
forward-looking statements are more fully described in Item 1, Part I of the
Company's Annual Report on Form 10-K for the Fiscal Year Ended February 26,
2000. You are urged to consider such factors. The Company assumes no
obligation for updating any such forward-looking statements.
ITEM 7A. 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
50% per annum (8.75% and 8.38% at February 26, 2000, 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, except for an embedded interest-rate swap instrument that is
clearly and closely related to the host long-term debt agreement. The
Company believes that the existence of this derivative instrument does not
pose a material risk to the Company's financial position or results of
operations. All of the Company's revenues 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 20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
STROUDS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------
February 26, February 27, February 28,
IN THOUSANDS, EXCEPT PER SHARE DATA 2000 1999 1998
- ------------------------------------ ---------- ---------- -----------
<S> <C> <C> <C>
Net sales $ 223,965 $ 227,571 $ 221,828
Cost of sales, buying and
occupancy 159,108 163,628 163,198
---------- ---------- ----------
Gross profit 64,857 63,943 58,630
Expenses:
Selling and administrative
expenses 61,343 60,695 59,290
Amortization of excess of cost
over net assets acquired 258 258 258
---------- ---------- ----------
Operating income (loss) 3,256 2,990 (918)
Other income 633 254 248
Interest expense, net (3,451) (3,030) (3,598)
---------- ---------- ----------
Income (loss) before income
taxes 438 214 (4,268)
Income tax benefit 865 0 470
---------- ---------- ----------
Net income (loss) $ 1,303 $ 214 $ (3,798)
========== ========== ==========
Per share of common stock:
Basic:
- ------
Net income (loss) per share: $ 0.18 $ 0.02 $ (0.44)
========== ========== ==========
Weighted average shares outstanding 7,242 8,597 8,553
========== ========== ==========
Diluted:
- --------
Net income (loss) per share: $ 0.18 $ 0.02 $ (0.44)
========== ========== ==========
Weighted average shares outstanding 7,335 8,889 8,553
========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
Page 21
<PAGE>
STROUDS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
FEBRUARY 26, FEBRUARY 27,
IN THOUSANDS, EXCEPT SHARE DATA 2000 1999
- --------------------------------- -------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 214 $ 269
Accounts receivable 2,050 1,763
Inventory 65,475 60,832
Prepaid expenses 2,244 3,554
Deferred income taxes 806 439
-------- --------
Total current assets 70,789 66,857
Property and equipment - at cost, net of
accumulated depreciation and amortization 22,366 21,354
Excess of cost over net assets acquired, net of
accumulated amortization 7,015 7,273
Deferred income taxes 498 ---
Other assets 1,115 959
-------- --------
Total assets $101,783 $ 96,443
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 686 $ 624
Accounts payable 12,953 15,565
Accrued expenses 10,147 15,726
Current portion of restructuring and asset
impairment reserves --- 4,330
-------- --------
Total current liabilities 23,786 36,245
Long-term debt (primarily revolving debt) 44,962 26,887
Other non-current liabilities 3,403 3,194
-------- --------
Total liabilities 72,151 66,326
-------- --------
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
February 26, 2000, 7,110,620 shares; and
February 27, 1999, 8,624,131 shares 1 1
Treasury stock at cost; February 26, 2000,
1,800,000 shares (1,890) ---
Additional paid-in capital 39,248 39,146
Accumulated deficit (7,727) (9,030)
-------- --------
Total stockholders' equity 29,632 30,117
-------- --------
Total liabilities and stockholders' equity $101,783 $ 96,443
======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
Page 22
<PAGE>
STROUDS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common stock Additional Total
-------------- paid-in Accumulated Treasury stockholders'
IN THOUSANDS Shares Amount capital deficit stock equity
- --------------------- ------ ------ ------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 1, 1997 8,536 $ 1 $39,018 $(5,446) $ --- $33,573
Net loss --- --- --- (3,798) --- (3,798)
Common stock issued through
1994 Employee Stock
Purchase Plan 43 --- 64 --- --- 64
----- ---- ------- ------- ------- -------
Balance, February 28, 1998 8,579 $ 1 $39,082 $(9,244) $ --- $29,839
Net income --- --- --- 214 --- 214
Common stock issued through
1994 Employee Stock
Purchase Plan 44 --- 62 --- --- 62
Common stock issued upon
exercise of stock options 1 --- 2 --- --- 2
----- ---- ------- ------- ------- -------
Balance, February 27, 1999 8,624 $ 1 $39,146 $(9,030) $ --- $30,117
Net income --- --- --- 1,303 --- 1,303
Common stock issued through
1994 Employee Stock
Purchase Plan 56 --- 70 --- --- 70
Common stock issued upon
exercise of stock options 18 --- 32 --- --- 32
Common stock issued upon
exercise of warrants 213 --- --- --- --- ---
Purchase of treasury stock (1,800) --- --- --- (1,890) (1,890)
----- ---- ------- ------- ------- -------
Balance, February 26, 2000 7,111 $ 1 $39,248 $(7,727) $(1,890) $29,632
----- ---- ------- ------- ------- -------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
Page 23
<PAGE>
STROUDS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------
February 26, February 27, February 28,
IN THOUSANDS 2000 1999 1998
- ------------------------------------ --------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,303 $ 214 $ (3,798)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization of property and
equipment 5,372 4,749 4,755
Loss on abandonment of property and equipment 2 --- 165
Amortization of excess of cost over net assets
acquired 258 258 258
Deferred income taxes (865) --- 608
(Increase) decrease in:
Accounts receivable (287) (113) 307
Inventory (4,643) 3,170 5,764
Prepaid expenses 1,310 (41) (1,678)
Income taxes receivable --- 1,078 1,410
Increase (decrease) in:
Accounts payable and accrued expenses (5,461) 2,803 (2,286)
Restructuring and asset impairment reserves (3,973) (6,485) (3,524)
Other 53 (17) 216
--------- --------- ---------
Net cash (used in) provided by operating
activities (6,931) 5,616 2,197
--------- --------- ---------
Net cash used in investing activities:
Capital expenditures (6,743) (5,233) (2,426)
--------- --------- ---------
Cash flows from financing activities:
Borrowings (repayments) under long-term debt-net 18,137 (2,521) (2,616)
(primarily revolving debt)
Principal payments under capital lease obligations (106) --- (46)
(Decrease) increase in overdraft (2,624) 1,825 2,580
Repurchase of common stock held in treasury (1,890) --- ---
Other equity transactions 102 64 64
--------- --------- ---------
Net cash provided by (used in) financing
activities 13,619 (632) (18)
--------- --------- ---------
Net decrease in cash (55) (249) (247)
Cash at beginning of period 269 518 765
--------- --------- ---------
Cash at end of period $ 214 $ 269 $ 518
--------- --------- ---------
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 3,216 $ 2,984 $ 3,385
--------- --------- ---------
Income taxes $ --- $ --- $ 28
--------- --------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
Page 24
<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY
Strouds, Inc. ("Strouds" or the "Company"), a Delaware corporation, is a
specialty retailer of bed, bath, tabletop and other home textiles products,
decorative accessories and other selected home furnishings. At February 26,
2000, the Company operated 68 stores (46 full-line stores and 22 outlets) in
five states under the name Strouds.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company's fiscal year is based on a 52-53 week fiscal year ending on the
Saturday closest to the last day of February. The fiscal years ended February
26, 2000, February 27, 1999 and February 28, 1998 included 52 weeks.
The Company has defined its fiscal year as the period in which most of the
activity occurs (e.g., the year ending February 26, 2000 is referred to as
fiscal 1999).
Asset Impairment
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Long-lived operating assets
are reviewed at the individual store level. Intangible assets are reviewed at
an organizational level. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net
cashflows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the assets.
See note 5.
Revenue Recognition
Revenue is recognized when the customer takes possession of the merchandise,
that is the point of sale . Revenue is shown net of returns.
Stock Compensation
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
123, "Accounting for Stock Based Compensation" ("SFAS No. 123"), and has elected
to measure compensation cost under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and comply with the pro forma
disclosure requirements of SFAS No. 123, except for options and warrants granted
to non-employees, which are accounted for under SFAS No. 123.
Page 25
<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Segment Information
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131") requires public
business enterprises to report information about operating segments in annual
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, full-line stores
and outlet stores. During the current year, the Company expanded into two new
business segments; internet and boutique stores. Revenues and results of
operation from these segments were minor in fiscal 1999. See note 12.
Fair Value of 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.
Use Of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses for the years then ended. Actual
results could differ from those estimates.
Inventory
Inventory is stated at the lower of cost (principally average cost) or market as
determined by the retail inventory method. Included in inventory costs for
financial reporting purposes is the capitalization of certain buying,
warehousing, storage and transportation costs. Capitalized costs in inventory
at February 26, 2000 and February 27, 1999 were $1,713,000 and $1,598,000,
respectively.
Page 26
<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Depreciation And Amortization
Depreciation and amortization are provided on a straight-line basis over the
following estimated useful lives:
Furniture, fixtures and equipment 5 to 7 years
Equipment held under capital leases Term of the lease
Leasehold improvements Term of the lease or life of
the asset, whichever is shorter
(generally 7 to 10 years)
Excess Of Cost Over Net Assets Acquired
Excess of cost over net assets acquired is amortized on a straight-line basis
over its estimated useful life of 40 years. As part of an ongoing review and
evaluation of intangible assets, management assesses the carrying value of the
Company's intangible assets if facts and circumstances suggest that it may be
impaired. If this review indicates that the intangibles will not be
recoverable, as determined by an undiscounted cash flow analysis over the
remaining amortization period, the carrying value would be reduced to estimated
fair market value. Accumulated amortization amounted to $3,311,000 as of
February 26, 2000 and $3,053,000 as of February 27, 1999. No writedowns were
recorded during the fiscal years ended February 26, 2000 and February 27, 1999.
Concentration of Credit Risk
The Company's deposits are with various high quality financial institutions.
Customer purchases are transacted generally using cash or credit cards.
Advertising Costs
The Company charges production costs of advertising to expense the first time
the advertising takes place. The advertising expense amounted to $8,311,000,
$8,222,000 and $8,807,000 for fiscal 1999, 1998 and 1997 respectively.
Store Preopening Costs
Store preopening costs, consisting primarily of advertising, labor and supplies
directly related to the opening of specific stores, are expensed as incurred.
Income Taxes
The Company accounts for income taxes under the asset and liability method,
whereby deferred income taxes are provided for the temporary differences between
the financial reporting basis and income tax basis of the Company's assets and
liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
Page 27
<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 February 26, 2000 and February 27, 1999, the
reserve balance was $50,000 and $0, respectively. The Company anticipates all
of these costs to be incurred within a twelve to twenty four month period. The
Company evaluates its store closure reserve on a quarterly basis and makes
periodic adjustments as necessary.
Reclassifications
Certain reclassifications have been made to the fiscal 1998 and 1997 amounts to
conform to the fiscal 1999 presentation.
3. INCOME (LOSS) PER SHARE
The following is a reconciliation of the numerator and denominator used in the
basic and diluted earnings (loss) per share ("EPS") calculations:
<TABLE>
<CAPTION>
February 26, February 27, February 28,
IN THOUSANDS, EXCEPT PER SHARE DATA 2000 1999 1998
- ------------------------------------ ----------- ----------- -----------
<S><C> <C> <C> <C>
Numerator:
Net income (loss) $ 1,303 $ 214 $ (3,798)
Denominator:
Basic EPS
Weighted average common shares
outstanding 7,242 8,597 8,553
Effect of dilutive securities:
Warrants and stock options 93 292 ---
Diluted EPS
Weighted average common shares
and dilutive potential common
shares outstanding 7,335 8,889 8,553
- ------------------------------------ ----------- ----------- -----------
Basic EPS $ 0.18 $ 0.02 $ (0.44)
Diluted EPS $ 0.18 $ 0.02 $ (0.44)
</TABLE>
Page 28
<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
3. INCOME (LOSS) PER SHARE (Continued)
In fiscal 1999 and 1998, respectively, options to purchase 1,492,000 and 918,000
shares of common stock, par value $0.0001 par share, of the Company (the "Common
Stock") were not included in the computation of diluted earnings per common
share because the option price was greater than the average market price of the
Common Stock during the year, and therefore their inclusion would have been
antidilutive. Options to purchase 697,000 shares and warrants to purchase
213,000 shares of Common Stock in fiscal 1997 were not included in the
computation of diluted earnings per common share because the Company was in a
loss position and their inclusion would have been antidilutive.
4. PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
<TABLE>
<CAPTION>
February 26, February 27,
IN THOUSANDS 2000 1999
--------------------------------- --------- ---------
<S> <C> <C>
Furniture, fixtures and equipment $ 48,106 $ 44,351
Equipment held under capital leases 597 ---
Leasehold improvements 9,033 8,205
--------- ---------
57,736 52,556
Accumulated depreciation and amortization (35,370) (31,202)
--------- ---------
$ 22,366 $ 21,354
========= =========
</TABLE>
Page 29
<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
5. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
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 was 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 26, 2000, the Company had closed 9 stores related to its
restructuring efforts.
In June 1999, the Company closed 1 store in the Washington, D.C. market and in
February 2000, the Company closed 1 store in the Chicago market. These store
closures completed the Company's Restructuring Plan. The remaining reserve in
excess of actual Restructuring Plan costs in the amount of $332,000 was reversed
in the fourth quarter of fiscal 1999 and is included in other income on the
Statements of Operations.
During fiscal 1999, cash used related to the Restructuring Plan totaled
$2,453,000, related primarily to lease termination costs, workforce reductions
and consulting and advisory fees associated with the Company's restructuring and
cost reduction efforts.
The following table summarizes the original Restructuring Plan charge:
(in thousands)
- ---------------------------------------
<TABLE>
<S> <C>
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
=========
</TABLE>
Page 30
<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
5. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES (Continued)
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 in 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> <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
February 26, 2000 2,264 1,514 220 3,998
Adjustment ** (1,565) 1,314 (81) (332)
-------- -------- -------- --------
Reserve balance,
February 26, 2000 $ 0 $ 0 $ 0 $ 0
======== ======== ======== ========
</TABLE>
Page 31
<PAGE>
STROUDS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
5. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES (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. During the fourth
quarter of fiscal 1999, the Company completed its restructuring efforts and
accordingly reversed the remaining reserve of $332,000 which is included in
other income on the Statements of Operations.
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 are summarized as follows:
<TABLE>
<CAPTION>
February 26, February 27, February 28,
(in thousands) 2000 1999 1998
- -------------- ----------- ----------- -----------
<S> <C> <C> <C>
Revenues $ 3,263 $ 9,283 $12,995
=========== =========== ===========
Operating Loss $ 926 $ 3,038 $ 4,658
=========== =========== ===========
</TABLE>
6. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
February 26, February 27,
IN THOUSANDS 2000 1999
-------------------------------- ----------- ---------
<S> <C> <C>
Cash overdraft $ 1,781 $ 4,405
Salary, wages and related expense 2,659 3,629
Sales tax 1,258 1,164
Other 4,449 6,528
----------- ---------
$ 10,147 $ 15,726
=========== =========
</TABLE>
Page 32
<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
7. LONG-TERM DEBT, PRIMARILY REVOLVING DEBT
Long-term debt, primarily revolving debt, is summarized as follows:
<TABLE>
<CAPTION>
February 26, February 27,
IN THOUSANDS 2000 1999
------------------------------------------------ ----------- ------------
<S> <C> <C>
Revolving promissory note payable to a financial
institution ("Credit Facility"), secured by
inventory, The borrowing limit is the lesser of
$50,000,000 or the sum of 85% of eligible
accounts receivable plus the lesser of 75% of
eligible inventory or 90% of appraised net
liquidation value of inventory. Interest is
payable at a rate equivalent to the Chase
Manhattan Bank Rate ("Bank Rate") plus 0.25%
per annum or LIBOR plus 2.50% per annum
(8.75% and 8.38% at February 26, 2000,
respectively). The Company can lower its
interest spread up to a maximum of 0.25% and
0.50% on its Bank Rate and LIBOR borrowings,
respectively, if it achieves a certain fixed
charge coverage ratio, as defined, measured on
a quarterly rolling twelve month basis. The
revolving promissory note expires March 26, 2001
and may be renewed annually thereafter. $ 44,594 $ 25,833
Promissory note payable to a financial institution,
secured by equipment, fixtures and leasehold
improvements at two store locations. Interest is
payable at the rate of 9.580% per annum. The
promissory note is for five years, payable in
monthly installments through September 2001. 1,054 1,678
-------- --------
Total debt 45,648 27,511
Less current maturities 686 624
-------- --------
Total long-term debt $ 44,962 $ 26,887
======== ========
</TABLE>
Scheduled maturities for total debt outstanding at February 26, 2000 are as
follows:
<TABLE>
<CAPTION>
IN THOUSANDS Notes payable
------------- -------------
<S> <C>
Fiscal year:
2000 $ 686
2001 44,962
-------
$45,648
=======
</TABLE>
Page 33
<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
7. LONG-TERM DEBT (Continued)
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 February 26, 2000.
Included in this facility is a $7,000,000 letter of credit sub-facility. At
February 26, 2000, the Company had letters of credit outstanding amounting to
$781,000 for its purchase commitments to foreign suppliers under this
sub-facility.
On February 17, 2000, the Company entered into an Interest Rate Swap Agreement
(the "New Agreement") with a financial institution. The New Agreement is
effective March 1, 2000 and was entered into for the purpose of converting a
portion of its borrowings to a long-term fixed base rate of interest. The
Company converted $20,000,000 to a weighted average fixed base interest rate of
6.82% plus 2.25% until this New Agreement expires on March 3, 2003. The Company
has accounted for this hybrid derivative instrument at fair value. As of
February 26, 2000, the fair value of the agreement was nominal. The embedded
interest rate swap is clearly and closely related to the host long-term debt
agreement. The existence of the embedded swap feature does not have a material
impact on the fair value of the host long-term debt agreement. In connection
with the New Agreement, the Company has issued a standby letter of credit in the
amount of $500,000 to secure the interest rate risk associated with this
agreement. Concurrently, the Company terminated its existing agreement with the
same financial institution which covered $10,000,000 at a weighted average fixed
base interest rate of 6.03% plus 2.50%.
Page 34
<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
8. LEASE COMMITMENTS
At February 26, 2000, the Company occupied all of its facilities under operating
leases. The leases require minimum and percentage rental payments based on
gross sales and provide that the Company pay property taxes and costs arising
from the Company's use of the leased property. The leases are primarily for
ten-year periods, and certain leases contain renewal options. For lease
agreements with scheduled rent increases during the lease term or for rental
payments commencing on a date other than the initial occupancy, rental expense
is recognized from the date of occupancy on a straight-line basis over the lease
term. Total rental expense amounted to $22,454,000, $22,756,000 and $23,778,000
for fiscal 1999, 1998 and 1997, respectively.
The Company is obligated under various capital leases for certain machinery and
equipment that expire in August 2003. The gross amount of machinery and
equipment and related accumulated depreciation recorded under the capital leases
at February 26, 2000 and February 27, 1999 was $597,000 and $209,000,
respectively.
The Company has operating leases for equipment. These leases are for six month
to five year periods, and certain leases contain renewal options. The rental
expense amounted to $178,000, $983,000 and $797,000 for fiscal 1999, 1998 and
1997 respectively.
Minimum rental commitments under all operating leases are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
IN THOUSANDS LEASES LEASES
-------------- --------- ---------
<S> <C> <C>
Fiscal year:
2000 $ 148 $ 19,998
2001 148 18,810
2002 148 16,966
2003 37 15,018
2004 13,783
Thereafter 37,385
--------- ---------
Total minimum lease payments 481 $ 121,960
Less amount representing interest 64 =========
---------
Present value of minimum capital
lease payments 417
Less current installments of obligations
under capital leases 116
---------
Obligations under capital leases
excluding current installments $ 301
=========
</TABLE>
Page 35
<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
9. INCOME TAXES
The components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
February 26, February 27, February 28,
IN THOUSANDS 2000 1999 1998
-------------- ----------- -------- ---------
<S> <C> <C> <C>
Current:
Federal $ --- $ --- $(1,078)
State --- --- ---
------- ------- -------
Total current income tax
benefit --- --- (1,078)
------- ------- -------
Deferred:
Federal (738) --- 303
State (127) --- 305
------- ------- -------
Total deferred income tax
(benefit) expense (865) --- 608
------- ------- -------
Net income tax
benefit $ (865) $ --- $ (470)
======= ======= =======
</TABLE>
A summary of the deferred tax assets (liabilities) is as follows:
<TABLE>
<CAPTION>
February 26, February 27,
IN THOUSANDS 2000 1999
------------------- ----------- --------
<S> <C> <C>
Deferred tax assets:
Inventory $ 541 $ 772
Cash versus accrual basis 2,630 4,428
Net operating loss and tax
credit carryovers 6,481 5,052
------- -------
9,652 10,252
Valuation allowance (6,729) (7,950)
------- -------
Total deferred tax assets 2,923 2,302
Deferred tax liabilities:
Property and equipment (1,619) (1,863)
Capital equipment held on lease --- ---
------- -------
Total deferred tax liabilities (1,619) (1,863)
------- -------
Net deferred tax assets $ 1,304 $ 439
======= =======
</TABLE>
Page 36
<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
9. INCOME TAXES (Continued)
During fiscal 1999, the Company recorded a reduction in its valuation allowance
of $1,221,000 reflecting management's assessment of the expected benefit to be
derived from deferred tax assets which is considered more likely than not to be
realized. Such estimate is based upon management's projections of taxable
income for the immediate periods it is able to forecast.
The reconciliation of the Federal statutory rate to the effective tax rate is as
follows:
<TABLE>
<CAPTION>
February 26, February 27, February 28,
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
Amortization of excess of cost
over net assets acquired 24.2 42.2 (2.1)
Change in valuation allowance (304.3) (97.5) (19.8)
Non-deductible expenses and other 47.6 20.3 (2.1)
------- ------- -------
(197.5)% 0.0% 11.0%
======= ======= =======
</TABLE>
The Company has net operating loss carryforwards of approximately $15.2 million
and $9.6 million for Federal and California income taxes, respectively. These
loss carryforwards expire in fiscal years ending after 2020 and 2005,
respectively.
10. STOCKHOLDERS' EQUITY
On November 17, 1995, the Board of Directors of the Company declared a dividend
of one preferred stock purchase right (the "Rights") for each share of Common
Stock outstanding at the close of business on November 30, 1995. Each Right
will entitle the registered holder thereof, after the Rights become exercisable
and until November 17, 2005 (or the earlier redemption, exchange or termination
of the Rights), to purchase from the Company one one-hundredth of a share of
Series B Junior Participating Preferred Stock, par value $0.0001 per share, at a
price of $30.00 per one one-hundredth of a Preferred Share, subject to certain
anti-dilution adjustments. The Rights also, under certain conditions, entitle
the holders to purchase $60.00 worth of Common Stock for $30.00. The Rights
expire on November 17, 2005, unless the Company decides to redeem them earlier
at $0.01 per Right or upon the occurrence of certain events.
Page 37
<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
10. STOCKHOLDERS' EQUITY (Continued)
The Rights will not be exercisable or transferable apart from the Common Stock
until the earlier to occur of (i) the 10th day after a public announcement that
a Person (broadly defined as any individual or other entity) or group of
affiliated or associated Persons has become an Acquiring Person (a Person or
group of affiliated or associated Persons who has acquired, or obtained the
right to acquire, beneficial ownership of 20% or more of the Common Stock), or
(ii) the 10th day after a Person or group commences, or announces an intention
to commence, a tender or exchange offer, the consummation of which would result
in the beneficial ownership by a Person or group of 20% or more of the Common
Stock.
No event during fiscal 1999 made the Rights exercisable.
The Company issued 1,025,077 warrants to purchase shares of Common Stock related
to a prior year's financing arrangement. The warrants were exercisable at any
time at the exercise price of $0.0002 per share. Such warrants to purchase
212,850 shares of common stock were exercised during fiscal 1999. As of
February 26, 2000, no warrants to purchase shares of Common Stock were
outstanding.
On April 19, 1999, Strouds repurchased 1,800,000 shares of its outstanding
Common Stock in a private transaction. The average cost in the repurchase was
$1.05 per share. The repurchased shares were put into the Company's treasury
stock valued at cost. Concurrently, warrants for 212,850 shares of Common Stock
were exercised.
11. EMPLOYEE BENEFITS
Strouds sponsors the Strouds Profit Sharing and Retirement Plan (the "Plan"), a
qualified plan under Section 401(k) of the Internal Revenue Code of 1986, as
amended (the "Code"). The Plan covers substantially all full-time employees and
provides for Company matching of employee contributions, at the discretion of
the Board of Directors of the Company, up to 3% of each employee's salary.
Effective April 1997, the Company suspended matching contributions. Matching
contributions totaled $16,000 for fiscal 1997. At the end of each fiscal year,
the Board of Directors of the Company recommend a specific annual amount to be
awarded to the profit sharing portion of the Plan. In fiscal 1998, the Company
contributed $100,000 to the profit sharing plan. No contributions were made in
fiscal 1999.
Page 38
<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
11. EMPLOYEE BENEFITS (Continued)
On May 19, 1994, the Company's Board of Directors adopted the Second Amended and
Restated 1994 Equity Participation Plan ("1994 Plan") to attract and retain
directors, officers and key employees. The 1994 Plan authorizes the
Compensation Committee of the Board of Directors to issue 3,680,000 shares of
Common Stock upon exercise of options, stock appreciation rights, and other
awards, or as restricted or deferred stock awards. Under this plan, 1,351,466
shares are available to be granted. The exercise price of the non-qualified
stock options awarded under the 1994 Plan is determined by the Compensation
Committee and can be less than fair market value but not less than par value
($0.0001). The Compensation Committee can determine the period of
exercisability and the vesting schedule; however, the life of the option is
limited to ten years from the date of grant.
On October 20, 1999, the Company's Board of Directors adopted the 1999 Special
Purpose Stock Option Plan ("1999 Plan") to retain key employees who are not
officers or directors and to attract new employees who may become officers or
directors of the Company. The 1999 Plan authorizes the Compensation Committee
of the Board of Directors to issue 2,000,000 shares of Common Stock upon
exercise of options, stock appreciation rights, and other awards, or as
restricted or deferred stock awards. Under this plan, 1,524,000 shares are
available to be granted. The exercise price of the non-qualified stock options
awarded under the 1999 Plan is determined by the Compensation Committee and can
be less than fair market value but not less than par value ($0.0001). The
Compensation Committee can determine the period of exercisability and the
vesting schedule; however, the life of the option is limited to ten years from
the date of grant.
There were 12,900 options outstanding at February 26, 2000 related to the Stock
Option Plan for Executives and Key Employees (the "1988 Plan"). The 1988 Plan
was amended to prohibit the issuance of any additional options after September
1, 1994.
On May 14, 1997, the Compensation Committee approved repricing all previously
granted options to current employees to $1.75 per share with credit for accrued
vesting in the option. Repriced options could not be exercised for a period of
one year from the date of repricing. The number of options cancelled and
reissued due to the repricing were 447,284.
Page 39
<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
11. EMPLOYEE BENEFITS (Continued)
Information with respect to the Company's option plans is summarized as follows:
<TABLE>
<CAPTION>
February 26, February 27, February 28,
2000 1999 1998
----------------- ----------------- -----------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 1,087,984 $2.11 909,205 $2.14 755,109 $7.06
Granted 1,942,000 $1.88 373,100 $2.70 1,067,434 $2.01
Exercised (19,370) $1.80 (840) $1.75 --- $ --
Cancelled (213,390) $2.22 (193,481) $3.39 (913,338) $6.06
------- -------- ------- -------- ------- --------
Outstanding at
end of year 2,797,224 $1.94 1,087,984 $2.11 909,205 $2.14
======= ======== ======= ======== ======= ========
Exercisable at
end of year 517,587 245,810 133,000
======= ======= =======
Weighted-average fair
value of options
granted during
the year $1.88 $2.70 $2.00
===== ===== =====
</TABLE>
The following table summarizes information about the stock options
outstanding at February 26, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------- ---------------------
Weighted- Weighted- Weighted-
Number average average Number average
Range of outstanding contractual exercise exercisable exercise
exercise prices at 02/26/00 life price at 02/26/00 price
---------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 1.06 to $ 1.50 565,770 9.19 $ 1.30 21,520 $ 1.39
1.63 to 1.78 345,224 6.49 1.73 178,497 1.75
1.81 to 2.06 339,500 7.50 1.89 159,600 1.89
2.06 to 2.16 1,126,000 9.89 2.07 100,000 2.16
2.25 to 3.25 420,730 8.86 2.68 57,970 2.89
---------------- ----------- ----------- -------- ----------- --------
$ 1.06 to $ 3.25 2,797,224 8.88 $ 1.94 517,587 $ 1.98
================ =========== =========== ======== =========== ========
</TABLE>
Page 40
<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
11. EMPLOYEE BENEFITS (Continued)
On September 1, 1994, the Company's Board of Directors adopted the 1994 Employee
Qualified Stock Purchase Plan (the "Purchase Plan"). The purpose of the
Purchase Plan is to enable the Company to grant options to employees to buy
shares of its Common Stock, at a 15% discount from the then fair market value
without commissions and other charges, to attract and retain experienced and
capable employees and to help employees to further identify their interests with
those of the Company's stockholders generally. The Purchase Plan is intended to
qualify as an "employee stock purchase plan," as defined in Section 423(b) of
the Code. An aggregate of 250,000 shares of Common Stock has been reserved for
issuance under the Purchase Plan, subject to adjustment for stock splits, stock
dividends and similar events. In fiscal 1999, the Company issued 55,659 shares
under the Purchase Plan.
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123). Accordingly, no compensation cost has been recognized for the stock
option or stock purchase plans. Had compensation cost for the Company's 1999,
1994 and 1988 plans been determined consistent with SFAS No. 123, the Company's
net income (loss) and net income (loss) per share for 1999, 1998 and 1997 would
approximate the pro forma amounts below:
<TABLE>
<CAPTION>
February 26, February 27, February 28,
IN THOUSANDS, EXCEPT PER SHARE DATA 2000 1999 1998
- ------------------------------------- ------------ ----------- -----------
<S> <C> <C> <C>
Net income (loss):
As reported $ 1,303 $ 214 $ (3,798)
Pro forma $ (295) $ (348) $ (4,153)
Net income (loss) per share:
Basic
As reported $ 0.18 $ 0.02 $ (0.44)
Pro forma $ (0.12) $ (0.04) $ (0.49)
Diluted
As reported $ 0.18 $ 0.02 $ (0.44)
Pro forma $ (0.12) $ (0.04) $ (0.49)
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model using the following weighted-average
assumptions:
<TABLE>
<CAPTION>
February 26, February 27, February 28,
Weighted-average assumptions 2000 1999 1998
---------------------------- ------------ ----------- -----------
<S> <C> <C> <C>
Risk-free interest rate 6.0% 5.1% 6.0%
Expected volatility 45% 45% 45%
Expected dividend yield 0% 0% 0%
Expected life (years) 9 9 9
</TABLE>
Page 41
<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
12. 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 revenue and earnings from operations. Interest income and
expense is evaluated on a consolidated basis and not allocated to the Company's
business segments.
Segment information is summarized as follows:
<TABLE>
<CAPTION>
February 26, February 27, February 28,
IN THOUSANDS 2000 1999 1998
- ------------------------------- ----------- ----------- -----------
<S><C> <C> <C> <C>
Net revenue:
Full-line stores $ 184,639 $ 190,390 $ 186,827
Outlet stores 39,326 37,181 35,001
----------- ----------- ----------
$ 223,965 $ 227,571 $ 221,828
=========== =========== ==========
Operating income (loss):
Full-line stores $ 2,824 $ 2,320 $ (946)
Outlet stores 432 670 $ 28
----------- ----------- ----------
$ 3,256 $ 2,990 $ (918)
=========== =========== ==========
Total assets:
Full-line stores $ 68,241 $ 65,715
Outlet stores 11,117 7,330
Other (1) 22,425 23,398
----------- -----------
$ 101,783 $ 96,443
=========== ===========
- ---------------------------------------------------------------------------
</TABLE>
(1) Other includes corporate and distribution center property, equipment and
assets which are not attributed to a business segment.
Page 42
<PAGE>
STROUDS, INC.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The results of operations for fiscal 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
IN THOUSANDS, EXCEPT PER SHARE DATA Quarter Quarter Quarter Quarter
- ---------------------------------------- ------- ------- ------- -------
<S><C> <C> <C> <C> <C>
FISCAL 1999:
Net sales $53,605 $53,399 $57,192 $59,769
Gross profit $14,727 $15,665 $17,049 $17,416
Operating income (loss) $ (528) $ 747 $ 1,056 $ 1,981
Net income (loss) $(1,182) $ 31 $ 248 $ 2,206
Basic net income (loss) per share (1) $ (0.15) $ (0.00) $ 0.04 $ 0.31
Diluted net income (loss) per share (1) $ (0.15) $ (0.00) $ 0.03 $ 0.31
FISCAL 1998:
Net sales $55,015 $54,190 $59,162 $59,204
Gross profit $14,678 $15,000 $17,411 $16,854
Operating income $ 106 $ 358 $ 1,196 $ 1,330
Net income (loss) $ (596) $ (366) $ 506 $ 670
Basic net income (loss) per share (1) $ (0.07) $ (0.04) $ 0.06 $ 0.08
Diluted net income (loss) per share (1) $ (0.07) $ (0.04) $ 0.06 $ 0.08
- ----------------------------------------------------------------------------------
</TABLE>
(1) Net income per share amounts for each qaurter are required to be
computed independently and may not equal the amount computed for the total
year.
Page 43
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The integrity and objectivity of the financial statements and related financial
information in this report are the responsibility of the management of the
Company. The financial statements have been prepared in conformity with
generally accepted accounting principles and include, when necessary, the best
estimates and judgments of management.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance, at appropriate cost, that assets are safeguarded,
transactions are executed in accordance with management's authorization, and the
accounting records provide a reasonable basis for the preparation of the
financial statements. The system of internal accounting controls is continually
reviewed by management and improved and modified as necessary in response to
changing business conditions and recommendations of the Company's independent
auditors.
The Audit Committee of the Board of Directors, currently consisting solely of
outside non-management directors, meet periodically with management and the
independent auditors to review matters relating to the Company's financial
reporting, the adequacy of internal accounting controls and the scope and
results of audit work. The independent auditors have free access to the Audit
Committee.
KPMG LLP, certified public accountants, are engaged to audit the financial
statements of the Company. Their Independent Auditors' Report, which is based
on an audit made in conformity with generally accepted auditing standards,
expresses an opinion as to the fair presentation of these financial statements.
/s/Charles R. Chinni
- --------------------
Charles R. Chinni
Chairman of the Board, President and Chief Executive Officer
/s/Robert M. Menar
- ------------------
Robert M. Menar
Director, Chief Operating Officer and Secretary
/s/Gary A. Van Wagner
- ---------------------
Gary A. Van Wagner
Vice President - Chief Financial Officer
Page 44
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Strouds, Inc.:
We have audited the accompanying balance sheets of Strouds, Inc. as of
February 26, 2000 and February 27, 1999 and the related statements of
operations, stockholders' equity and cash flows for each of the years in the
three-year period ended February 26, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Strouds, Inc. as of February
26, 2000 and February 27, 1999 and the results of its operations and its cash
flows for each of the years in the three-year period ended February 26, 2000 in
conformity with generally accepted accounting principles.
/s/KPMG LLP
- -----------
Los Angeles, California
April 18, 2000
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- ------------------------------------------------------------------------
Not applicable.
Page 45
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
DIRECTORS
The information required by this Item is incorporated by reference to the
Company's 2000 Proxy Statement (the "Proxy Statement") under the heading
"General Information - Election of Directors."
EXECUTIVE OFFICERS
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Executive Officers and Certain Key
Personnel."
COMPLIANCE WITH SECTION 16(a) UNDER THE SECURITIES EXCHANGE ACT
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Section 16(a) Beneficial Ownership
Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the headings "Compensation of Directors" and
"Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Security Ownership of Certain
Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Certain Relationships and Related
Transactions."
Page 46
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------
(a) The following documents are filed as a part of this report.
1. Financial Statements:
The following financial statements of Strouds, Inc. are included under Item 8:
<TABLE>
<S><C> <C>
Statements of Operations -
for the fiscal years ended February 26, 2000,
February 27, 1999 and February 28, 1998 Page 21
Balance Sheets -
as of February 26, 2000 and February 27, 1999 Page 22
Statements of Stockholders' Equity -
for the fiscal years ended February 26, 2000,
February 27, 1999 and February 28, 1998 Page 23
Statements of Cash Flows -
for the fiscal years ended February 26, 2000,
February 27, 1999 and February 28, 1998 Page 24
Notes to the Financial Statements Page 25
Management's Responsibility for Financial Reporting Page 44
Independent Auditors' Report Page 45
2. Not applicable
3. Exhibits:
</TABLE>
The exhibits on the accompanying Index to Exhibits are filed as part of, or
incorporated by reference into, this report.
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<C> <S>
3.1 Form of Restated Certificate of Incorporation of the Company.
Incorporated herein by reference to Amendment No. 1 to
the Company's Form S-1, Registration No. 33-82090, as
filed with the Commission on September 13, 1994.
3.2 Restated By-laws of the Company.
Incorporated herein by reference to Amendment No. 1 to
the Company's Form S-1, Registration No. 33-82090, as
filed with the Commission on September 13, 1994.
4.1 Rights Agreement, dated as of November 17, 1995, between
Strouds, Inc. and American Stock Transfer & Trust Company.
Incorporated herein by reference to the Company's Form
8-K, as filed with the Commission on December 1, 1995.
* 4.2 First Amendment to Rights Agreement, dated as of January 31,
2000, between Strouds, Inc. and American Stock Transfer &
Trust Company.
</TABLE>
Page 47
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<C> <S>
** 10.1 Second Amended and Restated 1994 Equity Participation Plan of
the Company.
Incorporated herein by reference to the Company's
Form S-8, Registration No. 333-34684, as filed with
the Commission on April 13, 2000.
** 10.2 1999 Special Purpose Stock Option Plan of the Company.
Incorporated herein by reference to the Company's
Form S-8, Registration No. 333-91515, as filed with
the Commission on November 23, 1999.
** 10.3 Form of the Company's Employee Qualified Stock Purchase Plan.
Incorporated herein by reference to Amendment No. 1 to
the Company's Form S-1, Registration No. 33-82090, as
filed with the Commission on September 13, 1994.
** 10.4 Amendment to the Strouds, Inc. Employee Qualified Stock
Purchase Plan dated January 5, 1995.
Incorporated herein by reference to the Company's Form
10-K for the fiscal year ended February 25, 1995, as
filed with the Commission on May 25, 1995.
10.5 Security Agreement between Lyon Credit Corporation and
Strouds, Inc., dated July, 1996.
Incorporated herein by reference to the Company's Form
10-Q for the period ended August 31, 1996, as filed
with the Commission on October 11, 1996.
10.6 Financing Agreement between The CIT Group/Business Credit,
Inc. and Strouds, Inc. dated March 27, 1998.
Incorporated herein by reference to the Company's Form
10-K for the fiscal year ended February 28, 1998, as
filed with the Commission on May 27, 1998.
* 10.7 Interest Rate Swap Agreement between Wells Fargo Bank,
National Association and Strouds, Inc. dated February 17,
2000.
10.8 Employment Agreement between Charles Chinni and Strouds,
Inc., dated October 20, 1999.
Incorporated herein by reference to the Company's Form
10-Q for the period ended November 27, 1999, as filed
with the Commission on January 11, 2000.
10.9 Employment Agreement between Robert M. Menar and Strouds,
Inc., dated August 9, 1999.
Incorporated herein by reference to the Company's Form
10-Q for the period ended November 27, 1999, as filed
with the Commission on January 11, 2000.
10.10 Employment Agreement between Harry Brown and Strouds,
Inc., dated November 1, 1999.
Incorporated herein by reference to the Company's Form
10-Q for the period ended November 27, 1999, as filed
with the Commission on January 11, 2000.
* 23 Consent of Independent Auditors
* 27 Financial Data Schedule
- ------------------------------
</TABLE>
* Filed herewith
** Management contract or compensatory plan or arrangement required to be
filed as an exhibit to the form pursuant to Item 14(a)3 of Form 10-K.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Company during the last fiscal
quarter of fiscal 1999.
Page 48
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
STROUDS, INC.
(Registrant)
/s/Charles R. Chinni May 19, 2000
--------------------
Charles R. Chinni
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below on its behalf of the Registrant in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Charles R. Chinni Chairman of the Board, May 19, 2000
- --------------------- President and Chief Executive Officer
Charles R. Chinni (Principal Executive Officer)
/s/ Wilfred C. Stroud Founder, Chairman Emeritus May 19, 2000
- --------------------- and Director
Wilfred C. Stroud
/s/ Dale D. Achabal Director May 19, 2000
- -------------------
Dale D. Achabal
/s/ Larry R. Bemis Director May 19, 2000
- ------------------
Larry R. Bemis
/s/ Marshall S. Geller Director May 19, 2000
- ------------------------
Marshall S. Geller
/s/ Marco F. Weiss Director May 19, 2000
- ------------------
Marco F. Weiss
/s/ Robert M. Menar Director, Chief Operating May 19, 2000
- --------------------- Officer and Secretary
Robert M. Menar
/s/ Gary A. Van Wagner Vice President - May 19, 2000
- ---------------------- Chief Financial Officer
Gary A. Van Wagner (Principal Financial Officer and
Principal Accounting Officer)
</TABLE>
Page 49
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<C> <S>
3.1 Form of Restated Certificate of Incorporation of the Company.
Incorporated herein by reference to Amendment No. 1 to
the Company's Form S-1, Registration No. 33-82090, as
filed with the Commission on September 13, 1994.
3.2 Restated By-laws of the Company.
Incorporated herein by reference to Amendment No. 1 to
the Company's Form S-1, Registration No. 33-82090, as
filed with the Commission on September 13, 1994.
4.1 Rights Agreement, dated as of November 17, 1995, between
Strouds, Inc. and American Stock Transfer & Trust Company.
Incorporated herein by reference to the Company's Form
8-K, as filed with the Commission on December 1, 1995.
* 4.2 First Amendment to Rights Agreement, dated as of January 31,
2000, between Strouds, Inc. and American Stock Transfer &
Trust Company.
** 10.1 Second Amended and Restated 1994 Equity Participation Plan of
the Company.
Incorporated herein by reference to the Company's
Form S-8, Registration No. 333-34684, as filed with
the Commission on April 13, 2000.
** 10.2 1999 Special Purpose Stock Option Plan of the Company.
Incorporated herein by reference to the Company's
Form S-8, Registration No. 333-91515, as filed with
the Commission on November 23, 1999.
** 10.3 Form of the Company's Employee Qualified Stock Purchase Plan.
Incorporated herein by reference to Amendment No. 1 to
the Company's Form S-1, Registration No. 33-82090, as
filed with the Commission on September 13, 1994.
** 10.4 Amendment to the Strouds, Inc. Employee Qualified Stock
Purchase Plan dated January 5, 1995.
Incorporated herein by reference to the Company's Form
10-K for the fiscal year ended February 25, 1995, as
filed with the Commission on May 25, 1995.
10.5 Security Agreement between Lyon Credit Corporation and
Strouds, Inc., dated July, 1996.
Incorporated herein by reference to the Company's Form
10-Q for the period ended August 31, 1996, as filed
with the Commission on October 11, 1996.
10.6 Financing Agreement between The CIT Group/Business Credit,
Inc. and Strouds, Inc. dated March 27, 1998.
Incorporated herein by reference to the Company's Form
10-K for the fiscal year ended February 28, 1998, as
filed with the Commission on May 27, 1998.
* 10.7 Interest Rate Swap Agreement between Wells Fargo Bank,
National Association and Strouds, Inc. dated February 17,
2000.
10.8 Employment Agreement between Charles Chinni and Strouds,
Inc., dated October 20, 1999.
Incorporated herein by reference to the Company's Form
10-Q for the period ended November 27, 1999, as filed
with the Commission on January 11, 2000.
10.9 Employment Agreement between Robert M. Menar and Strouds,
Inc., dated August 9, 1999.
Incorporated herein by reference to the Company's Form
10-Q for the period ended November 27, 1999, as filed
with the Commission on January 11, 2000.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<C> <S>
10.10 Employment Agreement between Harry Brown and Strouds,
Inc., dated November 1, 1999.
Incorporated herein by reference to the Company's Form
10-Q for the period ended November 27, 1999, as filed
with the Commission on January 11, 2000.
* 23 Consent of Independent Auditors
* 27 Financial Data Schedule
- ------------------------------
</TABLE>
* Filed herewith
** Management contract or compensatory plan or arrangement required to be
filed as an exhibit to the form pursuant to item 14(a)3 of Form 10-K.
<PAGE>
FIRST AMENDMENT
to
RIGHTS AGREEMENT
between
STROUDS, INC.
and
AMERICAN STOCK TRANSFER & TRUST COMPANY
as Rights Agent
Dated as of January 31, 2000
<PAGE>
FIRST AMENDMENT TO RIGHTS AGREEMENT
FIRST AMENDMENT, dated as of January 31, 2000 ("First Amendment"), to
Rights Agreement dated as of November 17, 1995 (the "Rights Agreement"), between
Strouds, Inc., a Delaware corporation (the "Company"), and American Stock
Transfer & Trust Company, a New York banking corporation, as Rights Agent (the
"Rights Agent"). Capitalized terms used but not otherwise defined herein shall
have the meanings ascribed to them in the Rights Agreement.
WHEREAS, the Company and the Rights Agent previously entered into the
Rights Agreement; and
WHEREAS, pursuant to Section 26 of the Rights Agreement, the Company and
the Rights Agent may from time to time supplement or amend any provision of the
Rights Agreement in accordance with the terms of such Section 26.
NOW, THEREFORE, in consideration of the foregoing premised and mutual
agreements set forth in the First Amendment, the parties hereby amend the Rights
Agreement as follows:
1. Section 1.1 of the Rights Agreement is hereby amended by deleting
the percentage "15%" in each of the first and third (including the proviso
thereto) sentences thereof and substituting the percentage "20%" therefor.
2. The second sentence of Section 1.ll of the Rights Agreement is
hereby amended by deleting the percentage "15%" and substituting the percentage
"20%" therefor.
3. The first sentence of Section 3.1 of the Rights Agreement is hereby
amended by deleting the percentage "15%" and substituting the percentage "20%"
therefor.
4. The second paragraph of Exhibit C to the Rights Agreement ("SUMMARY
OF RIGHTS TO PURCHASE PREFERRED SHARES") is hereby amended and rested in its
entirety as follows:
"Until the earlier to occur of (i) the 10th day after a public
announcement that a person or group of affiliated or associated persons (an
"ACQUIRING PERSON") has acquired, or obtained the right to acquire, beneficial
ownership of 20% or more of the Common Shares or (ii) the 10th day after the
commencement or announcement of an intention to make a tender offer or exchange
offer the consummation of which would result in the beneficial ownership by a
person or group of 20% or more of the Common Shares (the earlier of (i) and (ii)
being called the "DISTRIBUTION DATE," whether or not either such date occurs
prior to the Record Date), the Rights will be evidenced, with respect to any of
the Common Share certificates outstanding as of the Record Date, by such Common
Share certificate. Notwithstanding the foregoing, BT Capital Corporation ("BT
CAPITAL") shall not be an Acquiring Person unless and until BT Capital shall
acquire beneficial ownership of any Common Shares of the Company on or after
November 17, 1995."
<PAGE>
5. The seventh paragraph of Exhibit C to the Rights Agreement ("SUMMARY
OF RIGHTS TO PURCHASE PREFERRED SHARES") is hereby amended and rested in its
entirety as follows:
"In the event that a Person becomes an Acquiring Person (except
pursuant to certain cash offers for all outstanding Common Shares approved by
the Board) or if the Company were the surviving corporation in a merger with an
Acquiring Person or any affiliate or associate of an Acquiring Person and the
Common Shares were not changed or exchanged, each holder of a Right, other than
Rights that are or were acquired or beneficially owned by the 20% stockholder
(which Rights will thereafter be void), will thereafter have the right to
receive upon exercise that number of Common Shares having a market value of two
times the then current Purchase Price of the Right. With certain exceptions, in
the event that the Company were acquired in a merger or other business
combination transaction or more than 50% of its assets or earning power were
sold, proper provision shall be made so that each holder of a Right shall
thereafter have the right to receive, upon the exercise thereof at the then
current Purchase Price of the Right, that number of shares of common stock of
the acquiring company which at the time of such transaction would have a market
value of two times the then current Purchase Price of the Right."
6. This First Amendment shall be effective as of the date hereof and,
except as expressly set forth herein, the Rights Agreement shall remain in full
force and effect and be otherwise unaffected hereby.
7. This First Amendment may be executed in any number of counterparts,
each of which, when executed, shall be deemed to be an original and all such
counterparts shall together constitute one and the same document.
IN WITNESS WHEREOF, the parties have executed this First Amendment as of
the date first written above.
STROUDS, INC.
By: /s/Robert M. Menar
------------------
Name: Robert M. Menar
Title: Chief of Operations
AMERICAN STOCK TRANSFER & TRUST COMPANY
By: /s/Herbert J. Lemmer
------------------
Name: Herbert J. Lemmer
Title: Vice President
Page 2
<PAGE>
EXHIBIT 10.7
INTEREST RATE SWAP AGREEMENT
THIS AGREEMENT ("Agreement") is entered into as of the 17th day of
February, 2000, by and between STROUDS, INC. ("Fixed Rate Payer"), and WELLS
FARGO BANK, NATIONAL ASSOCIATION ("Floating Rate Payer").
WHEREAS, both Fixed Rate Payer and Floating Rate Payer seek to reduce
actual or expected exposure to changes in interest rates or to lower costs of
actual or expected borrowings.
WHEREAS, the Fixed Rate Payer is willing to make the payments based on a
fixed rate of interest as provided herein; and
WHEREAS, the Floating Rate Payer is willing to make the payments based on a
floating rate of interest as provided herein;
NOW THEREFORE, in consideration of their mutual covenants, Fixed Rate Payer
and Floating Rate Payer agree as follows:
1. DEFINITIONS. The capitalized terms, "Effective Date", "Fixed Rate",
"Floating Rate", "Floating Rate Maturity", "Net Swap Settlement Payment Dates",
"Reset Dates", "Swap Amount", "Termination Date" and "Trade Date" shall each be
as specified in the Swap Confirmation. All other capitalized terms shall have
the meanings set forth below or otherwise as set forth in this Agreement:
(a) "BUSINESS DAY" means a day (other than Saturday, Sunday or
holiday) on which Bank is open and conducting its customary banking transactions
in the State of California.
(b) "BUSINESS DAY CONVENTION" means, for purposes of determining each
Calculation Period, that convention specified in the Swap Confirmation for
adjusting any relevant date if it would otherwise fall on a day that is not a
Business Day, so that:
(i) if "following" is specified, that date will be the first
following day that is a Business Day;
(ii) if "modified following" is specified, that date will be the
first following day that is a Business Day unless that day falls in the next
calendar month, in which case that date will be the first preceding day that is
a Business Day; and
(iii) if "preceding" is specified, that date will be the first
preceding day that is a Business Day.
Page 1
<PAGE>
(c) "CALCULATION PERIOD" means, subject to the Business Day
Convention, each consecutive period designated in the Swap Confirmation, the
first of which will commence on, and include, the Effective Date and extend to,
but exclude, the first Reset Date. Each subsequent Calculation Period will
commence on, and include, the Reset Date and extend to, but exclude the next
Reset Date. The final Calculation Period will end on, but exclude, the
Completion Date.
(d) "SWAP CONFIRMATION" means a document, substantially in the form
of Exhibit A hereto, with the information required in each blank space
completed.
(e) "COMPLETION DATE" shall mean the Termination Date unless an Early
Termination Date has occurred, in which case the Completion Date shall be the
Early Termination Date.
(f) "DAY COUNT CONVENTION" means that the calculation of each Net
Swap Settlement will be based on the actual number of days in the Calculation
Period divided by a 360-day year.
(g) "EARLY TERMINATION DATE" means the date, if any, prior to the
Termination Date upon which this Agreement is terminated pursuant to Paragraph
3(a) below.
(h) "LIBOR" means, with respect to each Calculation Period, the rate
for deposits in U.S. Dollars for a period equal to the Floating Rate Maturity,
as such rate appears on Telerate Page 3750 as of 11:00 AM, London Time, on the
Reset Date (or the Effective Date in the case of the initial Period). If such
rate does not appear on Telerate Page 3750, the rate for that Reset Date will be
the arithmetic mean of the rates quoted by major Banks in London, selected by
Floating Rate Payer, for a period equal to the Floating Rate Maturity, as of
11:00 AM, London Time, on the Reset Date.
(i) "TELERATE PAGE 3750" means the display designated as "Page
3750" on the Dow Jones Telerate Service (or such other page as may replace Page
3750 on that service or such other service as may be nominated by the British
Bankers' Association as the information vendor for the purpose of displaying
British Bankers' Association Interest Settlement Rates for U.S. Dollar
Deposits).
2. DETERMINATION; NET SWAP SETTLEMENT PAYMENTS.
(a) On the first Business Day following the end of each Calculation
Period, Floating Rate Payer will send Fixed Rate Payer a written notice
("Settlement Notice") specifying:
(i) the amount of interest which would have accrued on the Swap
Amount during the Calculation Period at a rate per annum equal to the Floating
Rate ("Floating Rate Payment").
(ii) the amount of interest which would have accrued on the Swap
Amount during the Calculation Period at a rate per annum equal to the Fixed Rate
("Fixed Rate Payment"); and
(iii) the difference, if any, between the Floating Rate Payment
and the Fixed Rate Payment ("Net Swap Settlement Payment").
Page 2
<PAGE>
(b) All calculations under Paragraph 2(a) above will be made on the
basis of the Day Count Convention.
(c) On each Net Swap Settlement Payment Date:
(i) if the Fixed Rate Payment exceeds the Floating Rate Payment,
Fixed Rate Payer shall pay Floating Rate Payer the amount of the Net Swap
Settlement Payment by, at Floating Rate Payer's option, Floating Rate Payer's
debiting Fixed Rate Payer's demand deposit account with Floating Rate Payer, or
by wiring funds to Floating Rate Payer; or
(ii) if the Floating Rate Payment exceeds the Fixed Rate Payment,
Floating Rate Payer shall pay Fixed Rate Payer the amount of the Net Swap
Settlement Payment by, at Floating Rate Payer's option, crediting Fixed Rate
Payer's demand deposit account with Floating Rate Payer, or by wiring funds to a
designated Fixed Rate Payer account.
3. EARLY TERMINATION.
(a) This Agreement shall expire on the Termination Date and neither
party may terminate this Agreement prior thereto; provided, however that in the
event that either Floating Rate Payer or Fixed Rate Payer fail to make any
payment when due hereunder or otherwise fail to perform any of their obligations
hereunder, unless such default is cured within five Business Days of the
defaulting party's receipt of written notice thereof, the non-defaulting party
may, so long as such default in then continuing, upon five Business Days written
notice terminate this Agreement.
(b) In the event of an early termination of this Agreement pursuant
to Paragraph 3(a), the defaulting party shall promptly pay the non-defaulting
party, on demand, an amount equal to the Termination Amount. Each party hereto
acknowledges the Termination Amount to be a reasonable estimate of the value,
costs and loss of compensation incurred by the other party as a result of the
early termination of this Agreement.
(c) "Termination Amount" means the amount in U.S. Dollars equal to
the arithmetic mean of the respective one-time all-in fees (including
documentation costs) communicated to the non-defaulting party on the earliest
practicable Business Day following the Early Termination Date by each of three
leading commercial banks or investment banking firms in San Francisco, Los
Angeles or New York selected in good faith by the non-defaulting party as the
fee that it would charge to assume, as of the Early Termination Date, all of the
rights and obligations of the defaulting party. However, if one or more such
entities fail so to communicate such a fee, the Termination Amount shall be
determined on the basis of those fees so communicated by the other entities.
4. LIMITATIONS OF LIABILITY. In no event shall either party hereto be
liable to the other for loss of profit or indirect, special, consequential,
punitive or exemplary damages, arising out of any default under this Agreement.
Page 3
<PAGE>
5. NOTICES. All notices and other communications required or permitted
to be given hereunder shall be in writing and shall be deemed served when
personally delivered or, if mailed, upon the first to occur of receipt or the
expiration of seventy-two hours after deposit in the United States Postal
Service, certified mail, or if sent by overnight courier service, upon the first
to occur of receipt or 3:00 p.m. (local time at place of delivery) the next
Business Day, addressed to Floating Rate Payer or Fixed Rate Payer at their
respective addresses set forth in the Swap Confirmation.
6. SUCCESSORS; ASSIGNS. This Agreement shall be binding on and inure to
the benefit of the successors and assigns of the parties; provided, however,
that Fixed Rate Payer shall not, without the prior written consent of Floating
Rate Payer, assign (whether by operation of law or otherwise) its rights and
obligations under this Agreement or any interest herein and any such attempted
assignment shall be void and without force or effect.
7. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California, without giving effect to
any choice of law doctrine.
8. NO THIRD PARTY BENEFICIARY. This Agreement and the payments to be
made by the parties hereunder are solely for the benefit of the parties hereto
for the purposes stated herein and no other person or entity shall have any
rights hereunder or be a beneficiary of either party's obligations under this
Agreement.
9. COUNTERPARTS. This Agreement and the Swap Confirmation may be
executed in any number of counterparts and by each party hereto on separate
counterparts, each of which when executed and delivered shall constitute an
original, but all the counterparts shall together constitute but one and the
same instrument.
10. AMENDMENTS; WAIVERS. Any amendment or waiver of any right under any
provision of this Agreement shall be in writing and, in the case of an
amendment, signed by both parties hereto, or in the case of a waiver, signed by
the party waiving such right. No failure or delay by either party hereto in
exercising any right, power or privilege hereunder shall operate as a waiver
thereof.
11. TRADE DATE; INTEREST AGREEMENT NOT CREDIT COMMITMENT. This Agreement
shall be effective at, and as of, 12:01 a.m., California time, on the Trade
Date. Nothing in this Agreement shall be construed to (i) mean that Floating
Rate Payer is committed to make a loan or extend any other credit to Fixed Rate
Payer, or (ii) amend or modify any contract, instrument or document executed in
connection with the Loan Facility.
12. COSTS, EXPENSES AND ATTORNEYS' FEES. In the event of any dispute or
litigation between the parties hereto, the prevailing party shall be entitled to
recover from the other party, immediately upon demand, all costs and expenses,
including reasonable attorneys' fees, incurred by the prevailing party in
connection with the enforcement of its rights and/or the collection of any
amounts which become due to it under this Agreement, and the prosecution or
defense of any action in any way related to this Agreement, including any of the
foregoing incurred in connection with any bankruptcy proceeding relating to such
other party.
Page 4
<PAGE>
13. ENTIRE AGREEMENT. This Agreement and the Swap Confirmation constitute
the entire agreement and understanding of the parties with respect to its
subject matter and supersedes all oral communications and prior writings with
respect thereto.
14. SECURITY. All obligations of Fixed Rate Payer are secured by a Standby
Letter of Credit issued by Chase Manhattan Bank in the amount of $175,000
expiring on March 1, 2001.
15. NO RELIANCE. In connection with the negotiation of and entering
into this Agreement, (i) Fixed Rate Payer acknowledges that the Floating Rate
Payer is not acting as a fiduciary or a financial or investment advisor for
it; (ii) Fixed Rate Payer is not relying upon any advice, counsel or
representations (whether written or oral) of the Floating Rate Payer hereto
other than the representations expressly set forth in this Agreement, and in
any Confirmation; (iii) the Floating Rate Payer has not given Fixed Rate
Payer any advice or counsel as to the expected or projected success, return,
performance, result, consequence or benefit (either legal, regulatory, tax,
financial, accounting, or otherwise) of this Agreement; (iv) Fixed Rate Payer
has consulted with its own legal, regulatory, tax, business, investment,
financial and accounting advisors to the extent is has deemed necessary and
has made its own investment, hedging, and trading decisions (including
decisions regarding suitability of any Transaction pursuant to this
Agreement) based upon its own judgment and upon any advice from such advisors
as it has deemed necessary and not upon any view expressed by the other party
hereto; (v) Fixed Rate Payer has determined that the rates, prices, or
amounts and other terms of each Transaction in the indicative quotations (if
any) provided by Floating Rate Payer hereto reflect those in the relevant
market for similar Transactions, and all trading decisions have been the
result of arms length negotiations between the parties; (vi) Fixed Rate Payer
is entering into this Agreement with a full understanding of all of the
terms, conditions and risks thereof (economic and otherwise), and Fixed Rate
Payer is capable of assuming and willing to assume (financially and
otherwise) those risks; and (vii) Fixed Rate Payer is a sophisticated
investor.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first written above.
Floating Rate Payer: Fixed Rate Payer:
WELLS FARGO BANK, STROUDS, INC.
NATIONAL ASSOCIATION
By: /s/Steven D. Berg By: /s/Gary Van Wagner
----------------- ------------------
Name: Steven D. Berg Name: Gary Van Wagner
Its: Vice President Its: Senior Vice President and CFO
Page 5
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
To Board of Directors
Strouds, Inc.:
We consent to incorporation by reference in the Registration Statements on Form
S-8 (No. 333-34684 and No. 333-91515) of our report dated April 18, 2000,
relating to the balance sheets of Strouds, Inc. as of February 26, 2000 and
February 27, 1999 and the related statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
February 26, 2000, which report appears in the February 26, 2000 Annual Report
on Form 10-K of Strouds, Inc.
/s/KPMG LLP
- --------------------------
Los Angeles, California
May 24, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS OF OPERATIONS AND BALANCE SHEETS FOUND ON PAGES 21 AND 22 OF
THE COMPANY'S FORM 10-K FOR THE YEAR, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> FEB-26-2000
<PERIOD-START> FEB-28-1999
<PERIOD-END> FEB-26-2000
<CASH> 214
<SECURITIES> 0
<RECEIVABLES> 2,050
<ALLOWANCES> 0
<INVENTORY> 65,475
<CURRENT-ASSETS> 70,789
<PP&E> 57,736
<DEPRECIATION> 35,370
<TOTAL-ASSETS> 101,783
<CURRENT-LIABILITIES> 23,786
<BONDS> 0
0
0
<COMMON> 1
<OTHER-SE> 29,631
<TOTAL-LIABILITY-AND-EQUITY> 101,783
<SALES> 223,965
<TOTAL-REVENUES> 223,965
<CGS> 159,108
<TOTAL-COSTS> 159,108
<OTHER-EXPENSES> 61,601
<LOSS-PROVISION> (633)
<INTEREST-EXPENSE> 3,451
<INCOME-PRETAX> 438
<INCOME-TAX> (865)
<INCOME-CONTINUING> 1,303
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,303
<EPS-BASIC> 0.18
<EPS-DILUTED> 0.18
</TABLE>
