UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 1, 1996
____ 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: 0-24614
BABY SUPERSTORE, INC.
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<CAPTION>
<S> <C>
South Carolina 57-0527831
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification Number)
</TABLE>
1201 Woods Chapel Road 29334
Duncan, South Carolina (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (864)968-9292
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
At June 7, 1996, there were 19,232,833 shares of Common Stock, no par value,
outstanding.
Page 1 of 15
Exhibits Begin on Page 15
1
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BABY SUPERSTORE, INC.
FORM 10-Q FOR THE QUARTER ENDED MAY 1, 1996
INDEX
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<CAPTION>
Page
<S> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited):
a. Condensed consolidated balance sheets as of May 1, 1996 and 3-4
January 31, 1996
b. Condensed consolidated statements of income for the thirteen
weeks ended May 1, 1996 and April 26, 1995 5
c. Condensed consolidated statements of cash flows for the
thirteen weeks ended May 1, 1996 and April 26, 1995 6
d. Notes to unaudited condensed consolidated financial statements - 7-8
May 1, 1996
e. Independent accountants' report on review of interim
financial information 12
Item 2. Management's Discussion and Analysis of Financial 9-11
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings 13
Item 2. Change in Securities 13
Item 3. Defaults in Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
2
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Part 1 - Financial Information
Item 1. Financial Statements
BABY SUPERSTORE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
May 1, January 31,
1996 1996
(Unaudited) (1)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 64,715 $ 72,353
Marketable securities 28,322 35,292
Receivables 4,909 5,441
Merchandise inventories 109,697 101,402
Prepaid income taxes --- 695
Other current assets 342 396
------------ ------------
Total current assets 207,985 215,579
--------- ----------
PROPERTY AND EQUIPMENT, NET 56,699 52,046
---------- ----------
OTHER ASSETS:
Deferred debt issuance costs 3,193 3,350
Deferred income taxes 695 444
Utility deposits 252 226
-------------- ------------
TOTAL ASSETS $ 268,824 $ 271,645
========== ==========
</TABLE>
(1) Derived from audited financial statements.
See notes to unaudited condensed consolidated financial statements.
3
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BABY SUPERSTORE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(In thousands, except share data)
<TABLE>
<CAPTION>
May 1, January 31,
1996 1996
(Unaudited) (1)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 41,135 $ 47,400
Accrued expenses 6,026 5,979
Accrued interest 389 1,760
Income taxes payable 1,431 272
----------- -------------
Total current liabilities 48,981 55,411
OTHER DEFERRED CREDITS 2,511 2,381
4 7/8% CONVERTIBLE SUBORDINATED
NOTES DUE 2000 115,000 115,000
----------- -----------
TOTAL LIABILITIES 166,492 172,792
----------- -----------
SHAREHOLDERS' EQUITY:
Common Stock; no par value, 50,000,000 shares
authorized, 19,232,833 (May 1,
1996) and 19,223,184 (January 31, 1996)
shares issued and outstanding 71,304 71,108
Retained earnings 31,028 27,745
----------- -----------
Total shareholders' equity 102,332 98,853
---------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 268,824 $ 271,645
========== ==========
</TABLE>
(1) Derived from audited financial statements.
See notes to unaudited condensed consolidated financial statements.
4
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BABY SUPERSTORE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
May 1, April 26,
1996 1995
<S> <C> <C>
Net sales $ 106,780 $ 67,293
Cost of sales 77,089 47,817
-------- --------
Gross profit 29,691 19,476
Selling, general and administrative expenses 23,706 14,381
-------- ---------
Income from operations 5,985 5,095
Interest income (1,136) (234)
Interest expense 1,559 ---
Other expense 6 159
------------ -----------
Income before income taxes and cumulative
effect of change in accounting principle 5,556 5,170
Income tax provision 2,030 1,975
---------- ----------
Income before cumulative effect of change in
accounting principle 3,526 3,195
Cumulative effect of change in accounting principle (adoption
of SFAS 121) net of income taxes of $141,000 245 ---
---------- ------------
Net income $ 3,281 $ 3,195
========== ==========
Net income per common share before cumulative
effect of change in accounting principle $ 0.18 $ 0.17
Cumulative effect of change in accounting principle 0.01 ---
------------ --------------
Net income per common share $ 0.17 $ 0.17
=========== ===========
Weighted average common shares outstanding 19,621 19,182
========== ==========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
5
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BABY SUPERSTORE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Thirteen Weeks Ended
May 1, April 26,
1996 1995
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,281 $ 3,195
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Cumulative effect of change in accounting principle, net 245 --
Depreciation and amortization 1,999 1,036
Amortization of debt issuance costs 157 --
Writedown and loss on disposition of property 13 171
Deferred income taxes (34) 60
Decrease (increase) in assets and increase (decrease) in liabilities:
Receivable 532 106
Merchandise inventories (8,295) (12,010)
Prepaid and other assets (59) (9)
Prepaid income taxes 695 --
Accounts payable (6,265) 4,634
Accrued expenses 47 994
Accrued interest (1,371) --
Income taxes payable 1,159 1,825
Other deferred credits 130 7
-------- --------
Net cash provided by (used in) operating activities (7,766) 78
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (7,040) (7,326)
Maturities of marketable securities 6,970 --
Net cash used in investing activities (70) (7,326)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from public offering of Common Stock, net of offering expenses -- 28,566
Proceeds from issuance of Common Stock under stock purchase and option plans 198 512
Payments to redeem Common Stock -- (2)
-------- --------
Net cash provided by financing activities 198 29,076
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,638) 21,828
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 72,353 13,682
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 64,715 $ 35,510
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 322 $ 90
Interest paid $ 2,772 $ --
</TABLE>
See notes to unaudited condensed consolidated financial statements.
6
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BABY SUPERSTORE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
May 1, 1996
1. Basis of presentation:
The accompanying condensed financial statements are unaudited. These
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and the instructions of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements, and should be read in conjunction with the annual report.
In the opinion of management, all adjustments necessary for a fair presentation
of such financial statements have been included and were normal and recurring in
nature. Interim results are not necessarily indicative of results that may be
expected for a full year.
2. Effect of New Accounting Pronouncement
The Company was required to adopt Statement of Financial Accounting
Standards (SFAS No. 121) "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" as of February 1, 1996. This statement
essentially requires that when the Company commits to closing specific stores,
the fixed assets for such stores (primarily leasehold improvements) be written
down to fair market value. The cumulative effect of the adoption of SFAS No. 121
resulted in a charge of approximately $245,000 (net of an income tax benefit of
$141,000) in the May 1, 1996 income statement.
3. Inventories:
Inventories are valued at the lower of cost, as determined using the
retail method applied on the average cost basis, or market.
4. Long Term Debt and Credit Facility:
On September 27, 1995, the Company sold $115 million of 4 7/8%
convertible subordinated notes due 2000. The notes are convertible into Common
Stock at the Company's option any time on or after October 3, 1997 at a
conversion price of $53.875 per share. Interest is payable semi-annually on
April 1st and October 1st.
The Company has a commitment from NationsBank, National Association
(Carolinas) for a $25 million credit facility with a one-year unsecured
revolving line of credit. There were no outstanding borrowings under this
facility at May 1, 1996.
7
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5. Income taxes:
Income taxes are provided based upon management's estimate of the
annual effective tax rate.
6. Stock split:
The Company effected a three-for-two stock split in the form of a stock
dividend in February 1995. All common share and per share data reflect these
stocks splits.
7. Stock options and stock purchase plan:
During the quarter ended May 1, 1996, stock options for the purchase of
38,000 shares of Common Stock were granted at fair market value under the Stock
Incentive Plan and 4,725 shares were purchased under the Employee Stock Purchase
Plan.
8. Net income per common share:
Net income per common share is computed based upon the weighted average
number of common and common equivalent shares outstanding. Common equivalent
shares are represented by shares under option or warrant.
The 4 7/8% convertible subordinated notes were determined not to be
Common Stock equivalents at the issuance date based on the yield to maturity and
are anti-dilutive under the "if converted" method. Therefore, the common
equivalent shares represented by the 4 7/8% convertible subordinated notes are
excluded from both the primary net income per share and fully diluted net income
per share calculations.
8
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BABY SUPERSTORE, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Thirteen Weeks (First Quarter) Ended May 1, 1996 Compared to Thirteen Weeks
(First Quarter) Ended April 26, 1995:
During the thirteen weeks ended May 1, 1996, the Company opened four
stores, one of which was a relocation of an existing store, as compared to one
store opening, a relocation, in the comparable period of 1995. At May 1, 1996,
the Company operated 64 stores, as compared to 46 stores at April 26, 1995.
During the thirteen weeks ended May 1, 1996, sales increased 59% to $106.8
million, as compared to $67.3 million in the same period of the previous fiscal
year. This increase reflects an 8% increase in comparable store sales, as well
as sales from the 23 new stores opened and three stores expanded during the
fifty-two week period ending May 1, 1996. Comparable store sales were below the
Company's objectives, and managment expects sales weakness to continue in the
near term. The comparable store sales growth was generated primarily by enhanced
merchandising programs, including additions of baby food and baby formula in the
commodity department. Comparable store sales were negatively impacted by the
liquidation of a competitor in Florida during the quarter and the effects of
opening of new stores in existing markets. The Company considers stores that
have not expanded and are older than twelve months as comparable, and there were
35 such stores at May 1, 1996.
Gross profit was $29.7 million, or 27.8% of sales for the thirteen
weeks ended May 1, 1996, compared to $19.5 million, or 28.9% of sales for the
same period of the previous fiscal year. The Company priced aggressively during
the quarter and also saw the sales of commodities, a very low margin category,
increase to 10.1% of first quarter 1996 sales from 5.4% of sales in the first
quarter of 1995.
Selling, general and administrative costs for the thirteen weeks ended
May 1, 1996 were $23.7 million, or 22.2% of sales, as compared to $14.4 million,
or 21.4% of sales for the same period of the previous fiscal year. Earnings were
principally impacted by an increase in selling, general and administrative costs
and by a reduction in gross margin. Management expects continued increases in
selling, general and administrative costs and reductions in gross margin in the
near term. Gross margins were impacted by lower margins on commodity items such
as diapers and formula. The increase in selling, general and administrative
costs as a percentage of sales was primarily attributable to increased costs
related to investments made in additional Company infrastructure (primarily the
hiring of additional personnel) as well as the opening of four stores during the
first quarter of 1996, compared to one store opening, a relocation, in the same
period of 1995.
As a result of the above factors, income from operations for the
thirteen weeks ended May 1, 1996 increased 17.5% to $6.0 million, or 5.6% of
sales, as compared to $5.1 million, or 7.6% of sales, for the same period of the
previous fiscal year.
9
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Net interest expense for the first quarter of 1996 was $423,000,
compared to net interest income of $234,000 in the first quarter of 1995. This
was primarily attributable to interest expense associated with Company's 4 7/8%,
$115 million convertible subordinated notes issued on September 27, 1995. The
unexpended proceeds are currently invested principally in cash equivalents or
marketable securities with maturities of one year or less. The Company invested
a significant portion of its investment portfolio in tax exempt securities
during the quarter, resulting in lower interest income.
The Company was required to adopt Statement of Financial Accounting
Standards (SFAS No. 121) "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of "as of February 1, 1996. This statement
essentially requires that when the Company commits to closing specific stores,
the fixed assets for such stores (primarily leasehold improvements) be written
down to fair market value. The cumulative effect of the adoption of SFAS No. 121
resulted in a charge of approximately $245,000 (net of an income tax benefit of
$141,000) in the May 1, 1996 income statement.
The Company's effective income tax rate for the thirteen weeks ended
May 1, 1996 decreased to 36.5% from 38.2% in the comparable period in 1995. The
decrease was primarily due to the Company's investment of a significant portion
of its marketable securities in tax exempt securities during the quarter.
As a result of the factors described above, net income for the thirteen
weeks ended May 1, 1996, increased 2.7% to $3.3 million, or $0.17 per share and
3.1% of sales, compared to $3.2 million, or $0.17 per share and 4.8% of sales
for the same period in 1995.
LIQUIDITY AND CAPITAL RESOURCES:
Net cash used in operating activities was $7.8 million during the
thirteen weeks ended May 1, 1996, compared to cash provided by operations of
$78,000 in the same period of 1995. Such decrease was due primarily to increased
inventory levels associated with the Company's new store openings, store
expansions, and a build up of inventory for planned new store openings in the
second quarter of fiscal 1996.
Net cash flows used in investing activities totalled $70,000 for the
thirteen weeks ended May 1, 1996, compared to $7.3 million for the same period
of the previous fiscal year. This decrease was primarily due to the maturity of
$7.0 million of marketable securities during the thirteen week period ended May
1, 1996. Capital expenditures in 1996 related primarily to costs assciated with
four new store openings while capital expenditures for the comparable 1995
period included costs to complete the Company's distribution and home office
facility in Duncan, SC, the purchase of the Company's warehouse in Simpsonville,
SC and the costs associated with one new store opening.
Net cash flows provided by financing activities were $198,000 during
the thirteen weeks ended May 1, 1996, compared to net cash provided of $29.1
million in the same period of the previous fiscal year. The Company received
$28.6 million from a public offering of Common Stock in March 1995.
Cash, cash equivalents and marketable securities totaled $93.0 million
at May 1, 1996. Such amounts were invested principally in Federal agency
discount notes, municipal and other securities with terms to
10
<PAGE>
maturity of one year or less when purchased.
The Company has a commitment for a $25 million revolving line of credit
from NationsBank, N.A. (Carolinas). As of May 1, 1996 the Company had
outstanding letters of credit with NationsBank, N.A.
(Carolinas) totalling approximately $5.7 million.
The Company estimates that capital expenditures for fiscal 1996 will
approximate $30 to $40 million. During the remainder of fiscal 1996, the Company
plans to open approximately 18 additional stores, an estimated four of which are
expected to be a relocation of an existing store. The Company anticipates that
cash generated from operations, together with its existing cash resources, and
funds available from its revolving line of credit, will be sufficient to satisfy
the Company's cash needs for the next 18 months.
Baby Superstore has never paid cash dividends on its Common Stock and
has no intention of paying cash dividends in the foreseeable future.
IMPACT OF INFLATION:
The Company does not believe inflation has had or is likely to have a
material adverse effect on its results of operation.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENT:
In October 1995, Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation," was issued and is effective for
the Company on February 1, 1996. As permited by SFAS No. 123, the Company will
continue to apply APB Opinion No. 25, which recognizes compensation cost based
on the intrinsic value of the equity instrument awarded to its stock based
compensation awards to employees and will disclose the required proforma effect
on net income and earnings per share.
11
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INDEPENDENT ACCOUNTANT'S REVIEW REPORT
Baby Superstore, Inc.
We have reviewed the accompanying condensed consolidated balance sheets of Baby
Superstore, Inc. and subsidiaries (the "Company") as of May 1, 1996 and April
26, 1995, and the related condensed consolidated statements of income and of
cash flows for the thirteen (13) week periods then ended. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Baby Superstore, Inc. and
subsidiaries as of January 31, 1996, and the related consolidated statements of
income and cash flows for the year then ended (not presented herein); and in our
report dated March 29, 1996, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of January 31, 1996 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
Deloitte & Touche LLP
May 28, 1996
12
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BABY SUPERSTORE, INC.
Part II - Other Information
Item 1. LEGAL PROCEEDINGS:
None.
Item 2. CHANGES IN SECURITIES:
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES:
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
a. An Annual Meeting of Shareholders of the Company was
held on June 4, 1996
b. The seven directors listed in subsection (c) were
elected at the meeting. The Company has no other
directors whose term of office continued after the
meeting.
c. i. Election of Directors
<TABLE>
<CAPTION>
Number of Shares
Withhold
For Authority
<S> <C> <C>
Jack P. Tate 17,063,332 14,836
Linda M. Robertson 17,063,132 15,036
Jodi L. Taylor 17,059,629 18,539
Robert E. Howard 17,063,369 14,799
Kenneth G. Langone 17,063,339 14,829
Roger G. Owens 17,061,857 16,311
Thomas L. Teague 17,062,789 15,379
</TABLE>
ii. Proposal to ratify the appointment of
Deloitte & Touche LLP as independent
auditors for the Company for the fiscal year
ending January 31, 1996.
Number of Shares
For 17,070,524
Against 5,788
Abstain 1,856
13
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Item 5. OTHER INFORMATION:
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K:
a. Exhibits:
11.1 Computation of net income per common share
b. Reports on Form 8-K:
None.
14
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized.
BABY SUPERSTORE, INC.
(Registrant)
Date: June 14, 1996 /s/ Jack P. Tate
-------------------- -------------------------
Jack P. Tate
Chairman of the Board and Chief Executive Officer
(Principal executive officer of the Registrant)
Date: June 14 , 1996 /s/ Jodi L. Taylor
-------------------- ---------------------------
Jodi L. Taylor
Chief Financial Officer
(Principal financial officer of the Registrant)
15
Exhibit 11.1
BABY SUPERSTORE, INC.
COMPUTATION OF NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
Thirteen Weeks Ended
May 1, April 26,
1996 1995
<S> <C> <C>
PRIMARY NET INCOME PER COMMON SHARE
Income before cumulative effect of change in accounting principle $ 3,526,000 $ 3,195,000
Cumulative effect of change in accounting principle 245,000 --
Net income $ 3,281,000 $ 3,195,000
Weighted average shares outstanding during the period:
Common Stock 19,227,625 18,641,612
Net effect of dilutive stock options and warrents - based on the
treasury stock method using the average market price 392,945 540,642
Weighted average common and common equivalent
shares outstanding (1) 19,620,570 19,182,254
Per share data:
Income before cumulative effect of change in accounting principle $ 0.18 $ 0.17
Cumulative effect of change in accounting principle 0.01 --
Net income $ 0.17 $ 0.17
FULLY DILUTED NET INCOME PER COMMON SHARE
Weighted average shares outstanding during the period:
Common Stock 19,227,625 18,641,612
Net effect of dilutive stock options and warrents - based on
the treasury stock method using the greater of ending or
average market price 406,091 540,642
Weighted average common and common equivalent shares
outstanding (1) 19,633,176 19,182,254
Per share data:
Income before cumulative effect of change in accounting principle $ 0.18 $ 0.17
Cumulative effect of change in accounting principle 0.01 --
Net income $ 0.17 $ 0.17
</TABLE>
(1) The 4 7/8 convertible subordinated notes were determined not to be Common
Stock equivalents at the issuance date based on the yield to maturity and are
anti-dilutive under the "if converted" method. Therefore, the common equivalent
shares represented by the 4 7/8% convertible subordinated notes are excluded
from both the primary net income per share and fully diluted net income per
share calculations.
16
