SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to ______________
Commission File Number 1-13518
GAYLORD COMPANIES, INC.
(Name of small business issuer in its charter)
Delaware 31-1421571
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4006 Venture Court, Columbus, Ohio 43228
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (614) 771-2777
Securities registered pursuant to Section 12(b) of the exchange act:
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
(Title of Class)
Warrants
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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>
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained in this form, and no disclosure will 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-KSB or any amendment to
this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year $13,304,394.
The number of shares of Common Stock held by nonaffiliates of the registrant (as
determined for the purpose of this Form 10-KSB only) as of February 28, 1997 was
1,854,475 with an approximate aggregate market value of $2,405,023 (based upon
the average of the bid and asked prices of such shares as of such date). The
number of shares of the Common Stock of the registrant outstanding as of
February 28, 1997 was 3,785,000.
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TABLE OF CONTENTS
Page
Item Number and Caption Number
PART I
Item 1. Description of Business....................................4
Item 2. Description of Property...................................10
Item 3. Legal Proceedings.........................................12
Item 4. Submission of Matters to a Vote of Security Holders.......12
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters........................13
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operation...........14
Item 7. Financial Statements......................................18
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................18
PART III
Item 9. Directors, Executive Officers, Promoters
and Control Person; Compliance with Section 16(a) of
the Exchange Act of the Registrant......................18
Item 10 Executive Compensation ...................................20
Item 11 Security Ownership of Certain Beneficial
Owners and Management..................................21
Item 12 Certain Relationships and Related Transactions............23
PART IV
Item 13 Exhibits, Lists and Reports on Form 8-K...................24
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PART I
Item 1. Business.
Gaylord Companies, Inc. (the "Company") is a specialty retailer of
books in "Little Professor" bookstores (the "Bookstores") and quality cookware
and serving equipment, cooking accessories and certain select food products as
well as cookbooks and food-related publications in specialty retail stores (the
"Cookstores"). Unless the context otherwise indicates, the term "Company"
includes Gaylord Companies, Inc. and its six wholly-owned subsidiaries (the
"Subsidiaries"). The Company owns and operates six Bookstores and six
Cookstores.
The Bookstores are operated pursuant to separate license
agreements ("License Agreements") with Little Professor Book Centers, Inc. (the
"Franchisor"). Five of the six Bookstores are known as Little Professor Book
Company Superstores (the "Superstores"), while the other Bookstore is known as a
bargain Bookstore.
The following table sets forth information relating to each of the Company's
Subsidiaries:
<TABLE>
<CAPTION>
Date of
Subsidiary Incorporation Store Location Store Opening Store Type
- -------------------- ------------- -------------- ------------- ---------------------
<S> <C> <C> <C> <C>
Gaylord Book Company 1977 Lane Avenue Shopping Center, August 1977 Little Professor Book
Columbus, Ohio Company Store
Lane Avenue Shopping Center, October 1993 Little Professor
Columbus, Ohio Bargain Bookstore
The Cookstore, Inc......... 1981 Lane Avenue Shopping Center, October 1981 Cookstore
Columbus, Ohio
Summit Mall, December 1994 Cookstore
Akron, Ohio
Castleton Square Mall
Indianapolis, Indiana December 1996 Cookstore
Florence Mall
Florence, Kentucky December 1996 Cookstore
Sawworth Book Little Professor Book
Company................... 1984 Worthington Mall, October 1984 Company Bookstore
Worthington, Ohio
Plaza at Sawmill Place, April 1985 Little Professor Book
Columbus, Ohio Company Bookstore
Gaylord's Inc.............. 1989 Forest Fair Mall, April 1989 Little Professor Book
Cincinnati, Ohio Company Bookstore
The Cookstore Worthington Mall, December 1993 Cookstore
Worthington, Inc.......... 1993 Worthington, Ohio
The Mall at Fairfield Commons, November 1994 Cookstore
Beavercreek, Ohio
Gaylord Enterprises, Inc... 1993 Boardman Plaza, December 1993 Little Professor Book
Boardman, Ohio Company Bookstore
</TABLE>
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The Company was formed pursuant to the laws of the State of
Delaware on July 19, 1994. The first of the Company's Subsidiaries was formed
and commenced operating a Bookstore in 1977. The executive offices of the
Company are located at 4006 Venture Court, Columbus, Ohio 43228. Its telephone
number is (614) 771-2777.
Store Characteristics
The six Bookstores are located in regional malls and shopping
centers in Ohio. The Company operates five Superstores (the "Superstores"). The
Superstores are based upon the Company's "superstore" concept and range from
8,000 to 18,000 square feet in size while offering 60,000 to 80,000 book titles.
The Superstores offer thousands of foreign and domestic magazines, books on
cassette, out-of-town newspapers, travel guides, maps and calendars. The Company
also operates a bargain bookstore (the "Bargain Bookstore") which is
approximately 2,000 square feet in size and offers approximately 10,000 book
titles. The Bargain Bookstore sells deeply discounted publisher overstock,
remaindered and used books. The Company's long-term strategy is to selectively
locate and open additional Bookstores, although the Company does not have any
present plans to do so.
The six Cookstores are each approximately 3,300 square feet in
size and are situated in regional retail malls. Each store offers approximately
5,000 different types of products which includes 30,000 to 50,000 separate items
and includes products from over 200 vendors. The current product lines for the
Cookstores fall into 12 distinct categories including accessories, bakeware,
books, cookware, cutlery, electronics, food, furniture, gadgets, gifts,
tableware and textiles. Management intends to use its existing Cookstores as the
basic store design prototype for most of the Company's anticipated expansion.
The Company is also considering implementing a "superstore" concept for the
Cookstores. These superstore Cookstores would expand each product category
carried in the basic prototype store, particularly the food and tableware
categories. The superstore Cookstores would be in excess of 5,000 square feet in
size.
Store Design and Ambiance
The Company believes that it has created a warm, comfortable
atmosphere in the Bookstores which are Superstores. The Superstores contain
furnishings that include fireplaces, pianos, reading rooms and comfortable
chairs, including special children's sections with child-sized furniture.
In the Cookstores, the Company's strategy is to present the
merchandise in what the Company believes is an upscale and fashionable setting.
The full range of the stores' products are displayed and stocked on the retail
floor. The merchandise is arranged by category for shopping convenience and
every item is tagged with the current retail price. Feature displays are
arranged throughout the store emphasizing seasonal products or particular
themes.
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Advertising
The Superstores utilize marketing programs aimed at reading
activities for readers of all ages including visits, readings, workshops and
booksignings by locally and nationally acclaimed writers and book illustrators.
The Superstores place special emphasis on marketing aimed at the sale of
children's books including its "Rug Club Storytime" and "Read-n-Grow Kid's Club"
reading programs for children.
Current Cookstore promotions center around seasonal events and
holidays in which certain product lines are traditional favorites. Promotions
are planned around in-store demonstrations and are advertised in local
newspapers, press releases and/or through direct mail and point of sale
materials.
Customer Service
The Company emphasizes customer service in both the Bookstores and
Cookstores and, through its salespeople, strives to provide its customers with
an enjoyable shopping experience. The Company adheres to a number of customer
service policies and practices to reinforce customer confidence in the Company.
Expansion
The Company's strategy is to expand its Cookstore locations into
regional malls and strip shopping centers and other select sites throughout the
country, with an emphasis in the Midwest. The Company plans to open additional
Cookstores. The number of additional Cookstores that will be opened will be
dependent upon site opportunities, the ability of the Company to secure
additional financing the cost of opening such stores, the renewal of the
Company's existing credit facilities and cash flow from operations. However,
there can be no assurance that additional Cookstores will be opened. The Company
believes that the primary markets for the basic Cookstore are middle to upper
income shopping destinations. The majority of these locations are in regional
shopping malls located in suburban and urban core revitalization areas. Smaller
specialty malls and select, upper end in-line shopping centers are additional
target locations. The Company believes that due to the industry's highly
fragmented nature, and the relatively few number of stores of its chief national
competitors, Williams-Sonoma, Inc., Bed Bath & Beyond, Linens & Things and
Lechter's, Inc., there are hundreds of prime locations available for future
Cookstores although there is no assurance that such locations can be obtained on
terms favorable or acceptable to the Company.
The Company intends to continue expansion close to its current
Midwest base. The Company intends to focus on those locations in which products
may be delivered direct from suppliers by United Parcel Service or truck,
eliminating the costs which would be necessitated by central warehousing and
distribution. Prime considerations for successful new stores are market and site
demographics, competition and the Company's ability to successfully manage the
logistics of store operations.
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Competition
The Bookstores
The retail bookselling business is highly competitive. The Company
competes in the bookstore business with Barnes & Noble, Inc., Media Play, a
division of Musicland Stores Corporation, and Borders-Walden Group. In the
Bookstore business, the Company competes with other national chains, which
operate substantially more superstores than the Company. The Company also
competes with regional chains, as well as independent single store operators,
local multi-store operators, department stores, variety discounters, drug stores
and warehouse clubs. The Company competes with its competitors on the basis of
price and its presentation of its products. Many of the Company's competitors
have been expanding in both store size and number of outlets, while others have
announced their intentions to pursue such expansion. In addition, certain of the
Company's competitors have substantially greater financial, advertising and
other resources than the Company, which may give them certain competitive
advantages.
The Cookstores
The specialty retail business is highly competitive. The Company's
stores compete against a wide variety of stores, including department and
specialty stores, as well as mail order catalogs. Certain of the Company's
competitors have greater financial, distribution, advertising and marketing
resources than the Company, which may give them certain competitive advantages.
The Company competes on the basis of its selection and quality of merchandise,
and service to its customers. While some cooking product lines are carried in
many stores stocking a broad range of products, few stores specialize totally in
kitchen/cookware as do the Cookstores. The specialized market is highly
fragmented with many local independent stores and small regional chains. The
only national specialized kitchen products stores are Williams-Sonoma, Inc. and
Lechter's, Inc. In addition, the Company competes with other well-known stores,
including Linens & Things and Bed Bath & Beyond. Other local and small regional
competitors vary widely in design, product selection and customer service. The
Company believes that most local competitors are small, highly specialized
operations situated in less desirable retail or non-retail locations. While
these operators may be localized competition for the Cookstores, the Company
believes that most markets do not have significant local operators and few
competitors, with the exception of Williams-Sonoma, Inc. and Lechter's, Inc.,
are located in the mall locations where the Company anticipates opening
Cookstores.
Suppliers and Distribution
The Company purchases approximately 64% of its products for the
Bookstores from Ingram Book Company (the "Consignor") and approximately 10% from
Unimag Distributors. The Bookstores do not purchase more than 5% of their
inventory from any other single supplier. Four of the Subsidiaries are parties
to five separate consignment agreements with the Consignor. Two of such
consignment agreements may be terminated upon 120 days prior written notice by
the Consignor. The balance of the consignment agreements may generally be
terminated by the
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Consignor upon 270 days prior written notice. Although the Subsidiaries have not
satisfied certain provisions in the consignment agreements, the Consignor has
never declared a default under any of the consignment agreements, or expressed
an intention to do so. Specifically, the Company has not met the provisions in
the consignment agreements with respect to the required inventory turnover
ratios. The inventory turnover provisions under the consignment agreements
require the Company to sell consigned goods at a rate equal to 2.5 to 3 times
the average amount of consigned goods held by the Company at certain Bookstore
locations on an annualized and/or a calendar year basis. In 1996 the Company
failed to meet such requirements in the five Bookstores subject to the
consignment agreements. The inventory turnover ratios ranged from 41% to 70%, of
the required inventory turnover ratios for each of the Bookstores, respectively.
In addition, the Company may have failed to comply with the provisions in the
consignment agreement with respect to the amount of consigned goods on hand in
two of the Bookstores. The Company does not anticipate curing such defaults in
the future unless required to do so by the Consignor. Upon a default by any of
the Subsidiaries under any of the consignment agreements, the Consignor may
terminate all of such consignment agreements. Management believes that the
consignment agreements with the Consignor are advantageous to the Company and
that in the event that such consignment agreements are terminated, there could
be a material adverse affect on the Company. The Cookstores acquire their
inventory from approximately 200 suppliers and do not purchase more than 5% of
their inventory from any single supplier. The Company does not have any written
supply agreements with these vendors, who are not obligated to continue to
furnish products to the Company.
The Company believes that its decentralized distribution and
inventory control system has significantly enhanced its ability to control costs
and to manage its inventory on a store-by-store basis for both the Bookstores
and the Cookstores. The Company's suppliers ship inventory directly to the
stores and almost all of the inventory is displayed and stocked on the retail
floor. Management believes that this distribution system has resulted in
significant cost savings for the Company. Although the Company may make
commitments for significant warehouse space in the future, management believes
that its present distribution system can continue to be utilized in connection
with the Company's plans for expansion. However, there is no assurance that the
Company will not have to centralize its inventory and lease warehouse space in
connection with the Company's plans for expansion.
Management Information System
The Company's information systems provide management with sales,
inventory and other information and are important to the Company's ability to
achieve cost efficiencies, operate profitably and control shrinkage. The Company
uses retail point-of-sale systems which are polled daily and which generate
sales reports and supporting documentation which are forwarded to the main
office for auditing and input into the Company's automated accounting program.
The point-of-sale system provides daily accounting of sales and gross profit as
well as other control items such as discounts, price overrides and refunds.
Financial statements, including income statements and balance sheets, are
produced monthly for each location. Complete inventories are taken once or twice
a year. Each item in the Bookstores and the Cookstores has its own distinct
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item number which is used by the point-of-sales system to record sale and cost
information. Items are also tracked for reorder information and generation of
historical sales reports used to make purchasing and reorder decisions.
License Agreements
Four of the Subsidiaries have entered into five separate License
Agreements with the Franchisor, Little Professor Book Centers, Inc., with
respect to the Bookstores. The License Agreements replaced separate franchise
agreements relating to five of the Bookstores. The Company owns approximately
11% of the outstanding common stock of the Franchisor. The initial term of the
License Agreements expired on December 31, 1996 and may be extended by the
Company until December 31, 2001. The Company and the Franchisor have agreed to
renew the License Agreement on a month-to-month basis. The Company will pay to
the Franchisor a royalty of 1/2 of 1% of monthly sales for all of the
Bookstores. If there is a default by any of the Subsidiaries under any one of
the License Agreements, then the Franchisor may terminate all of the License
Agreements.
The Company and the Franchisor have also entered into a separate
agreement (the "Supplementary Agreement") which includes, among other things,
consulting services to be rendered to the Franchisor, rights of first refusal
permitting the Company to open additional franchises, the termination of the
License Agreements and the Franchisor's repurchase of its common stock owned by
the Company. Pursuant to the Supplementary Agreement, the Company or the
Franchisor may terminate the License Agreements and the Supplementary Agreement
upon 12 months notice and the payment of $100,000. The initial term of the
Supplementary Agreement expired on December 31, 1996 and may be extended by the
Franchisor until December 31, 2001. The Company and the Franchisor have agreed
to renew the Supplementary Agreement on a month-to-month basis. In addition,
upon the termination of the Supplementary Agreement, the Franchisor has the
right to purchase its shares of common stock owned by the Company at the
greatest of the cost to the Company, the book value or the fair market value of
such shares. The Franchisor has granted the Company a right of first refusal for
the opening of any Little Professor Bookstore in Ohio, or in Collier County or
Lee County, Florida. The Company has not exercised its right of first refusal in
either Ohio or Florida to date. Management believes that the Company would have
to consider its ability to manage the logistics of store operations in locations
that are distant from its principal executive offices in Columbus, Ohio before
electing to open any Little Professor Bookstores in Florida.
Upon the opening of Little Professor Book Company bookstores by
third parties in excess of 8,000 square feet in size, the Franchisor will pay to
the Company the greater of $10,000 or 15% of the Franchisor's then current
initial franchise fees plus 2/10 of 1% of the monthly sales during the initial
term of any such agreements.
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Trademarks
The Cookstore, Inc. has been granted a registered trademark for
"The Cookstore" with the United States Patent and Trademark Office. The Company
intends to submit applications to register any new trademarks that it develops
in the future.
Employees
As of December 31, 1996, the Company had 93 full-time employees
and 100 part-time employees of which 180 were involved in retail store sales and
13 in general management and administration. The Company believes its success
will depend upon its ability to identify, hire and retain capable management. As
there is significant competition for qualified personnel, there can be no
assurance that the Company will succeed in recruiting or retaining suitable
staff. In particular, the Company's success is dependent on the continued
availability of both John Gaylord and John D. Critser, either of whose loss or
impairment could have a material adverse affect on the Company. The Company
considers its relations with its employees, none of whom are covered by
collective bargaining agreements, to be generally good.
Insurance
The Company presently maintains insurance as required by law,
including workers' compensation coverage, and liability insurance in respect of
hazards on the Company's business premises. The Company carries a general
liability policy which provides for coverage of $1,000,000 per occurrence and
$2,000,000 in the aggregate. The Company carries key man life insurance in the
amount of $1,000,000 on the lives of both John Gaylord and John D. Critser with
the Company as beneficiary.
Seasonality
The Company's business is subject to substantial seasonal
variations. Historically, a significant portion of the Company's net sales and
net earnings have been realized during the period from October through December,
and levels of net sales and net earnings have generally been significantly lower
during the period from February through July.
Item 2. Properties.
The Company currently operates and occupies, pursuant to written
leases, five Superstores, one Bargain Bookstore and six Cookstores. Total rental
expenses for the Company's real estate leases were $1,156,662 and $1,512,178 in
1995 and 1996, respectively.
The five Superstores average approximately 13,156 square feet in
size and have current minimum rents which average approximately $12.60 per
square foot. All of the
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Bookstore leases have initial terms which expire between September 1998 and
December 2003, and four of the five leases give the Company an option or options
to renew the lease for additional periods ranging from five to ten years. The
Bargain Bookstore operates under a month-to-month lease, is approximately 2,000
square feet, and pays 10% of its gross receipts as rent. The Cookstores average
approximately 3,475 square feet and have current minimum rents which average
approximately $25.71 per square foot. All of the Cookstore leases have initial
terms which expire between 2004 and 2006 and one of the six leases gives the
Company an option to renew the lease for an additional five years.
In addition to current minimum rent, the Bookstore and Cookstore
leases generally require the Company to pay additional rent which is calculated
as a percentage of gross sales over an agreed upon figure. For the Bookstore
leases, the percentage ranges from 3% to 10.5% and the amount of gross sales
ranges from approximately $971,000 to $4,426,000. For the Cookstore leases, the
percentage ranges from 5% to 6% and the gross sales number ranges from
approximately $959,000 to $1,800,000. Generally, except for the Forest Fair Mall
site, the Company has not paid percentage rent in excess of minimum base rent.
In addition, the Company is generally obligated to pay common area maintenance
charges and other charges on each of the Superstores and Cookstores leases.
All of the Company's leased properties are situated in regional
malls, specialty centers or strip centers located in Ohio. The Company leases
9,620 square feet for a Superstore, 2,000 square feet for a Bargain Bookstore
and 3,298 square feet for a Cookstore at the Lane Avenue Shopping Center,
Columbus, Ohio, a 225,000 square foot enclosed specialty center containing
approximately 100 stores, including Talbots, Banana Republic and Bombay Company.
The Company leases 8,929 square feet for a Superstore and 3,341 square feet for
a Cookstore at the Worthington Mall, Worthington, Ohio, a 175,000 square foot
enclosed specialty center containing approximately 50 stores including Talbots,
The Gap, Ann Taylor and Jos. A. Bank. The Company leases 17,356 square feet for
a Superstore at the Plaza at Sawmill Place, Columbus, Ohio, a 110,000 square
foot strip center containing approximately 25 stores, including Service
Merchandise and Blockbuster Video. The Company leases 18,312 square feet for a
Superstore at the Forest Fair Mall, Cincinnati, Ohio, a 1,400,000 square foot
enclosed regional center containing approximately 100 stores, including Elder
Beerman, Parisian and Biggs. The Company leases 11,565 square feet for a
Superstore at Boardman Plaza, Boardman, Ohio, a 450,000 square foot strip center
containing approximately 100 stores, including Burlington Coat Factory and Radio
Shack. The Company leases 3,598 square feet for a Cookstore at the Mall at
Fairfield Commons, Beavercreek, Ohio, a suburb of Dayton, which is a 1,000,000
square foot major regional mall with approximately 100 stores, including The
Limited, The Gap and five major department stores. The Company leases 3,227
square feet for a Cookstore at the Summit Mall in Akron, Ohio, which is an
850,000 square foot major regional mall with approximately 100 stores, including
Kaufman's, Dillards, The Limited and The Gap. The Company leases 3,790 square
feet for a Cookstore at the Castleton Square Mall in Indianapolis, Indiana which
is a 1,000,000 square foot major regional mall with approximately 100 specialty
stores and five major department stores. The Company leases 3,598 square feet
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for a Cookstore at the Florence Mall in Florence, Kentucky which is a 1,000,000
square foot major regional mall with approximately 100 specialty stores and four
major department stores.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
On November 6, 1996 the Company held an annual meeting of the
stockholders. At the meeting John Gaylord, George Gaylord, John D. Critser and
Martin C. Licht were re-elected to the board of directors. Of the shares voted,
2,374,094 voted for all of the directors and 4,500 abstained.
In addition, the stockholders ratified Feldman Radin & Co., P.C.
as the Company's independent auditors for the year ended December 31, 1996 and
ratified the amendment of the Company's certificate of incorporation increasing
the number of authorized shares of Common Stock from 10,000,000 to 50,000,000.
Of the shares voted with respect to the ratification of Feldman Radin & Co.,
P.C. as the Company's auditors, 2,348,594 voted for ratification, 500 voted
against ratification and 30,000 abstained. Of the shares voted with respect to
the ratification of the amendment of the Company's certificate of incorporation
2,330,464 voted for ratification, 15,000 voted against ratification and 33,600
abstained.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Market Information
The Common Stock and the Redeemable Warrants are quoted on the
NASDAQ Small Market under the symbols GJCO and GJCOW, respectively, and on the
Boston Stock Exchange under the symbols GJC and GJCW, respectively. The
following table sets forth the range of high and low bid quotations of the
Common Stock through February 28, 1997 as reported by the NASDAQ Small Cap
Market. The quotations reflect inter-dealer prices without retail mark-ups,
mark-downs, or commissions and may not represent actual transactions. Prior to
October 31, 1995 there was no public market for the Common Stock or the
Redeemable Warrants.
Common Stock
High Low
1995
Fourth Quarter* ..................................4 3
1996
First Quarter ....................................5 1 1/2
Second Quarter...............................3 5/16 7/8
Third Quarter.....................................2 7/8
Fourth Quarter..............................1 17/32 27/32
1997
First Quarter (through February 28, 1997) 1 1/2 1
* Prior to such time there was no public market for the Company's Common Stock.
Holders
As of February 28, 1997 the Company had approximately 37 record holders
of its Common Stock.
Private Placement
In November 1996 in a private placement exempt from the registration
requirements under the Securities Act of 1933, as amended under Section 4(2)
thereof and/or Rule 506 of Regulation D thereunder the Company issued an
aggregate of $300,000 of the Company's promissory notes and 180,000 shares of
the Company's common stock to three accredited investors.
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Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Forward-Looking Statements
When used in the Form 10-KSB and in future filings by the Company with
the Securities and Exchange Commission, the words or phrases "will likely
result" and "the Company expects" "will continue," "is anticipated,"
"estimated," "project," or "outlook" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. The Company wishes to caution readers
not to place undue reliance on any such forward-looking statements, each of
which speak only as of the date made. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical earnings and those presently anticipated or projected. The
Company has no obligation to publicly release the result of any revisions which
may be made to any forward-looking statements to reflect anticipated or
unanticipated events or circumstances occurring after the date of such
statements.
Results of Operations
Year Ended December 31, 1995 and 1996
Consolidated Operations
The Company incurred a net loss of $987,810 in fiscal 1996 as compared
to a net loss of $609,927 for fiscal 1995. The increase in the net loss in
fiscal 1996 as compared to fiscal 1995 was primarily due to lower sales, higher
store operating expenses and higher administrative expenses in fiscal 1996 as
compared to fiscal 1995. Additionally, the Company did not record a tax benefit
in fiscal 1996 as compared to a tax benefit of $267,490 for fiscal 1995.
Net sales in fiscal 1996 were $13,304,394, a 3.0% decrease from net
sales of $13,722,144 for fiscal 1995. The decrease was due primarily to the fact
that while total Cookstore sales increased 15.0% and comparable Cookstore sales
increased 5.8%, total Bookstore sales decreased 8.2% for fiscal 1996 as compared
to fiscal 1995. All Bookstores sales are comparable.
Cost of goods sold, including store occupancy and delivery costs, was
$9,886,911 for fiscal 1996 as compared to $10,177,693 for fiscal 1995.
Management believes that such decrease was due primarily to the decreased level
of sales. Gross profit as a percentage of net sales was 25.8% for both fiscal
1995 and fiscal 1996.
Store operating expenses for fiscal 1996 were $2,473,243 compared to
$2,394,236 for fiscal 1995. Management believes that the increase in such
expenses was due primarily to the reclassification of certain payroll expenses
to store level operating expenses for fiscal 1996.
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Such expenses were classified as administrative expenses in fiscal 1995. Store
operating expenses were 18.6% of net sales for fiscal 1996 as compared to 17.5%
in fiscal 1995. Management believes that the increase in such expenses as a
percentage of net sales is due primarily to the fact that while store level
operating expenses increased in fiscal 1996 as compared to the prior year, net
sales decreased.
Administrative expenses for fiscal 1996 were $1,333,846 compared to
$1,206,874 for fiscal 1995. Management believes that the increase in
administrative expenses is due primarily to an increase in various professional
and consulting fees in fiscal 1996 as compared to the prior year.
Depreciation and amortization for fiscal 1996 were $193,810 compared to
$246,991 for fiscal 1995 Management believes that the decrease in depreciation
and amortization is due primarily to the fact that some assets had been
completely depreciated and amortized in fiscal 1996 as compared to the prior
year.
Interest expenses for fiscal 1996 were $327,734 compared to $391,081
for fiscal 1995. Management believes that the decrease in interest expenses is
due primarily to a lower level of bank debt in fiscal 1996 as compared to the
same period in the prior year.
Amortization of discount on notes payable for fiscal 1996 was $10,667
compared to $190,208 for fiscal 1995. Management believes that the decrease in
amortization of discount on notes payable is due primarily to the fact that the
amortization was accelerated upon the repayment of bridge loans in the aggregate
principal of $500,000 after the completion of the Company's initial public
offering during fiscal 1995 compared to fiscal 1996. Amortization of debt issue
costs amounted to $139,319 in fiscal 1996. Such costs were related to the
issuance of $622,500 in convertible notes during fiscal 1996.
Cookstore Operations
Net sales in fiscal 1996 were $3,497,940, a 15.0% increase over net
sales of $3,042,412 during fiscal 1995. Management believes that the increase
was due primarily to the opening of the two newest Cookstores on December 1,
1996 and increases in comparable stores net sales. Comparable store net sales
were up 5.8% in fiscal 1996 as compared to fiscal 1995.
Cost of goods sold, including store occupancy and delivery costs, was
$2,286,565 for fiscal 1996 as compared to $2,103,086 for fiscal 1995. Management
believes that such increase was due primarily to the increased level of sales
and the inclusion of the occupancy costs for the two newest Cookstores opened on
December 1, 1996. Gross profit as a percentage of net sales was 34.6% for fiscal
1996 as compared to 30.9% during fiscal 1995. Management believes that the
primary reasons for the higher gross profit as a percentage of net sales for
fiscal 1996, as compared to fiscal 1995, are lower occupancy costs as a
percentage of net sales due primarily to higher comparable store sales and
seasonality in the two newest Cookstores that were open only a few weeks at the
end of 1996. While the store occupancy cost portion of cost of goods
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sold is generally relatively fixed throughout the year, December net sales in
the Cookstores generally are about 29% of total sales for the twelve month
period.
Bookstore Operations
Net sales in fiscal 1996 were $9,806,454, an 8.2% decrease from net
sales of $10,679,732 in the prior year. Management believes that the decrease
was due primarily to the fact that Superstore Bookstores in Boardman, Cincinnati
and Columbus (Sawmill Road) posted significant sales decreases as a result of
new competition from stores operated by Barnes & Noble, Inc. and Borders-Walden
Group, Inc., in close proximity in fiscal 1996. All Bookstore net sales are
comparable in the period.
Cost of goods sold, including store occupancy and delivery costs, were
$7,580,345 for fiscal 1996 as compared to $8,074,607 for fiscal 1995. Gross
profit as a percentage of net sales was 22.7% for fiscal 1996 as compared to
24.4% for fiscal 1995. Management believes that the decrease in the gross profit
as a percentage of net sales for fiscal 1996 as compared to the same period in
the prior year is due primarily to the fact that while sales decreased,
occupancy costs were higher.
Liquidity and Capital Resources
Through December 31, 1996, the Company has funded its requirements for
working capital and capital expenditures primarily from the net proceeds of its
initial public offering in November 1995 (the "Initial Public Offering"),
through borrowings under its bank credit facilities, and the sale of the
Company's debt and equity securities in private placements. In 1996 the Company
sold $622,500 of convertible notes of which $352,500 had been converted as of
December 31, 1996. As of December 31, 1996, the Company had a revolving line of
credit of $395,000, secured term debt in the aggregate amount of $164,994,
promissory notes in the face amount of $300,000 and subordinated notes in the
aggregate amount of $270,000 ($150,000 of which were repaid in January 1997).
The bank debt bears interest at 2.5% per annum over the prime rate of interest,
the promissory notes bear interest at 8.0% per annum and $60,000 of the
subordinated notes bear interest at 5.0% per annum and another $60,000 of the
subordinated notes bear interest at 17.5% per annum. The line of credit and the
secured term debt mature on May 31, 1997. Under the bank loan agreements, no
additional advances will be made under the line of credit through the maturity
date of May 31, 1997. The failure of the Company to refinance the Company's
existing credit facilities, of which there can be no assurance, would have a
material adverse affect on the Company.
In June 1996 the Company consummated a private placement to 12
investors of an aggregate of $622,500 of its convertible notes at an interest
rate of 5.0%. The principal amount of each convertible note is convertible into
shares of Common Stock at the rate of $1.50 per share. The resale of the shares
of Common Stock issuable upon the conversion of the convertible notes were
registered under the Securities Act of 1933, as amended. As of December 31, 1996
an aggregate principal amount of $352,500 of the convertible notes had been
39696.4
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<PAGE>
converted to 235,000 shares of the Company's Common Stock, an aggregate
principal amount of $150,000 has been repaid and of the remaining aggregate
principal amount of $120,000, $60,000 was extended to mature at the demand of
the bearer after June 10, 1997 at a new rate of interest of 17.5% and another
$60,000 matured on March 27, 1997 and is currently in default. The notes are
convertible into shares of Common Stock at the rate of $1.50 per share.
The Company's capital expenditures totaled $26,775 in fiscal 1995 and
$204,551 in fiscal 1996. Capital expenditures were higher in 1996 because the
Company opened two new Cookstores.
On November 7, 1995, the Company consummated the Initial Public
Offering of 750,000 shares of common stock and 1,725,000 warrants at a price to
the public of $3.00 and $0.10, respectively. In addition, certain principal
stockholders of the Company purchased 60,000 shares of the Company's Series A
Preferred Stock at a price of $5.00 per share.
On November 11, 1996 the Company consummated a private placement of
promissory notes in the aggregate principal amount of $300,000. The notes bear a
rate of interest of 8.0% and mature on May 11, 1999.
The Company had working capital of $231,457 at December 31, 1996
compared to working capital of $604,191 at December 31, 1995, a decrease of
$372,734. Cash used by operating activities during fiscal 1996 was $671,186. The
major elements comprising this amount consisted of the net loss of $987,810,
offset by non-cash expenses aggregating approximately $260,000. Cash was used
for increases to inventory and prepaid expenses aggregating approximately
$496,000, which was offset by increases to accounts payable of approximately
$552,000. In addition, approximately $205,000 was expended for purchases of
property and equipment, primarily to open two new Cookstores. Financing
activities, including issuances of equity and debt (net of repayments), provided
the Company with approximately $1,041,000 of the Company's cash.
The Company has informal agreements with one of its major suppliers with
respect to the reduction of certain charges. Such reductions aggregate
approximately $283,000 at December 31, 1996, which is reflected as a reduction
in the balance of the payable to this vendor on the Company's books. Such
amounts have not formally been credited by the vendor to the Company's account.
At December 31, 1996, the Company had approximately $398,000 recorded as
deferred tax assets, representing amounts the Company believes are more likely
than not to be recovered through future operations, of which there can be no
assurance. Taxable income would need to aggregate approximately $1,000,000 prior
to the expiration of these carry-forwards in the year 2011, for the Company to
realize their full benefit. The Company's evaluation of the recoverability of
deferred tax assets is based on certain assumptions regarding future operations,
of which there can be no assurance. Specifically, such evaluation assumes an
annualized profitability on the two new Cookstores opened in December 1996, the
anticipation of opening two additional Cookstores within three years of December
31, 1996 (and that such stores will experience
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similar profitability to the Company's existing Cookstores), and the absence of
certain professional, consulting and finance charges incurred during fiscal 1996
which the Company believes are non-recurring.
The Company anticipates that it will be necessary for the Company to
refinance its existing credit facilities and raise additional capital during the
next twelve months in order to increase the number of Cookstores and become
profitable. However, there can be no assurance that this will occur. The failure
of the Company to secure additional financing would have a material adverse
affect on the Company.
Item 7. Financial Statements and Supplementary Data.
See Item 13 of this Form 10-KSB, "Exhibits, Lists, and Reports on Form 8-K."
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 9. Directors and Executive Officers of the Registrant.
The following table sets forth certain information concerning the
directors and executive officers of the Company.
Name Age Position
---- --- --------
George Gaylord .............70 Senior Chairman of the Board and Director
John Gaylord ...............42 Chairman of the Board, Chief Executive Officer,
Treasurer, Chief Financial Officer and Director
John D. Critser ............42 President, Chief Operating Officer and Director
Janet Gaylord Goodburn .....37 Secretary
Martin C. Licht ............55 Director
All directors of the Company hold office until the next annual meeting
of shareholders and until their respective successors are duly elected and
qualify. Officers serve at the discretion of the Board of Directors.
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<PAGE>
The following is a brief summary of the background of each executive
officer and director of the Company:
George Gaylord has been a director and Senior Chairman of the Company
since its inception in July 1994. Mr. Gaylord opened the Company's first Little
Professor Book Center in 1970 and was Chairman and Chief Executive Officer of
each of the Subsidiaries from their inception through November 1993. Mr. Gaylord
has been a director and Chairman Emeritus of the Subsidiaries since November
1993. Mr. Gaylord is the father of John Gaylord, Janet Gaylord Goodburn, Susan
Gaylord Noble and Judy Gaylord and is the uncle of John D. Critser.
John Gaylord has been Chairman of the Board of Directors, Chief
Executive Officer, Treasurer, Chief Financial Officer and a director of the
Company since its inception in July 1994. Since November 1993, Mr. Gaylord has
served as Chairman of the Board of Directors and Chief Executive Officer of the
Subsidiaries. From August 1977 through November 1993, Mr. Gaylord served as
President or Vice President of each of the Subsidiaries. Mr. Gaylord is the son
of George Gaylord, the brother of Janet Gaylord Goodburn, Susan Gaylord Noble
and Judy Gaylord, and the first cousin of John D. Critser.
John D. Critser has been a director, President and Chief Operating
Officer of the Company since its inception in July 1994. Mr. Critser has been
President and Chief Operating Officer of each of the Subsidiaries since November
1993. Prior to joining the Company in July 1993, Mr. Critser was Vice President
- - Store Operations for Eckerd Vision Group, a division of the Eckerd
Corporation. Mr. Critser joined Eckerd Corporation in 1983 as an operations
manager and served as a Vice President of the Eckerd Vision Group since February
1991. He holds a B.S. degree in Administrative Science (1976) and an M.B.A.
degree from the University of South Florida (1981). Mr. Critser is the first
cousin of John Gaylord, Janet Gaylord Goodburn, Susan Gaylord Noble and Judy
Gaylord and the nephew of George Gaylord.
Janet Gaylord Goodburn has been the Secretary of the Company since its
inception in July 1994. Commencing in October 1984 Ms. Goodburn served as a Vice
President of each of the Subsidiaries and she has also served as the Secretary
and/or Treasurer of certain of the Subsidiaries. Ms. Goodburn is the daughter of
George Gaylord and the sister of John Gaylord, Susan Gaylord Noble and Judy
Gaylord and the first cousin of John D. Critser.
Martin C. Licht has been a director of the Company since November 1995.
He has been a practicing attorney since 1967 and has been a partner of the law
firm of Lane & Mittendorf LLP, since January 1997. Mr. Licht is also a director
of two companies traded on the NASDAQ Small Capitalization Market, Natural
Health Trends Corp. which owns and operates three vocational schools and is
engaged in the business of complementary medicine and Cable & Co. Worldwide,
Inc. which imports and markets footwear on a wholesale basis.
39696.4
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<PAGE>
Directors' Compensation
Directors of the Company do not receive any fixed compensation for
their services as directors. However, the Board of Directors may authorize the
payment of a fixed sum to non-employee directors for their attendance at regular
and special meetings of the Board as is customary for similar companies.
Directors will be reimbursed for their reasonable out-of-pocket expenses
incurred in connection with their duties to the Company. For the fiscal year
ended December 31, 1996, neither the Company nor the Subsidiaries paid its
directors any cash or other form of compensation for acting in such capacity
except that directors who were also executive officers of the Company and
Subsidiaries received cash compensation for acting in the capacity of executive
officers.
Item 10. Executive Compensation.
The following table provides a summary of cash and non-cash
compensation for each of the last three fiscal years ended December 31, 1994,
1995 and 1996 with respect to the following officers of the Company:
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------- ---------------------------------
Awards Payouts
----------------------- ---------
Securities
Restricted Underlying
Other Annual Stock Options LTIP All Other
Name and Principal Positions Year Salary($) Bonus($) Compensation($)(1) Award(s)($) SARs(#) Payouts($) Compensation
- ---------------------------- ---- -------- ------- ------------------ ---------- ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John Gaylord...................1996 134,048 -- -- -- -- -- --
Chief Executive Officer and ..1995 136,259 -- -- -- -- -- --
Chairman of the Board ........1994 139,832 -- -- -- -- -- --
George Gaylord.................1996 145,423 -- -- -- -- -- --
Senior Chairman of the Board..1995 216,010 -- -- -- -- -- --
234,641 -- -- -- -- -- --
John D. Critser................1996 122,532 -- -- -- -- -- --
President and Chief Operatin..1995 103,076 -- -- -- -- -- --
Officer(2) ...................1994 88,443 40,000(2) -- -- -- -- --
</TABLE>
(1) Excludes perquisites and other personal benefits that in the aggregate do
not exceed 10% of each of such individual's total annual salary and bonus.
(2) Mr. Critser received 21,845 shares of Common Stock in 1994 which were
valued at $40,000.
Employment and Consulting Agreements
The Company has entered into employment agreements with George Gaylord,
John Gaylord and John D. Critser, which will expire in April 1998, under which
they each receive annual salaries of $150,000 per annum. The agreements provide
that the executive will be eligible to receive short-term incentive bonus
compensation if the Company is profitable, the amount of which, if any, will be
determined by the Board of Directors based on the employee's performance,
contributions to the Company's success and on the Company's ability to pay such
incentive compensation. The employment agreements also provide for termination
based on
39696.4
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<PAGE>
death, disability, voluntary resignation or material failure in performance. The
employment agreements provide for severance payments upon termination unless the
executive is terminated without cause, in which case the executive will receive
one year's salary as severance. The agreements contain non-competition
provisions that preclude each executive from competing with the Company for a
period of one year from the date of termination of employment.
Stock Options
No options were granted to, held or exercised by, any of the Company's
officers during the fiscal year ended December 31, 1996. The Company has adopted
the 1994 Stock Option Plan under which up to 333,333 options to purchase shares
of Common Stock may be granted to key employees, consultants and members of the
Board of Directors of the Company. The exercise price of the options will be
determined by the Stock Option Committee selected by the Board of Directors, but
the exercise price will not be less than 85% of the fair market value of the
Common Stock on the date of grant.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of February 28,
1997 as to the Common Stock and Series A Preferred Stock ownership of each of
the Company's directors, executive officers, all executive officers and
directors as a group and all persons known by the Company to be the beneficial
owners of more than five percent of the Company's Common Stock.
39696.4
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<PAGE>
<TABLE>
<CAPTION>
Ownership of Common Stock and Series A Preferred Stock
Name and Address of Beneficial Common Stock Common Series A Series A
- ------------------------------ Number of Stock Preferred Preferred Stock
Owner Shares(1) Percentage Stock - Number Percentage
----- ------ ---------- -------------- ----------
<S> <C> <C> <C> <C>
George Gaylord......................678,580(2)(4) 17.9% 28,320 47.2%
2611 Clarion Court
Columbus, Ohio 43220
John Gaylord........................496,036(2)(3) 13.1% 20,720 34.5
8836 Finlarig Drive
Dublin, Ohio 43017
Judy Gaylord........................198,344(2) 5.2% 2,945 4.9
8667 Blanca Ct.
Powell, Ohio 43065
Janet Gaylord Goodburn..............198,344(2) 5.2% 2,946 4.9
3935 Cedric Lane
Dublin, Ohio 43017
Susan Gaylord Noble.................198,344(2) 5.2% 2,945 4.9
2933 Kicking Bird Trace
Dublin, Ohio 43017
John D. Critser.................... 160,877(2)(4) 4.3% 2,124 3.5
8562 Torwoodlee Ct.
Dublin, Ohio 43017
Martin C. Licht..................... - - -
Selden Lane
Greenwich, Connecticut
06831
- --------------------------------
All present officers and
directors as a group
(5 persons).......................1,533,837 40.5% 100%
</TABLE>
(1) Unless otherwise noted, all persons named in the table have sole voting and
dispositive power with respect to all shares of Common Stock and Series A
Preferred Stock beneficially owned by them.
(2) Each of these five members of the Gaylord family named, as well as John D.
Critser, disclaims beneficial ownership of the securities owned by the
other individuals named in the above table.
(3) Includes 71,345 shares of Common Stock and 2,960 shares of Series A
Preferred Stock owned by John Gaylord's wife, Jennifer Lynn Gaylord.
(4) The foregoing does not reflect an agreement between Mr. Critser and George
Gaylord whereby George Gaylord may purchase from Mr. Critser up to the
following number of
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<PAGE>
shares if Mr. Critser's employment with the Company is terminated for any
reason during any of the 12-month periods ending on July 31st of the years
indicated: 78,992 shares (1997) and 39,497 shares (1998). The purchase
price for the shares of Common Stock will be Mr. Critser's cost.
Item 12. Certain Relationships and Related Transactions.
Pursuant to an agreement dated September 12, 1994 between Gaylord
Family Limited ("GFL") and the Franchisor, the Franchisor has agreed to make
payments to GFL for the development of the superstore concept for two Little
Professor bookstores. GFL is owned by John Gaylord, George Gaylord, Janet
Gaylord Goodburn, Susan Gaylord Noble and Judy Gaylord. The Franchisor has
agreed to pay to GFL 25% of the initial franchise fees and 33% of the royalties
paid to the Franchisor by Little Professor bookstores unaffiliated with the
Company located in Ft. Wayne, Indiana (the "Ft. Wayne Store") and Reston,
Virginia (the "Reston Store"). GFL received $48,621 in 1995 and $21,670 in 1996
pursuant to such agreement. George Gaylord receives all of the payments, net of
expenses, received by GFL from the Franchisor.
John Gaylord and George Gaylord have guaranteed, jointly and severally,
certain loans in the aggregate principal amount of $559,994 due to Bank One
Columbus, N.A. John Gaylord and Jennifer Lynn Gaylord, his wife, and George
Gaylord have mortgaged their respective residences to secure the guarantees.
John Gaylord and Jennifer Lynn Gaylord have guaranteed, jointly and severally,
the lease for the Cookstore located in the Lane Avenue Shopping Center,
Columbus, Ohio. George Gaylord has guaranteed the lease for the Superstore
located in the Lane Avenue Shopping Center, Columbus, Ohio. In addition, John
Gaylord and George Gaylord have jointly and severally guaranteed certain
promissory notes in the aggregate principal amount of $300,000.
George Gaylord is a founder of the Company and may be deemed a parent
of the Company as a result of his ownership of approximately 17.9% of the Common
Stock, his service as a director, and his relationship to his children who
collectively owned approximately 28.7% of the Common Stock. John Gaylord may be
deemed a parent of the Company as a result of his ownership of approximately
13.1% of the Common Stock, including the 71,345 shares of Common Stock owned by
his wife, Jennifer Lynn Gaylord, his executive position, his service as a
director, and his relationship to his father, George Gaylord, who owns
approximately 17.9% of the Common Stock .
As of December 31, 1996, George Gaylord, John Gaylord, Susan Gaylord
Noble, Janet Gaylord Goodburn and Judy Gaylord owed the Company an aggregate of
$67,112 in connection with advances made to such individuals by the Company and
the Subsidiaries. The debt is evidenced by a term note (the "Note"), dated
February 28, 1995, in the original principal amount of $88,701 executed by such
individuals. Each of the parties are jointly and severally liable for the entire
amount due under the Note. The Note bears interest at 8.5% per annum and
39696.4
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<PAGE>
is payable in sixty equal monthly installments of principal and interest which
commenced August 1, 1995.
Martin C. Licht, a partner of Lane & Mittendorf LLP, the Company's
counsel, is a director of the Company. The Company paid $240,594 in 1995 and
$185,000 in 1996 to law firms in which Martin C. Licht was a member.
Item 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Index to Financial Statements
1. Financial Statements Page
Independent Auditor's Report F-2
Consolidated Balance Sheet - December 31, 1996 F-3
Consolidated Statements of Operations - Years Ended
December 31, 1996, and 1995 F-4
Consolidated Statement of Changes in Stockholders'
the years ended December 31, 1996 and 1995 F-5
Consolidated Statements of Cash Flow - Years Ended
December 31, 1996 and 1995 F-6
Notes to Financial Statements F-7
2. Financial Statement Schedules
None
3. Exhibits Included Herein
See Exhibit Index on page 25 hereof for the exhibits filed as part of
this Form 10-KSB.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed with the Securities and Exchange
Commission during the quarter ended December 31, 1996.
39696.4
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<PAGE>
(c) Exhibit Index
Number Description of Exhibit
3.1 -- Certificate of Incorporation of the Company.+
3.2 -- By-Laws of the Company.+
4.1 -- Form of Warrant Agreement between the Company and Continental Stock
Transfer & Trust Company, as warrant agent.+
4.2 -- 1994 Stock Option Plan, as amended.+
4.3 -- Specimen Certificate of the Company's Warrant.+
4.4 -- Form of Underwriter's Warrants.+
10.1 -- Form of Employment Agreement between the Company and John D. Critser.+
10.2 -- Form of Employment Agreement between the Company and John Gaylord.+
10.3 -- Form of Employment Agreement between the Company and George Gaylord.+
10.4 -- Agreements between the Subsidiaries and Bank One, Columbus, N.A.+
10.5 -- Exchange Agreement, dated as of August 1, 1994, by and among George
Gaylord, John Gaylord, Janet Gaylord Goodburn, Susan Gaylord Noble,
Judy Gaylord, Jennifer Lynn Gaylord, John D. Critser and Gaylord
Companies, Inc.+
10.6 -- Lease, dated September 30, 1987, between UAP-Columbus JV326132, as
Landlord and Gaylord Book Company, as Tenant, as amended, for premises
located at 1655 and 1657 West Lane Avenue,Lane Avenue Shopping Center,
Upper Arlington, Ohio.+
10.7 -- Lease, dated December 15, 1988, between Retail Projects of Cincinnati,
Inc., as Landlord, and Little Professor Enterprises, Inc., as Tenant,
as subsequently assigned to Gaylord's Inc. and amended, for premises
located at Space 180, Forest Fair Mall, Forest Park, Ohio.+
10.8 -- Lease, dated June 13, 1989, between UAP-Columbus JV326132, as
Landlord, and The Cookstore, Inc., as Tenant, as amended, for
premises located at 1677 West Lane Avenue, M-1/4 and M-6, Lane Avenue
Shopping Center, Upper Arlington, Ohio.+
10.9 -- Lease, dated September 24, 1990, between Planned Communities Company,
as Landlord, and Little Professor Enterprises, Inc., as Tenant, for
premises located at Worthington Square Shopping Center, Worthington,
Ohio.+
10.10 -- Lease, dated July 16, 1992, between Sawmill Place Plaza
Associates, as Landlord, and Little Professor Enterprises, Inc., as
Tenant, as amended, for premises known as Space 122, Plaza at Sawmill
Place, 2700 Sawmill Place Blvd., Columbus, Ohio.+
10.11 -- Lease, dated September 10, 1993, between UAP-Columbus, JV326132,
as Landlord, and Gaylord Book Co., Inc., as Tenant, as amended, for
premises located at 1595 West Lane Avenue, Upper Arlington, Ohio.+
10.12 -- Lease, dated September 13, 1993, between Aetna Life Insurance
Company, as Landlord, and Gaylord Companies, Inc., as Tenant, for
premises located at Worthington Mall, Worthington, Ohio.+
39696.4
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<PAGE>
Number Description of Exhibit
10.13 -- Lease, dated October 21, 1993, between Greater Boardman Plaza, Inc.,
as Landlord, and Gaylord Enterprises, Inc., as Tenant, for premises
located at Room No. 101, Greater Boardman Plaza Shopping Center, 255
Boardman-Canfield Road, Youngstown, Ohio.+
10.14 -- Lease, dated July 15, 1994, between Glimcher Properties Limited
Partnership, as Landlord, and Gaylord Companies, as Tenant, for
premises located at the Mall at Fairfield Commons, Store #E181,
Beavercreek, Ohio.+
10.15 -- Lease, dated August 19, 1994, between DeBartolo Capital
Partnership, as Landlord, and The Cookstore Inc., as Tenant, for
premises located at Room 240, Summit Mall Shopping Center, 3265 West
Market Street, Akron, Ohio.+
10.16 -- Sublease, dated August 31, 1994, between J.E. Hanger, Inc., sublessor
and The Gaylord Companies, Inc., sublessee, as a sublease under the
master lease dated April 23, 1991 between Teachers Insurance and
Annuity Association, as lessor, and J.E.Hanger, Inc., as lessee, for
premises located at 4006 Venture Court, Columbus,Ohio.+
10.17 -- Consignment Agreement, dated February 25, 1989, between Ingram
Industries, Inc., as Consignor, and Gaylord's, Inc., as Consignee,
relating to the store located at 1018 Forest Fair Drive, Cincinnati,
Ohio.+
10.18 -- Consignment Agreement dated May 21, 1991, between Ingram Book
Company, as Consignor, and Little Professor Enterprises, Inc., as
Consignee, relating to the store located at 155 Worthington Square,
Worthington, Ohio.+
10.19 -- Consignment Agreement, dated February 10, 1993, between Ingram Book
Company, as Consignor, and Gaylord Book Company, as Consignee,
relating to the store located at 1646 W.Lane Avenue, Columbus, Ohio.+
10.20 -- Consignment Agreement, dated February 10, 1993, between Ingram Book
Company, as Consignor, and Little Professor Enterprises, Inc., as
Consignee, relating to the store located at 6490 Sawmill Road,
Columbus, Ohio.+
10.21 -- Consignment Agreement, dated December 1993, between Ingram Book
Company, as Consignor, and Gaylord Enterprises, Inc., as Consignee,
relating to the store located at 101 Boardman-Canfield Road,
Boardman, Ohio.+
10.22 -- License Agreement, dated as of January 1, 1994, between Sawworth Book
Company, as License Owner, and Little Professor Book Centers, Inc.,
as Franchisor, relating to 55 Worthington Square, Worthington, Ohio.+
10.23 -- License Agreement, dated as of January 1, 1994, between Sawworth
Book Company, as License Owner, and Little Professor Book Centers,
Inc., as Franchisor, relating to 6490 Sawmill Road, Columbus, Ohio.+
10.24 -- License Agreement, dated as of January 1, 1994, between Gaylord
Enterprises, Inc., as License Owner, and Little Professor Book
Centers, Inc., as Franchisor, relating to 101 Boardman-Canfield Road,
Boardman, Ohio.+
39696.4
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<PAGE>
10.25 -- License Agreement, dated as of January 1, 1994, between Gaylord's,
Inc., as License Owner, and Little Professor Book Centers, Inc., as
Franchisor, relating to 1018 Forest Fair Drive, Cincinnati, Ohio.+
10.26 -- License Agreement, dated as of January 1, 1994, between Gaylord Book
Company, as License Owner, and Little Professor Book Centers, Inc.,
as Franchisor, relating to 1657 W. Lane Avenue, Columbus, Ohio.+
10.27 -- Agreement, dated as of January 1, 1994, between the Company and
Little Professor Book Centers, Inc.+
10.28 -- Letter Agreement, dated September 12, 1994, from Little Professor
Book Centers, Inc. to Gaylord Family Limited.+
10.29 -- Mutual Release Agreement, dated September 12, 1994, among Little
Professor Book Centers, Inc. and the Company Gaylord's, Inc., Gaylord
Family Investments, Inc., Gaylord Book Company, Sawworth Book
Company, Gaylord Enterprises, Inc., Gaylord Family Limited, George
Gaylord and John Gaylord.+
10.30 -- Loan Agreement with Bank One+
21.1 -- List of Subsidiaries.+
27.1 -- Financial Data Schedule.*
* Filed with this Form 10-KSB
+ Previously Filed with Registration Statement No. 33-90832.
39696.4
-27-
<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.
Dated: April 14, 1997 GAYLORD COMPANIES, INC.
By: /S/ JOHN D. CRITSER
--------------------------------------
John D. Critser, President, Chief
Operating Officer, Director
By: /S/ JOHN GAYLORD
--------------------------------------
John Gaylord, Chairman of the
Board, Chief Executive Officer,
Treasurer, Chief Financial Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the date indicated.
Name Title Date
- --------------------- ----------------------------------- ---------------
/S/ JOHN D. CRITSER
- ---------------------
John D. Critser President, Chief Operating Officer, April 14, 1997
Director
/S/ JOHN GAYLORD
- ---------------------
John Gaylord Chairman of the Board, Chief April 14, 1997
Executive Officer, Treasurer, Chief
Financial Officer and Director
/S/ MARTIN C. LICHT
- ---------------------
Martin C. Licht Director April 14, 1997
/S/ GEORGE GAYLORD
- ---------------------
George Gaylord Senior Chairman April 14, 1997
of the Board and
Director
39696.4
-28-
<PAGE>
GAYLORD COMPANIES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
------
Independent Auditors' Report F-2
Consolidated Balance Sheet at December 31, 1996 F-3
Consolidated Statement of Operations for the years ended
December 31, 1996 and 1995 F-4
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 1996 and 1995 F-5
Consolidated Statement of Cash Flows for the years ended
December 31, 1996 and 1995 F-6
Notes to Consolidated Financial Statements F-7
F - 1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and
Board of Directors
Gaylord Companies, Inc.
We have audited the accompanying consolidated balance sheet of
Gaylord Companies, Inc. and subsidiaries as of December 31, 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the years ended December 31, 1996 and 1995. 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 Gaylord
Companies, Inc. as of December 31, 1996, and the results of its operations and
its cash flows for the years ended December 31, 1996 and 1995 in conformity with
generally accepted accounting principles.
/s/ Feldman Radin & Co., P.C.
------------------------------
Feldman Radin & Co., P.C.
Certified Public Accountants
February 28, 1997,
March 27, 1997 as to Note 11
and April 15, 1997 as to Note 5
F - 2
<PAGE>
GAYLORD COMPANIES, INC.
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
CURRENT ASSETS:
Cash $ 818,518
Accounts receivable - trade 80,329
Other receivables 177,217
Inventories 2,210,240
Prepaid expenses and other current assets 210,539
----------------
TOTAL CURRENT ASSETS 3,496,843
PROPERTY AND EQUIPMENT 723,576
GOODWILL 120,292
DEFERRED INCOME TAXES 398,196
INVESTMENT 125,000
OTHER ASSETS 26,977
----------------
$ 4,890,884
================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,244,918
Sales and other taxes payable 190,474
Line of credit 395,000
Convertible notes 270,000
Current portion of long-term debt 164,994
----------------
TOTAL CURRENT LIABILITIES 3,265,386
NOTE PAYABLE, net of discount 214,667
STOCKHOLDERS' EQUITY:
Cumulative preferred stock, par value
$.01 per share; 1,500,000 shares
authorized, 60,000 shares issued and outstanding 300,000
Common stock, par value $.01 per share;
10,000,000 shares authorized, 3,635,000
shares issued and outstanding 36,350
Paid-in-capital in excess of par 2,338,938
Accumulated deficit (999,219)
Receivable for stock (168,571)
Unearned stock compensation (96,667)
----------------
TOTAL STOCKHOLDERS' EQUITY 1,410,831
----------------
$ 4,890,884
================
The notes are an integral part of the consolidated financial statements.
F-3
<PAGE>
GAYLORD COMPANIES, INC.
STATEMENT OF OPERATIONS
Year ended December 31,
-----------------------------------
1996 1995
--------------- ----------------
NET SALES $ 13,304,394 $ 13,722,144
COST OF GOODS SOLD, including store
occupancy and delivery costs 9,866,911 10,177,693
--------------- ----------------
GROSS PROFIT 3,437,483 3,544,451
--------------- ----------------
OPERATING EXPENSES:
Store operating expenses 2,473,243 2,394,236
Administrative 1,333,846 1,206,874
Depreciation and amortization 193,810 246,991
--------------- ----------------
4,000,899 3,848,101
--------------- ----------------
OPERATING INCOME (LOSS) (563,416) (303,650)
--------------- ----------------
OTHER INCOME (EXPENSE):
Interest expense (327,734) (391,081)
Interest income 15,917 4,448
Amortization of discount on
notes payable (10,667) (190,208)
Amortization of debt issue costs (139,319) -
Other - net 37,409 3,074
--------------- ----------------
(424,394) (573,767)
--------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES (987,810) (877,417)
INCOME TAX BENEFIT - 267,490
--------------- ----------------
NET INCOME (LOSS) $ (987,810) $ (609,927)
=============== ================
EARNINGS (LOSS) PER COMMON SHARE $ (0.33) $ (0.29)
=============== ================
WEIGHTED AVERAGE COMMON SHARES USED 3,103,957 2,125,000
=============== ================
The notes are an integral part of the consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
GAYLORD COMPANIES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Paid-in Unearned
Preferred Stock Common Stock Capital in Stock Retained
---------------------- ----------------- Excess of Compen- Receivable Earnings
Shares Amount Shares Amount Par Value sation for Stock (Deficit) Totals
------------ ------- -------- ------- ---------- --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1994 - $ - 2,000,000 $20,000 $ 226,024 $ - $ - $639,897 $ 885,921
Sale of preferred stock 60,000 300,000 - - - - - - 300,000
Sale of common stock and warrants - - 750,000 7,500 1,374,793 - - - 1,382,293
Dividends paid on preferred stock - - - - - - - (5,379) (5,379)
Net loss - - - - - - - (609,927) (609,927)
------------ ------- --------- ------- ---------- --------- -------- --------- ---------
BALANCE - DECEMBER 31, 1995 60,000 300,000 2,750,000 27,500 1,600,817 - - 24,591 1,952,908
Sale of stock to consultant - - 300,000 3,000 297,000 - (168,571) - 131,429
Shares issued with note payable - - 180,000 1,800 94,200 - - - 96,000
Shares issued for services - - 170,000 1,700 112,050 (110,000) - - 3,750
Conversion of notes, net of associated
deferred debt issue costs - - 235,000 2,350 234,871 - - - 237,221
Dividends on preferred stock - - - - - - - (36,000) (36,000)
Amortization of unearned stock
compensation - - - - - 13,333 - - 13,333
Net loss - - - - - - - (987,810) (987,810)
------------ ------- --------- ------- --------- ------- ---------- -------- ---------
BALANCE - DECEMBER 31, 1996 60,000 $300,000 3,635,000 $36,350 $2,338,938 $(96,667) $(168,571)$(999,219) $1,410,831
============ ======= ========= ======= ========= ======= ======== ======= ==========
</TABLE>
The notes are an integral part of the consolidated financial statements.
F-5
<PAGE>
GAYLORD COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------
1996 1995
--------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (987,810) $ (609,927)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 193,810 246,991
Non cash imputed compensation expense 57,012 -
Gain on disposal of property and equipment (602) -
Amortization of discount on notes payable 10,667 190,208
Changes in assets and liabilities:
Decrease (increase) in accounts receivable (38,231) (9,674)
Decrease (increase) in other receivables 16,490 5,844
Decrease (increase) in inventory (399,788) 3,148
Decrease (increase) in prepaid expenses and other assets (96,668) (60,505)
Decrease (increase) in other assets 11,136 8,862
Decrease (increase) in deferred income taxes - (261,112)
Increase (decrease) in accounts payable 551,627 (253,272)
Increase (decrease) in sales and other taxes payable 11,171 32,560
Increase (decrease) in other current liabilties - (51,823)
Decrease (increase) in deferred registration costs - 192,832
--------------- ----------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (671,186) (565,868)
--------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (204,551) (26,775)
Proceeds from sale of property and equipment 3,785 -
--------------- ----------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (200,766) (26,775)
--------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock - 300,000
Proceeds from issuance of common stock and warrants, net of expenses 69,721 1,382,293
Dividends paid (36,000) (5,379)
Proceeds from note payable 204,000 -
Proceeds from bank debt 395,000 250,000
Repayments of bank debt (463,770) (688,817)
Proceeds from issuance of convertible notes 622,500 -
(Increase) decrease in restricted cash 250,000 (250,000)
Principal payments of capital lease obligations - (8,062)
--------------- ----------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 1,041,451 980,035
--------------- ----------------
NET INCREASE (DECREASE) IN CASH 169,499 387,392
CASH AT BEGINNING OF YEAR 649,019 261,627
--------------- ----------------
CASH AT END OF YEAR $ 818,518 $ 649,019
=============== ================
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year for:
Interest $ 318,612 $ 147,391
=============== ================
Income taxes $ - $ -
=============== ================
Non cash financing and investing activity:
Conversion of notes payable to common stock $ 352,500 $ -
=============== ================
Common stock issued for future services $ 112,500 $ -
=============== ================
Receivable for common stock $ 168,571 $ -
=============== ================
</TABLE>
The notes are an integral part of the consolidated financial statements.
F-6
<PAGE>
GAYLORD COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The financial statements of Gaylord Companies, Inc. (the "Company")
include the accounts of the Company and its subsidiaries. All
significant intercompany balances and transactions have been eliminated
in the consolidated financial statements. The Company is a specialty
retailer of books, quality cookware and serving equipment, with
operations in Ohio, Indiana and Kentucky.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that effect 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 during the reporting period. Actual results could differ
from those estimates.
(b) Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the retail method and the FIFO method.
(c) Investments
The Company adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." This SFAS requires, among other things,
that securities designated as available for sale be revalued at period
end with the unrealized gain or loss, net of tax effect, recorded as an
element of stockholders' equity. The held to maturity classification
includes debt securities that the Corporation has the positive intent
and ability to hold to maturity which are carried at amortized cost.
The available for sale classification includes debt and equity
securities which are carried at fair value. Unrealized gains or losses
on securities available for sale are included as a separate component
of stockholders' equity, net of tax effect.
F - 7
<PAGE>
The Company has an eleven percent interest in the common stock of a
franchisor organization, Little Professor Book Company ("LPBC"), held
for long-term investment purposes, which is stated at cost which
management believes approximates fair market value. An agreement with
the franchisor states that the franchisor may purchase the stock from
the Company at the end of the license agreements with the franchisor at
the higher of cost, book value, or market value.
(d) Property and Equipment
Property and equipment are stated at cost. Property and equipment held
under capital leases are stated at the lower of the present value of
minimum lease payments at the beginning of the lease term or fair value
at the inception of the lease.
Depreciation of property and equipment is calculated using the
straight-line method over the estimated useful lives of the assets.
Property and equipment held under capital leases and leasehold
improvements are amortized using the straight-line method over the
shorter of the lease term or estimated useful life of the asset.
(e) Goodwill
Goodwill, which arose as a result of the purchase of one of the
Company's bookstores in 1977 is being amortized on a straight-line
basis over a period of 40 years. The Company assesses the
recoverability of the goodwill by evaluating whether the amortization
of the goodwill balance over its remaining useful life can be recovered
through projected undiscounted future results of the acquired entity.
The amount of goodwill impairment, if any, is measured based on
projected discounted future results, using a discount rate reflecting
the Company's average cost of capital.
(f) Preopening Costs
Expenses associated with the opening of new stores are deferred and
amortized ratably over a twelve month period beginning on the date of
the store opening.
(g) Net Earnings (Loss) Per Share
Net earnings (loss) per share is computed based on the weighted average
number of common shares outstanding after giving effect to preferred
stock dividends.
F - 8
<PAGE>
(h) Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for cash,
receivables, accounts payable and accrued expenses approximate fair
value based on the short-term maturity of these instruments.
(i) Stock Based Compensation
The Company accounts for stock transactions in accordance with APB
Opinion No. 25, "Accounting For Stock Issued To Employees." In
accordance with Statement of Financial Accounting Standards No. 123,
"Accounting For Stock-Based Compensation," the Company has adopted the
pro forma disclosure requirements of Statement No. 123 in fiscal 1996.
(j) Impairment of Long - Lived Assets
The Company has adopted Statement of Financial Accounting Standards No.
121, "Accounting For The Impairment Of Long-Lived Assets And For
Long-Lived Assets To Be Disposed Of" as of January 1, 1996. Such
adoption had no material effect on the financial position of the
Company.
2. OTHER RECEIVABLES
Other receivables consist of the following at December 31, 1996:
Officers' receivable $ 67,112
Other receivables 110,105
----------------
$ 177,217
================
The officers' receivable is due in monthly installments through July
2000 and bears interest at the rate of 8.5% per annum.
3. INVENTORIES
The Company, as consignee, has entered into consignment agreements
whereby title to the consigned goods remain with the consignor until
sold by the Company. These consignment agreements have an original term
of 2 years with automatic one-year renewals, unless terminated by
either party. The Company is obligated to pay a formula based
consignment fee. Such formula is based on the average amount of
consigned goods held during the period at prime plus 2 percent (10.5%
at December 31, 1996 and 1995) plus a fixed charge. The
F - 9
<PAGE>
total consignment fees for the years ended December 31, 1996 and 1995
were $261,900 and $254,300, respectively.
The Company may return consigned goods to the consignor up to a defined
level without a fee. Upon the termination of the consignment
agreements, the consignor shall be entitled to the immediate return of
all of the consigned goods.
As the consigned goods remain the property of the consignor until sold,
the consigned goods (cost of approximately $2,871,000 at December 31,
1996) are not reflected as inventory in the accompanying consolidated
financial statements. The maximum amount of consigned goods the Company
may have on hand at any time cannot exceed $4,670,000 (at retail
value). The consigned goods sold under this arrangement were
approximately 64% and 61% of cost of sales in the years ended December
31, 1996 and 1995, respectively.
Currently, the Company is not in compliance with the provisions in the
consignment agreement with respect to the Company's inventory turnover
ratios. Upon a default under the consignment agreements, the consignor
may terminate all of such consignment agreements.
4. PROPERTY AND EQUIPMENT
The following is a summary of property and equipment at December 31,
1996:
Depreciable
Life
------------------
Computers and equipment 5 years $ 285,072
Leasehold improvements 10 years 550,213
Furniture and fixtures 7 years 1,091,179
----------------
1,926,464
Accumulated depreciation and amortization 1,202,888
----------------
$ 723,576
================
F - 10
<PAGE>
5. BANK DEBT
The following is a summary of bank debt at December 31, 1996:
Term loan $ 164,994
Line of credit 395,000
----------------
$ 559,994
================
In November 1995, the Company entered into a master financing agreement
with its lending bank, which was amended in May 1996. Under the amended
agreement, the rate of interest was set at prime plus 2.5% and all
outstanding principal became due on January 10, 1997.
The Company's accounts receivable, inventory and property and
equipment, are pledged as security under this loan agreement. Also,
certain stockholders have personally guaranteed the debt.
In April 1997, an amendment to this financing agreement was entered
into pursuant to which all principal becomes due by May 31, 1997 and
the interest rate is increased to prime plus 3.5%.
6. BRIDGE FINANCINGS
In August 1994, the Company borrowed $500,000 in a bridge financing. In
accordance with Accounting Principles Board Opinion No. 14, the
proceeds received for the bridge financings were allocated between the
equity and debt securities included in such units based upon their
relative estimated fair values. The difference between the face amount
and the allocated value of the debt was recorded as a discount on the
notes payable totaling $150,000. An additional $57,500 of financing
costs were also recorded as discounts. The remaining unamortized
discount was written off during November 1995 upon the Company's
accelerated repayment of the bridge loans with the proceeds of its
Initial Public Offering.
F - 11
<PAGE>
7. COMMITMENTS AND CONTINGENCIES
(i) Leases
The Company has ten noncancelable operating leases, covering its
headquarters and its store locations. Such leases expire variously over
the next ten years, but also provide for renewal options.
Future minimum lease payments under noncancelable operating leases are
as follows:
Operating
Year ending December 31, leases
----------------
1997 $ 1,162,471
1998 1,220,127
1999 1,022,610
2000 852,037
2001 873,708
Later years, through 2006 2,109,458
Total rental expense for operating leases was $1,512,178 and $1,156,662
in 1996 and 1995, respectively, including contingent rentals of
$141,389 and $166,266 in 1996 and 1995, respectively.
(ii) License Agreements
Four of the subsidiaries entered into five separate license agreements
with LPBC with respect to six bookstores. The initial term of the
license agreements expired on December 31, 1996 and may be extended by
the Company until December 31, 2001. Until such time as a renewal
agreement is drafted, the Company and LPBC are operating under a
month-to-month agreement under the same terms. The Company pays LPBC a
royalty of 1/2 of 1% of monthly sales for all of the bookstores. If
there is a default by any of the Subsidiaries under any one of the
license agreements, then LPBC may terminate all of the license
agreements.
The Company and LPBC also entered into a separate agreement (the
"Supplementary Agreement") which includes, among other things,
consulting services to be rendered to LPBC, rights of first refusal
permitting the Company to open additional franchises, the termination
of the license agreements and LPBC's repurchase of its common stock
owned
F - 12
<PAGE>
by the Company. Pursuant to the Supplementary Agreement, the Company or
LPBC may terminate the license agreements and the Supplementary
Agreement upon 12 months notice and the payment of $100,000. The
initial term of the Supplementary Agreement expired on December 31,
1996 and may be extended by LPBC until December 31, 2001. In addition,
upon the termination of the Supplementary Agreement, LPBC has the right
to repurchase its shares of common stock owned by the Company at the
greater of the cost to the Company, the book value or the fair market
value of such shares. Until such time as a renewal agreement is
drafted, the Company and LPBC are operating under a month-to-month
agreement under the same terms. LPBC has granted the Company a right of
first refusal for the opening of any Little Professor Bookstore in
Ohio, or in Collier County or Lee County, Florida. Upon the opening of
Little Professor Book Company bookstores by third parties in excess of
8,000 square feet in size, LPBC will pay to the Company the greater of
$10,000 or 15% of its then current initial franchise fees plus 2/10 of
1% of the monthly sales during the initial term of any such agreements.
(iii) Employment Agreements
The Company has entered into employment agreements with three of its
executive officers which expire in April 1998. Aggregate annual
salaries under these agreements are $425,000.
(iv) Verbal Agreements
The Company has informal agreements with one of its major suppliers
with respect to the reduction of certain charges. Such reductions
aggregate approximately $283,000 at December 31, 1996, which is
reflected as a reduction in the balance of the payable to this vendor
on the Company's books. Such amounts have not formally been credited by
the vendor to the Company's account.
F - 13
<PAGE>
8. INCOME TAX EXPENSE (BENEFIT)
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109.
The differences between income taxes computed by applying the statutory
federal income tax rate (35%) and income tax expense (benefit) in the
consolidated financial statements are:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------
1996 1995
------------------ --------------------
<S> <C> <C>
Tax benefit computed at statutory rate $ (346,000) $ (297,000)
State and local taxes, net of federal benefit - (40,000)
Effect of permanent differences 29,000 68,000
Other, net 3,000 1,510
Tax benefit not recognized 314,000 -
------------------ --------------------
$ - $ (267,490)
================== ====================
</TABLE>
The Company had deferred tax assets total $809,000, representing the
tax effects of net operating loss carryforwards totaling $670,000, book
depreciation in excess of tax depreciation of $110,000, and other items
aggregating $29,000 as of December 31, 1996. The Company has a
valuation allowance of approximately $411,000 as a reserve against such
deferred tax assets. The net operating loss carryforwards totaling
approximately $1,676,000, expire in the years 2009 and 2011.
9. STOCKHOLDERS' EQUITY
On August 1, 1994, the Company adopted the 1994 Stock Option Plan under
which up to 333,333 options to purchase shares of common stock may be
granted to key employees, consultants and members of the Board of
Directors. As of December 31, 1996, no options have been issued under
this plan.
In March and May 1995, certain principal shareholders surrendered an
aggregate of 41,667 and 659,735 shares, respectively, of the Company's
common stock and such shares were retired. These transactions were
accounted for as a recapitalization of the Company and were given
retroactive effect in the accompanying consolidated financial
statements for all periods presented.
In October 1995 the Company effected a stock split of one and
two-thirds shares for each
F - 14
<PAGE>
issued and outstanding share in the form of a stock dividend. All
common stock data in these financial statements are retroactively
adjusted to reflect this transaction.
The Company can issue a maximum of 1,500,000 shares of preferred stock,
in one or more series, containing such rights, including voting rights,
dividend rates, redemption prices and liquidation preferences, as the
Board of Directors may determine.
In November 1995, the Company sold 60,000 shares of Series A Cumulative
preferred stock to certain shareholders for $5.00 per share. The shares
pay an annual dividend of $0.60 per share and contain a liquidation
preference of $5.00 per share.
In April 1996, a consultant was issued options to purchase 300,000
shares for $1.00 per share. These were subsequently exercised for cash
of $89,000, services valued at $42,429 and a non-interest bearing
receivable totaling $168,571.
In November 1996, a consultant was issued 100,000 shares in exchange
for a fifteen month service agreement. Such shares were valued at $1.00
per share (the fair market value), with the resulting charge being
amortized over the fifteen month term of the agreement.
During 1996, an aggregate of 70,000 other shares were issued for
services to various parties, which were valued at their aggregate fair
value of $15,000.
10. INITIAL PUBLIC OFFERING
The Company completed an Initial Public Offering in November 1995,
selling a total of 750,000 shares of common stock for $3.00 per share,
and 1,725,000 warrants at $0.10 per warrant. The warrants initially
entitled the holder to purchase one share of Company common stock at
$3.00 per share through October 30, 2000. At December 31, 1996, the
total number of shares issuable upon the exercise of such warrants has
been increased to 2,756,917 and the exercise price has been adjusted to
$2.13 per share pursuant to anti-dilution provisions. Warrants are
redeemable by the Company at $0.05 per warrant, generally, upon the
common stock achieving certain price levels. Net proceeds to the
Company after underwriter discounts and other expenses were
approximately $1.4 million. In connection with the public offering, the
underwriter received warrants which allow for the purchase of (after
adjustment for anti-dilution provisions) an aggregate 269,103 shares at
$2.52 per share at December 31, 1996.
F - 15
<PAGE>
11. CONVERTIBLE NOTES
In June 1996, the Company issued six month, unsecured, convertible
notes with an aggregate face of amount of $622,500, which bear interest
at the rate of 5% per annum, and are convertible into common stock at
the rate of $1.50 per share. Through December 31, 1996, $352,500 in
principal was converted into 235,000 shares of common stock. Another
$150,000 in principal was repaid in January 1997, $60,000 was extended
through June 1997 at an interest rate of 17.5% and $60,000 was
presented for payment in March 1997 and became in default upon not
being repaid by the Company on March 27, 1997.
Costs associated with this financing, consisting of professional fees,
aggregated approximately $252,000. Such costs were amortized to expense
over the original term, with a pro rata amount of unamortized costs
charged to paid in capital upon conversions to stock.
12. NOTE PAYABLE
In November 1996, the Company borrowed $300,000 under an 18 month note
payable bearing interest at 8% per annum. The note is secured by the
personal guarantees of certain of the Companies principal shareholders,
and will be secured by all the assets of the Company upon the
satisfaction of the Company's bank debt and release of the associated
security interest. In connection with this borrowing, the Company
issued 180,000 shares of common stock to the lender. In accordance with
Accounting Principles Board Opinion No. 14, the proceeds were allocated
between the debt and equity securities based on their relative fair
value, resulting in a note discount of $96,000, which is being
amortized to expense over the term of the note. The unamortized balance
of the discount is $85,333 at December 31, 1996.
13. RETIREMENT PLAN
In August 1996, the Company adopted a Supplemental Executive Retirement
Plan to provide unfunded, deferred compensation benefits to a select
group of management employees, with eligibility determined at the
discretion of the Compensation Committee of the Board of Directors.
Benefits are payable upon each participant attaining retirement age
(whether or not he actually retires), and are based on a formula
which provides for a maximum annual retirement benefit not to exceed
75% of the participant's final average earnings prior to reaching
retirement age, less any amounts earned from the Company as a
result of the participant's continued employment.
The Company's policy is to record the present value of the projected
post-retirement benefit over the remaining service period.
F - 16
<PAGE>
14. SEGMENT INFORMATION
Summary information for the Company's two industry segments is as
follows:
<TABLE>
<CAPTION>
Bookstore Cookstore Total
----------------- --------------- ------------------
For the year ended December 31, 1996:
<S> <C> <C> <C>
Net Sales $ 9,806,454 $ 3,497,940 $ 13,304,394
Cost of Goods Sold, including store
occupancy and delivery costs 7,580,345 2,286,565 9,866,910
----------------- --------------- ------------------
Gross Profit 2,226,109 1,211,375 3,437,484
Store Operating Expenses 1,859,876 613,367 2,473,243
----------------- --------------- ------------------
Store Level Income 366,233 598,008 964,241
Depreciation and Amortization 125,477 68,334 193,811
Administrative 1,093,708 390,123 1,483,831
----------------- --------------- ------------------
Operating income (loss) $ (852,952) $ 139,551 (713,401)
================= ===============
Other expenses 274,409
------------------
Income (loss) before taxes $ (987,810)
==================
Identifiable assets $ 2,803,849 $ 1,859,984 $ 4,663,833
================= ===============
Corporate assets 227,051
------------------
Total assets $ 4,890,884
==================
Other information:
Capital acquisitions $ 2,410 $ 178,419
================= ===============
</TABLE>
F - 17
<PAGE>
<TABLE>
<CAPTION>
For the year ended December 31, 1995: Bookstore Cookstore Total
---------------- ---------------- ------------------
<S> <C> <C> <C>
Net Sales $ 10,679,732 $ 3,042,412 $ 13,722,144
Cost of Goods Sold, including store
occupancy and delivery costs 8,074,607 2,103,086 10,177,693
---------------- ---------------- ------------------
Gross Profit 2,605,125 939,326 3,544,451
Store Operating Expenses 1,803,698 590,538 2,394,236
---------------- ---------------- ------------------
Store Level Income 801,427 348,788 1,150,215
Depreciation and Amortization 156,128 90,863 246,991
Administrative 939,292 267,582 1,206,874
---------------- ---------------- ------------------
Operating income (loss) $ (293,993) $ (9,657) (303,650)
================ ================
Other expenses 573,767
------------------
Income (loss) before taxes $ (877,417)
==================
Identifiable assets $ 2,385,618 $ 1,620,389 $ 4,006,007
================ ================
Corporate assets 459,126
------------------
Total assets $ 4,465,133
==================
Other information:
Capital acquisitions $ 14,518 $ 12,257
================ ================
</TABLE>
F - 18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000930114
<NAME> GAYLORD COMPANIES, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 818,518
<SECURITIES> 0
<RECEIVABLES> 80,329
<ALLOWANCES> 0
<INVENTORY> 2,210,240
<CURRENT-ASSETS> 3,496,843
<PP&E> 1,926,464
<DEPRECIATION> (1,202,888)
<TOTAL-ASSETS> 4,890,884
<CURRENT-LIABILITIES> 3,265,386
<BONDS> 214,667
0
300,000
<COMMON> 36,350
<OTHER-SE> 1,074,481
<TOTAL-LIABILITY-AND-EQUITY> 4,890,884
<SALES> 13,304,394
<TOTAL-REVENUES> 13,304,394
<CGS> 9,866,911
<TOTAL-COSTS> 12,340,154
<OTHER-EXPENSES> 193,810
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 327,734
<INCOME-PRETAX> (987,810)
<INCOME-TAX> 0
<INCOME-CONTINUING> (987,810)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (987,810)
<EPS-PRIMARY> (.33)
<EPS-DILUTED> (.33)
</TABLE>
