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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,D.C. 20549
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FORM 10-Q
(Mark One)
/X/ Quarterly report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 - For the quarterly period ended November 30, 1996.
/ / Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 - For the transition period from _______________ to
_______________.
Commission File No. 0-19972
BRAUN'S FASHIONS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06 - 1195422
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2400 XENIUM LANE NORTH
PLYMOUTH, MINNESOTA 55441
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
TELEPHONE NUMBER: (612) 551-5000
__________________________________
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES X NO
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As of January 3, 1997 -- 4,416,588 shares of Common Stock were outstanding.
The manually signed copy of this report contains 22 pages.
BRAUN'S FASHIONS CORPORATION
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS:
Consolidated Condensed Balance Sheet --
As of November 30, 1996 and March 2, 1996 . . . . . . . . . . .3
Consolidated Condensed Statement of Operations --
For the Quarter Ended November 30, 1996 and
November 25, 1995 . . . . . . . . . . . . . . . . . . . . . . .4
Consolidated Condensed Statement of Operations --
For the Three Quarters Ended November 30, 1996 and
November 25, 1995 . . . . . . . . . . . . . . . . . . . . . . .5
Consolidated Condensed Statement of Cash Flows --
For the Three Quarters Ended November 30, 1996 and
November 25, 1995 . . . . . . . . . . . . . . . . . . . . . . .6
Notes to Consolidated Condensed Financial Statements. . . . . .7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . .9
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . 18
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . 18
Item 6. EXHIBITS AND REPORTS ON FORM 8 - K. . . . . . . . . . . . . . 19
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . 20
2
PART I. FINANCIAL INFORMATION
BRAUN'S FASHIONS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEET
ASSETS November 30, March 2,
1996 1996
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Current assets --
- Cash and cash equivalents $ 6,822,862 $ 1,543,131
- Accounts receivable, net of allowance for doubtful accounts 1,193,064 614,228
- Merchandise inventory 11,145,045 12,858,439
- Prepaid expenses 1,519,819 1,840,304
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TOTAL CURRENT ASSETS: 20,680,790 16,856,102
Equipment and improvements, net 11,179,955 14,865,961
Other assets --
- Leasehold interests, net -- 48,488
- Deferred financing costs, net -- 449,218
- Other assets 114,055 83,799
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TOTAL OTHER ASSETS: 114,055 581,505
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TOTAL ASSETS: $ 31,974,800 $ 32,303,568
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities --
- Checks issued, not yet presented for payment $ -- $ 1,335,088
- Accounts payable 2,831,595 2,183,362
- Other accrued liabilities 5,830,521 2,487,308
- Current maturities of capital lease obligation 232,191 217,867
- Long-term obligations subject to acceleration -- 10,384,000
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TOTAL CURRENT LIABILITIES: 8,894,307 16,607,625
Long-term obligations --
- 12% Senior Notes 10,300,200 --
- Capital lease obligation 775,882 951,860
- Accrued rent obligation 781,328 1,081,701
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TOTAL LONG-TERM OBLIGATIONS: 11,857,410 2,033,561
Stockholders' equity --
- Preferred stock-$0.01 par value, 1,000,000 shares
authorized; none outstanding -- --
- Common stock-$0.01 par value, 9,000,000 shares authorized;
4,414,028 and 3,793,312 shares issued and outstanding at
November 30, 1996, and March 2, 1996, respectively 44,140 37,933
- Additional paid - in capital 27,559,026 25,079,052
- Accumulated deficit (16,380,083) (11,454,603)
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TOTAL STOCKHOLDERS' EQUITY: 11,223,083 13,662,382
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY: $ 31,974,800 $ 32,303,568
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3
BRAUN'S FASHIONS CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
Quarter Ended
-------------------------------------
November 30, 1996 November 25, 1995
----------------- -----------------
Net sales $ 27,154,193 $ 27,443,154
Merchandise, buying and occupancy 17,040,833 18,972,776
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Gross profit 10,113,360 8,470,378
Selling, general and administrative expenses 5,575,978 6,388,008
Depreciation and amortization 580,279 792,263
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Operating income 3,957,103 1,290,107
Other expense
- Interest (Contractual interest for quarter
ended November 30, 1996 -- $316,888) 26,888 428,373
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Income before income taxes and reorganization
expense reversal 3,930,215 861,734
Reorganization expense reversal (899,379) --
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Income before income taxes 4,829,594 861,734
Income tax provision -- 292,990
Net income $ 4,829,594 $ 568,744
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Net income per common share and common
share equivalent $ 1.12 $ 0.15
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Weighted average number of shares of common
stock and common stock equivalents outstanding 4,310,099 3,791,272
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Sec accompanying notes to consolidated condensed financial statements.
4
BRAUN'S FASHIONS CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
Three Quarters Ended
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November 30, 1996 November 25, 1995
----------------- -----------------
Net sales $ 71,435,506 $ 70,916,029
Merchandise, buying and occupancy 49,130,199 51,251,273
--------------- ---------------
Gross profit 22,305,307 19,664,756
Selling, general and administrative expenses 17,369,526 18,496,915
Depreciation and amortization 2,008,905 2,367,070
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Operating income (loss) 2,926,876 (1,199,229)
Other expense
- Interest (contractual interest for three
quarters ended November 30, 1996 -- $1,012,588) 532,588 1,082,422
--------------- ---------------
Income (loss) before income taxes and reorganization
expense 2,394,288 (2,281,651)
Reorganization expense 8,170,766 --
--------------- ---------------
Loss before income taxes (5,776,478) (2,281,651)
Income tax benefit (850,998) (775,761)
Net loss $ (4,925,480) $ (1,505,890)
--------------- ---------------
--------------- ---------------
Net loss per common share and common
share equivalent $ (1.26) $ (0.40)
--------------- ---------------
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Weighted average number of shares of common
stock and common stock equivalents outstanding 3,896,587 3,791,272
--------------- ---------------
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See accompanying notes to consolidated financial statements.
5
BRAUN'S FASHIONS CORPORATION
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
Three Quarters Ended
-------------------------------------
November 30, 1996 November 25, 1995
----------------- -----------------
Cash flows from operating activities
- Net loss $ (4,925,480) $ (1,505,890)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
- Depreciation and amortization 2,008,905 2,367,070
- Amortization of deferred financing costs 30,400 68,400
- Increase (decrease) in accrued rent obligation (300,373) 56,138
- Loss on disposal of fixtures, equipment and improvements 2,392,895 --
Changes in operating assets and liabilities:
- (Increase) in accounts receivable (578,836) (419,338)
- (Increase) decrease in merchandise inventory,
prepaid expenses and other assets 2,003,623 (3,123,550)
- Increase (decrease) in accounts payable and
accrued liabilities 2,656,358 (2,031,162)
- Other -- (15,269)
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Net cash provided by (used in) operating activities 3,287,492 (4,603,601)
Cash flows from investing activities --
- Purchase of fixtures and improvements (720,577) (609,992)
- Proceeds from sale of fixtures and equipment 53,270 --
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Net cash used in investing activities (667,307) (609,992)
Cash flows from financing activities --
- Proceeds from stock issuance 5,000 --
- Principal payments on capital lease obligations (161,654) (177,537)
- Borrowings from debt agreements 3,116,200 6,900,000
- Principal payments on revolving line of credit (300,000) (900,000)
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Net cash generated by financing activities 2,659,546 5,822,463
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Net increase in cash and cash equivalents 5,279,731 608,870
Cash and cash equivalents at beginning of year 1,543,131 630,097
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Cash and cash equivalents at end of period $ 6,822,862 $ 1,238,967
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Supplemental cash flow information:
- Debt for equity exchange $ 2,900,000 $ --
- Write-off of deferred financing costs $ 418,818 $ --
6
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS:
1. BASIS OF PRESENTATION AND CHAPTER 11 REORGANIZATION
The financial statements included in this Form 10-Q have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed, or omitted, pursuant to such rules and regulations. These
financial statements should be read in conjunction with the financial
statements and related notes included in the Company's Annual Report on
Form 10-K for the fiscal year ended March 2, 1996.
The results of operations for the interim periods shown in this report are
not necessarily indicative of results to be expected for the fiscal year.
In the opinion of management, the information contained herein reflects all
adjustments necessary to make the results of operations for the interim
periods a fair statement of such operations. All such adjustments are of a
normal recurring nature.
On July 2, 1996, Braun's Fashions Corporation ("BFC"), together with its
wholly-owned operating subsidiary, Braun's Fashions, Inc. ("BFI")
(collectively, BFC and BFI are referred to herein as the "Company") filed
in the United States Bankruptcy Court in the District for Delaware a
petition for reorganization under Chapter 11 of Title 11 of the United
States Bankruptcy Code, case number 96-1030(HSB). Under the protection of
Chapter 11, the Company managed its affairs and operated its business as a
debtor-in-possession while developing a plan of reorganization. The
Company filed its Plan of Reorganization on July 18, 1996, the First
Amended Plan of Reorganization on August 29, 1996, and the Second Amended
Plan of Reorganization on October 22, 1996 (the "Plan"), along with its
Disclosure Statement. On October 22, 1996, the Bankruptcy Court approved
the Disclosure Statement as containing adequate information and established
November 18, 1996, as the deadline for voting on the Plan. The Plan was
approved by 99.6% of the voting shareholders and by a majority of each
class of the creditors that voted. On November 22, 1996, the Bankruptcy
Court confirmed the Plan. The effective date of the Plan was December 3,
1996.
As of December 3, 1996, the Company had 3,796,512 shares of Common Stock
issued and outstanding. Under the terms of the Plan, the Company issued
617,516 shares of Common Stock on or about January 2, 1997 to the exchange
agent for the unsecured creditors in BFC Class 3 and BFI Class 3 in respect
to their filed and allowed claims and interests. These shares are
reflected as outstanding in the balance sheet. For purposes of computing
earnings per share these shares have been considered outstanding since mid-
October when the Company reached agreement with these classes of creditors
as to the number of shares to be issued. The Company has issued
approximately $10.3 million in aggregate principal amount of New Notes to
the BFC Class 3 and BFI Class 3 creditors pursuant to the Plan.
2. SENIOR NOTES
As part of the Plan, the Company issued $10,300,200 of public debt in the
form of 12% Senior Notes (the "New Notes") due January, 2005. The New
Notes were issued, pursuant to an Indenture dated as of December 2, 1996,
to (i) the holders of the 9% Senior Notes due January, 2001 where each
holder received, for each $1,000 principal amount, (a) 48 shares of Common
Stock in BFC and (b) New Notes in the original principal amount of $800 and
(ii) the Company's prepetition banks who received a total of (a) 138,284
shares of Common Stock in BFC and (b) $2,313,000 in the original principal
amount of the New Notes. Principal repayments are scheduled to begin
January 1, 1998, and will occur annually, at the first of every calendar
year. The mandatory redemption percentage of the original principal amount
of New Notes is as follows: 1998 - 6.6%; 1999 - 7.2%; 2000 - 7.8%; 2001 -
8.5%; 2002 - 9.3%; 2003 - 10.1%; 2004 - 11.0%; 2005 - Maturity.
7
The principal amount of the New Notes bears interest at the rate of 12%
per annum from and after December 17, 1996. Interest at the rate of 9%
per annum on the outstanding principal amount is to be paid monthly
beginning on January 31, 1997, and on the last day of each calendar
month thereafter until all amounts due and owing on the New Notes and
under the Indenture have been paid in full. Interest at the rate of 3%
per annum on the outstanding principal amount shall accrue monthly and
shall, upon accrual, be treated as principal for all purposes, including
without limitation, the calculation of all interest payments due
thereafter, and shall be payable in full on January 1, 2005.
The New Notes are general unsecured senior obligations of the Company.
The Indenture for the New Notes contains certain covenants which, among
other things, limit the ability of the Company to incur liens, incur
additional indebtedness, and restrict the Company's ability to declare
dividends.
3. REVOLVING CREDIT FACILITY
As part of the Plan, the Company entered into a borrowing agreement with
Norwest Bank Minnesota, National Association (the "Norwest Revolver"),
expiring April 1, 1999. The Norwest Revolver provides the Company with
revolving credit loans and letters of credit up to $10 million, subject to
a borrowing base formula.
Loans under the Norwest Revolver bear interest at Norwest's base rate plus
3/4%. The interest is payable monthly in arrears. After June, 1997, the
Norwest Revolver provides for a potential decrease in the interest rate,
depending on the financial performance of the Company (as described in the
Norwest Revolver). The Norwest Revolver carries commitment fees of 1/4% of
the difference between $5 million and the average amount outstanding under
the facility (including letters of credit). If the average amount
outstanding under the facility (including letters of credit) is between $5
million and $7.5 million, the commitment fee shall be based on the
difference between $7.5 million and the average amount outstanding under
the facility (including letters of credit) and if the average amount
outstanding (including of letters of credit) is in excess of $7.5 million,
the commitment fee is on the difference between $10 million and the average
amount outstanding under the facility (including letters of credit). This
facility is secured by substantially all of the Company's assets. The
borrowing base at January 3, 1997, was $5.3 million. As of January 3,
1997, the Company had no borrowings and outstanding letters of credit in
the amount of $2.7 million under the Norwest Revolver. Accordingly, the
availability of revolving credit loans under the Norwest Revolver was $2.6
million at that date.
The Norwest Revolver contains, among other things, covenants with respect
to (i) capital expenditures, (ii) earnings before interest, taxes,
depreciation and amortization, (iii) inventory turnover ratios, (iv)
additional indebtedness, (v) investments and (vi) prohibitions on paying
dividends.
8
4. REORGANIZATION EXPENSES AND STORE CLOSINGS
The Company provided for or incurred the following expenses during the
second and third quarters of fiscal 1997 in connection with its Chapter 11
reorganization proceedings:
Professional fees and services $2,640,000
Loss on disposal of property, fixtures and equipment 2,393,000
Lease rejection claims 1,127,000
Inventory impairment reserve 820,000
Severance 225,000
Other 966,000
----------
$8,171,000
----------
----------
In connection with the reorganization, the Company realigned its operations
in an effort to improve its long-term profit potential. This realignment
enabled the Company to concentrate its efforts on those stores that
management believed provided potential for profitability. The Bankruptcy
Court entered orders approving the rejection of 49 unprofitable store
leases. Substantially all of these stores were closed between July 2,
1996, and November 2, 1996. The Company also elected to reject its former
headquarters and distribution center lease and sublease in Eden Prairie,
Minnesota in its bankruptcy proceedings. In addition, the Company has
negotiated more favorable terms with its landlords on a number of its
continuing stores.
5. STOCK OPTION PLAN
In December, 1996, the Company's shareholders approved an increase in the
number of shares of Common Stock reserved for issuance under the 1987 Stock
Incentive Plan from 510,000 to 710,000 shares. In June, 1996, the Company
also repriced previously granted employee options to purchase up to 358,200
shares of BFC's Common Stock. The initial exercise price of these options
was $7.00 per share and was reset to $2.00, $3.00 or $4.00 per share.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
Braun's Fashions Corporation ("BFC") is a Minneapolis-based regional retailer of
women's specialty apparel which operates through its wholly-owned subsidiary,
Braun's Fashions, Inc. ("BFI") (collectively, BFC and BFI are referred to herein
as the "Company"). As of January 3, 1997, the Company operated a chain of 170
continuing stores in 20 states in the Midwest and Pacific Northwest. The
Company's stores offer coordinated assortments of moderately priced sportswear,
sweaters, dresses and accessories.
REORGANIZATION
In response to the deteriorating liquidity position brought on by losses at
approximately 50 of its store locations and to facilitate restructuring of its
obligations, the Company filed for protection from its creditors under Chapter
11 of the United States Bankruptcy Code on July 2, 1996. Under the protection
of Chapter 11, the Company managed its affairs and operated its business as a
debtor-in-possession while developing a plan of reorganization. The Company
filed its Plan of Reorganization on July 18, 1996, the First Amended Plan of
Reorganization on August 29, 1996, and the Second Amended Plan of Reorganization
on October 22, 1996 (the "Plan"), along with its Disclosure Statement. On
October 22, 1996, the Bankruptcy Court approved the Disclosure Statement as
containing adequate information and established November 18, 1996, as the
deadline for voting on the Plan. The Plan was approved by 99.6% of the voting
shareholders and by a majority of each class of the creditors that voted. On
November 22, 1996, the Bankruptcy Court confirmed the Plan. The effective date
of the Plan was December 3, 1996.
9
Claims and interests in BFC are classified into six (6) classes under the Plan.
The following table summarizes the classification of the BFC claims and
interests under the Plan and the treatment of such claims and interests under
the Plan:
CLASS DESCRIPTION OF TREATMENT
1. Secured Claims Each holder of an allowed Class 1 claim shall
receive either (i) return of collateral in full
satisfaction of such secured claim; (ii) payment
in cash in an amount equivalent to the lesser of
(a) the value of the collateral or (b) the full
amount of the secured claim; (iii) treatment of
such secured claim in accordance with Section
1124(2) of the Bankruptcy Code; or (iv) such other
treatment as may be agreed to in writing by such
holder of the secured claim and BFC.
2. Priority Non-Tax Claims Each holder of an allowed Class 2 claim shall
receive (i) the amount of such holder's allowed
claim in one cash payment or (ii) such other
treatment as may be agreed upon in writing by the
holder of such claim and BFC.
3. Public Debt Claims Each holder will receive, in respect of each
$1,000 principal amount of such public debt claim,
(i) 48 shares of Common Stock in BFC and (ii) $800
in original principal amount of new notes bearing
interest at 12% per annum ("New Notes").
4. General Unsecured Claims Each eligible Class 4 claim holder will receive,
at the election of the Company, either (i) cash
equal to the allowed amount of such claim, or (ii)
the allowed amount of such holder's claim, plus
interest at 9% per annum, paid over 8 years.
5. Bank Guaranty Claims Each allowed Class 5 claim against BFC shall be
satisfied in full by performance of the Company's
obligations pursuant to the Plan with respect to
the bank claims reflected in BFI Class 3.
6. Holders of Braun's Each holder of an allowed Class 6 interest will
Fashions Corporation retain such interest, subject to the dilutive and
Stock other effects of the Plan.
10
Claims and interests in BFI are classified into nine (9) classes under the Plan.
The following table summarizes the classification of the BFI claims and
interests under the Plan:
CLASS DESCRIPTION OF TREATMENT
1. Secured Claims Each holder of an allowed Class 1 claim shall
receive either (i) return of the collateral in
full satisfaction of such secured claim; (ii)
payment in cash in an amount equivalent to the
lesser of (a) the value of the collateral or (b)
the full amount of the secured claim; (iii)
treatment of such secured claim in accordance with
Section 1124(2) of the Bankruptcy Code; or (iv)
such other treatment as may be agreed to in
writing by such holder of the secured claim and
BFI.
2. Priority Non-Tax Claims Each holder of an allowed Class 2 claim shall
receive (i) the amount of such holder's allowed
claim in one cash payment or (ii) such other
treatment as may be agreed upon in writing by the
holder of such claim and BFI.
3. Bank Claims The holders of allowed Class 3 claims will receive
a total of (i) 138,284 shares of Common Stock in
BFC and (ii) $2,313,000 in original principal
amount of New Notes.
4. Trade Claims Each eligible Class 4 claim holder shall receive
cash in an amount equal to the allowed amount of
such claim.
5. Rejection Claims Per the acceptance of the Plan by BFI Class 5
holders, each holder shall receive cash in an
amount equal to 25% of the allowed amount of such
claim.
6. General Unsecured Claims Each eligible Class 6 claim holder shall receive,
at the election of the Company (i) cash equal to
the allowed amount of such claim or (ii) the
allowed amount of such claim, plus interest at 9%
per annum paid over 8 years.
7. Public Debt Guranty Claims Each public debt guaranty claim against BFI shall
be satisfied in full by performance of the
Company's obligations pursuant to the Plan with
respect to the public debt claims in BFC Class 3.
8. Gift Certificate Claims The Company shall honor each gift certificate
claim in the ordinary course of business in
accordance with the Company's general practice.
9. Equity Interest Each holder of Class 9 equity interest will retain
such interest.
11
Administrative claims and priority tax claims are not classified under the Plan.
In accordance with terms under the Plan, each holder of an allowed claim for an
administrative expense shall receive, at the option of the Company (i) the
amount of such holder's allowed claim in one cash payment; (ii) the amount of
such holder's allowed claim in accordance with the ordinary business terms of
such expense or costs; (iii) such other treatment as may be agreed to in writing
by the holders of such administrative expense and the Company.
Each holder of an allowed priority tax claim shall receive, at the option of the
Company (i) the amount of such holder's allowed claim in one cash payment; (ii)
the amount of such holder's allowed claim, in equal annual cash payments on
January 2, 1997 and each anniversary of such date with interest thereon at 9%
per annum until the last anniversary of January 2, 1997 that precedes the sixth
anniversary of the date of assessment of such allowed claim; or (iii) such other
treatment as may be agreed to in writing by the holder of the priority tax claim
and the Company.
During the second and third quarters of fiscal 1997, the Company exercised its
right under Chapter 11 of the Bankruptcy Code and received Bankruptcy Court
approval to reject 49 of its unprofitable leases. A liability of approximately
$1.1 million for these rejected leases has been recorded in the balance sheet at
November 30, 1996. In addition to the lease rejection liability, the Company
recorded the following reorganization expenses in the second and third quarters
of fiscal 1997: loss on disposal of fixed assets - $2.4 million; professional
fees - $2.6 million; inventory impairment reserve - $0.8 million; severance pay
- - $0.2 million; and other bankruptcy related expenses - $1.0 million.
12
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items from
the Company's operating statement data expressed as a percentage of net sales.
Quarter Ended Three Quarters Ended
------------------- --------------------
Nov. 30, Nov. 25, Nov. 30, Nov. 25,
1996 1995 1996 1995
-------- --------- --------- ---------
Net sales 100.0% 100.0% 100.0% 100.0%
Merchandise, buying and occupancy 62.8 69.1 68.8 72.3
-------- -------- ------- --------
Gross profit 37.2 30.9 31.2 27.7
Selling, general & admin. expenses 20.5 23.3 24.3 26.1
Depreciation and amortization 2.1 2.9 2.8 3.3
-------- -------- ------- --------
Operating income (loss) 14.6 4.7 4.1 (1.7)
Interest, net 0.1 1.6 0.8 1.5
-------- -------- ------- --------
Income (loss) before income taxes
and reorganization expense 14.5 3.1 3.3 (3.2)
Reorganization expense (3.3) -- 11.4 --
-------- -------- ------- --------
Income (loss) before taxes 17.8 3.1 (8.1) (3.2)
Income tax provision (benefit) -- 1.0 (1.2) (1.1)
-------- -------- ------- --------
Net income (loss) 17.8% 2.1% (6.9)% (2.1)%
-------- -------- ------- --------
-------- -------- ------- --------
QUARTER ENDED NOVEMBER 30, 1996 COMPARED TO QUARTER ENDED NOVEMBER 25, 1995
NET SALES. Net sales decreased 1% to $27.2 million for the third quarter of
fiscal 1997 from net sales of $27.4 million for the third quarter of fiscal
1996. The decrease in net sales was primarily due to operating approximately 50
fewer stores during this period and was substantially offset by a 15% same store
sales increase in the 170 continuing stores.
GROSS PROFIT. Gross profit, which is net sales less cost of merchandise, buying
and occupancy expenses, was $10.1 million or 37.2% of net sales during the third
quarter of fiscal 1997 compared to $8.5 million or 30.9% of net sales during the
same period in fiscal 1996. The increase in gross profit was primarily due to
the Company's emphasis on the more profitable categories of its merchandise mix
and an increased concentration of direct import merchandise in the 170
continuing stores.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the third quarter of fiscal 1997 decreased to $5.6
million from $6.4 million for the third quarter of fiscal 1996. These expenses
were 20.5% of net sales in fiscal 1997 and 23.3% in fiscal 1996. The decrease
in these expenses was primarily due to closing approximately 50 unprofitable
stores in fiscal 1997.
OPERATING INCOME. The operating income for the quarter was $4.0 million or
14.6% of sales compared to an operating income of $1.3 million or 4.7% of net
sales for the same period last year.
INTEREST, NET. Interest expense, net of interest income, for the third quarter
of fiscal 1997 was $26,888, a decrease of $401,485 from $428,373 for the third
quarter of fiscal 1996. This decrease was primarily the result of the
discontinuance of accruing interest on prepetition debt after the petition date.
13
REORGANIZATION EXPENSE. The Company recorded a one-time gain of $0.9 million
related to a reversal of Chapter 11 bankruptcy reorganization expense previously
recorded in the second quarter. This gain is the net result of the acceptance
by landlords representing 49 rejected store leases of a cash settlement equal to
25% of their allowed claims partially offset by professional fees and other
bankruptcy related costs.
NET INCOME. As a result of the foregoing factors, the Company had net income of
$4.8 million or 17.8% of net sales for the third quarter of fiscal 1997 compared
to net income of $0.6 million or 2.1% of net sales for the third quarter of
fiscal 1996.
THREE QUARTERS ENDED NOVEMBER 30, 1996 COMPARED TO THREE QUARTERS ENDED NOVEMBER
25, 1995
NET SALES. Net sales increased 1% to $71.4 million for the first three quarters
of fiscal 1997 from net sales of $70.9 million for the same period of fiscal
1996. The increase in net sales was primarily due to a 7% same store sales
increase in the 170 continuing stores offset by closing approximately 50
unprofitable stores during the second and third quarters.
GROSS PROFIT. Gross profit, which is net sales less cost of merchandise, buying
and occupancy expenses, was $22.3 million or 31.2% of net sales during the first
three quarters of fiscal 1997 compared to $19.7 million or 27.7% of net sales
during the same period in fiscal 1996. The increase in gross profit was
primarily due to the reduced level of fall and holiday merchandise to be
liquidated in the first quarter; an increased concentration of direct imports
which yield a higher gross margin; and reduced occupancy costs partially offset
by markdowns taken to liquidate inventory in the closing stores.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the first three quarters of fiscal 1997 decreased to
$17.4 million from $18.5 million for the first three quarters of fiscal 1996.
These expenses were 24.3% of net sales in fiscal 1997 compared to 26.1% of net
sales in fiscal 1996. The decrease in these expenses was primarily due to
closing approximately 50 unprofitable stores in fiscal 1997.
OPERATING INCOME (LOSS). The operating income for the first three quarters of
fiscal 1997 was $2.9 million or 4.1% of sales compared to an operating loss of
$1.2 million or 1.7% of net sales for the same period last year.
INTEREST, NET. Interest expense, net of interest income, for the first three
quarters of fiscal 1997 was $532,588, a decrease of $549,834 from $1,082,422 for
the first three quarters of fiscal 1996. This decrease was primarily the result
of the discontinuance of accruing interest on prepetition debt after the
petition date.
REORGANIZATION EXPENSE. The Company recorded approximately $8.2 million of
reorganization expense during the second and third quarters of fiscal 1997.
This reorganization expense included a $2.4 million loss on disposal of fixed
assets; $2.6 million of professional fees and services; $1.1 million of lease
rejection claims; $0.8 million related to an inventory impairment reserve; $0.2
million of severance pay; and $1.0 million in other bankruptcy related expenses.
NET LOSS. As a result of the foregoing factors, the Company had a net loss of
$4.9 million or 6.9% of net sales for the first three quarters of fiscal 1997
compared to a net loss of $1.5 million or 2.1% of net sales for the first three
quarters of fiscal 1996.
14
PERFORMANCE OF 170 CONTINUING STORES
The closing of stores in connection with the Company's Chapter 11 bankruptcy
filing has enabled management to concentrate its efforts on the 170 continuing
stores that the Company believes provide the greatest potential for ongoing
profitability. The following tables set forth the results of operations for
these 170 continuing stores for the periods indicated. Certain financial
information for these stores is expressed in dollars and as a percentage of net
sales.
170 Continuing Stores
---------------------------------------------------------
Quarter Ended Three Quarters Ended
-------------------------- --------------------------
Nov. 30, Nov. 25, Nov. 30, Nov. 25,
1996 1995 1996 1995
----------- ----------- ----------- -----------
Net sales $26,441,552 $22,761,566 $62,738,484 $57,831,864
Merchandise, buying and occupancy 16,128,410 15,244,268 41,109,148 40,485,045
----------- ----------- ----------- -----------
Gross profit 10,313,142 7,517,298 21,629,336 17,346,819
Selling, general & admin. expenses 5,433,164 5,247,600 15,307,148 15,085,950
Depreciation and amortization 569,042 562,079 1,713,482 1,658,738
----------- ----------- ----------- -----------
Operating income $ 4,310,936 $ 1,707,619 $ 4,608,706 $ 602,131
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
170 Continuing Stores
---------------------------------------------------------
Quarter Ended Three Quarters Ended
------------------------ --------------------------
Nov. 30, Nov. 25, Nov. 30, Nov. 25,
1996 1995 1996 1995
-------- --------- --------- ---------
Net sales 100.0% 100.0% 100.0% 100.0%
Merchandise, buying and occupancy 61.0 67.0 65.5 70.0
-------- -------- -------- -------
Gross profit 39.0 33.0 34.5 30.0
Selling, general & admin. expenses 20.5 23.1 24.4 26.1
Depreciation and amortization 2.2 2.4 2.8 2.9
-------- -------- -------- -------
Operating income 16.3% 7.5% 7.3% 1.0%
-------- -------- -------- -------
-------- -------- -------- -------
For the three months ended November 30, 1996, operating income in the 170
continuing stores increased $2.6 million from the same period in the prior year,
improving upon the trend established in the second quarter. Management's focus
on the 170 continuing stores, following the decision to close approximately 50
underperforming stores, helped generate improved sales performance in the 170
continuing stores, particularly in the second and third quarters. Higher gross
margins were realized primarily due to the same store sales growth both in the
quarter and year-to-date; an increased concentration of direct imports; the
Company's emphasis on the more profitable categories of its merchandise mix; and
lower occupancy costs. Due to higher gross profit and reductions made in
selling, general and administrative expenses in the second and third quarters of
fiscal 1997, the operating income for the nine months ended increased by $4.0
million from the same period in the prior year.
15
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal on-going needs for liquidity are to finance the
purchase of merchandise inventories and other working capital requirements.
Merchandise purchases vary on a seasonal basis, peaking in the fall. As a
result, the Company's cash requirements historically reach their peak in
October and November. Conversely, cash balances reach their peak in January,
after the holiday season is completed.
Net cash generated by operating activities totaled $3.3 million for the first
nine months of fiscal 1997 as compared to a net usage of $4.6 million for the
same time period in the prior year. This is the result of (i) increased sales
from liquidating inventory at stores that were closed during the year; (ii)
certain prepetition liabilities, which would have been paid in the ordinary
course of business, were stayed as the result of the Company's Chapter 11
reorganization and will be paid in the fourth quarter of fiscal 1997; (iii)
increased same store sales of 7% in the 170 continuing stores; and (iv)
reductions in selling, general and administrative expenses due to closing
approximately 50 unprofitable stores. The Company used approximately $2.2
million of cash to make payments to professionals for services and for other
miscellaneous reorganization expenses. Cash was also used to finance $720,577
of capital expenditures for the completion of the major remodeling of five (5)
stores and other miscellaneous capital expenditures. During the fourth quarter
the Company expects to expend approximately $2.5 million to satisfy creditors'
prepetition and lease rejection claims. The Company expects to spend up to $4
million on capital expenditures in fiscal 1998 opening 5 to 10 new stores and
completing approximately ten (10) major remodels. Management expects its cash
on hand combined with cash flow from operations and borrowings under the Norwest
Revolver to be sufficient to meet its capital expenditure and working capital
requirements and its other needs for liquidity during the upcoming year.
While the Company was restructuring its operations, the Company had a $10
million debtor-in-possession Revolving Credit and Security Agreement (the
"DIP Facility") with Norwest Bank Minnesota, National Association, subject to a
borrowing base calculation. The Company had the ability to request revolving
credit loans and the issuance of letters of credit under the DIP Facility. The
DIP Facility terminated on December 3, 1996, the effective date of the Plan.
As part of the Plan, the Company entered into a borrowing agreement with Norwest
Bank Minnesota, National Association (the "Norwest Revolver") expiring April 1,
1999. The Norwest Revolver provides the Company with revolving credit loans and
letters of credit up to $10 million, subject to a borrowing base formula.
Loans under the Norwest Revolver bear interest at Norwest's base rate plus 3/4%.
The interest is payable monthly in arrears. After June, 1997, the Norwest
Revolver provides for a potential decrease in the interest rate, depending on
the financial performance of the Company (as described in the Norwest Revolver).
The Norwest Revolver carries commitment fees of 1/4% of the difference between
$5 million and the average amount outstanding under the facility (including
letters of credit). If the average amount outstanding under the facility
(including letters of credit) is between $5 million and $7.5 million, the
commitment fee shall be based on the difference between $7.5 million and the
average amount outstanding under the facility (including letters of credit) and
if the average amount outstanding (including letters of credit) is in excess of
$7.5 million, the commitment fee is on the difference between $10 million and
the average amount outstanding under the facility (including letters of credit).
This facility is secured by substantially all of the Company's assets. The
borrowing base at January 3, 1997, was $5.3 million. As of January 3, 1997, the
Company had no borrowings and outstanding letters of credit in the amount of
$2.7 million under the Norwest Revolver. Accordingly, the availability of
revolving credit loans under the Norwest Revolver was $2.6 million at that date.
The Norwest Revolver contains, among other things, covenants with respect to (i)
capital expenditures, (ii) earnings before interest, taxes, depreciation and
amortization, (iii) inventory turnover ratios, (iv) additional indebtedness, (v)
investments and (vi) prohibitions on paying dividends.
16
Further, as part of the Plan, the Company issued $10,300,200 of public debt in
the form of 12% Senior Notes (the "New Notes") due January, 2005. The New Notes
were issued, pursuant to an Indenture dated as of December 2, 1996, to (i) the
holders of the 9% Senior Notes due January, 2001 where each holder received, for
each $1,000 principal amount, (a) 48 shares of Common Stock in BFC and (b) New
Notes in the original principal amount of $800 and (ii) the Company's
prepetition banks who received a total of (a) 138,284 shares of Common Stock in
BFC and (b) $2,313,000 in the original principal amount of the New Notes.
Principal repayments are scheduled to begin January 1, 1998, and will occur
annually, at the first of every calendar year. The mandatory redemption
percentage of the original principal amount of New Notes is as follows: 1998 -
6.6%; 1999 - 7.2%; 2000 - 7.8%; 2001 - 8.5%; 2002 - 9.3%; 2003 - 10.1%; 2004 -
11.0%; 2005 - Maturity.
The principal amount of the New Notes bears interest at the rate of 12% per
annum from and after December 17, 1996. Interest at the rate of 9% per annum
on the outstanding principal amount is to be paid monthly beginning on
January 31, 1997, and on the last day of each calendar month thereafter until
all amounts due and owing on the New Notes and under the Indenture have been
paid in full. Interest at the rate of 3% per annum on the outstanding
principal amount shall accrue monthly and shall, upon accrual, be treated as
principal for all purposes, including without limitation, the calculation of
all interest payments due thereafter, and shall be payable in full on January
1, 2005.
The New Notes are general unsecured senior obligations of the Company. The
Indenture for the New Notes contains certain covenants which, among other
things, limit the ability of the Company to incur liens, incur additional
indebtedness, and restrict the Company's ability to declare dividends.
During the fiscal years ended February 26, 1994, February 25, 1995, and March 2,
1996, the Company experienced a decline in same store sales of 5 percent, 9
percent, and 3 percent, respectively. In the first three quarters ended
November 30, 1996, same store sales in the 170 continuing stores (excluding
stores closed as part of the Company's Chapter 11 reorganization) increased 7%
while margins improved significantly. In the past three years management
believes there has been a shift in consumer spending away from apparel purchases
to durable goods such as homes and home related items, automobiles and
electronics. Further, the casualization of the workplace has altered consumer
demand for apparel. While the Company's stores will continue to face strong
competition from a broad range of national and regional retail chains, including
department stores, specialty stores and discount stores, management has reacted
to this environment by refocusing its merchandising program. Specifically, the
Company has increased its emphasis on the more profitable categories of its
merchandise mix and increased its concentration of direct import merchandise.
In fiscal 1997, the Company expects to import directly approximately 50% of its
merchandise purchases as compared to approximately 40% the prior year. Through
the first nine months of fiscal 1997, approximately 19% of the Company's
purchases were from one overseas vendor. The Company believes it has a good
working relationship with this vendor as well as its other vendors in the
Company's direct import program. Management also believes that other suppliers
are available should there be a disruption in supply from this vendor or its
other current overseas vendors.
The Company is unaware of any environmental liability that would have a material
adverse effect on the financial position or the results of operations of the
Company.
FORWARD LOOKING INFORMATION
Information contained in this Form 10-Q contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995,
which can be identified by the use of forward-looking terminology such as "may",
"will", "expect", "plan", "anticipate", "estimate" or "continue" or the negative
thereof or other variations thereon or comparable terminology. There are
certain important factors that could cause results to differ materially from
those anticipated by some of these forward-looking statements. Investors are
cautioned that all forward-looking statements involve risks and
17
uncertainty. The factors, among others, that could cause actual results to
differ materially include: consumers' spending and debt levels; the Company's
ability to execute its business plan; the acceptance of the Company's
merchandising strategies by its target customers; the ability of the Company to
anticipate marketing trends and consumer needs; continuity of a relationship
with or purchases from major vendors, particularly those from whom the Company
imports merchandise; competitive pressures on sales and pricing; increases in
other costs which cannot be recovered through improved pricing of merchandise;
and the adverse effect of weather conditions from time to time on consumers'
ability or desire to purchase new clothing.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 2, 1996, Braun's Fashions Corporation ("BFC") and its wholly owned
subsidiary, Braun's Fashions, Inc. ("BFI") (collectively BFC and BFI are
referred to herein as the "Company"), filed a voluntary petition for relief
under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court
for the District of Delaware, Jointly Administered Case No. 96-1030 (HSB).
Under the protection of Chapter 11, the Company managed its affairs and operated
its business as a debtor-in-possession. The Company filed its Plan of
Reorganization on July 18, 1996, the First Amended Plan of Reorganization on
August 29, 1996, and the Second Amended Plan of Reorganization on October 22,
1996, (the "Plan") along with its Disclosure Statement. On October 22, 1996,
the Bankruptcy Court approved the Disclosure Statement as containing adequate
information and established November 18, 1996, as the deadline for voting on the
Plan. The Plan was approved by 99.6% of the shareholders and by a majority of
each class of the creditors that voted. On November 22, 1996, the Bankruptcy
Court confirmed the Plan. The effective date of the Plan was December 3, 1996.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Bankruptcy Court established November 18, 1996, as the deadline for
shareholders to vote for or against the Plan. Of voting shareholders,
99.6% approved the Plan. For further discussion of the Plan, see the
information under Management's Discussion and Analysis of Financial
Condition and Results of Operations, which information is incorporated in
this Item 4 by reference.
The following votes were cast with respect to the Plan:
Votes
For Against Withheld/Abstain
--- ------- ----------------
2,133,645 20 1,662,847
18
(b) The Company held its annual meeting on December 11, 1996, in Minneapolis,
Minnesota. The Company solicited proxies and filed definitive proxy
statements with the Commission pursuant to Regulation 14A. The matters
voted upon at the meeting and the votes cast were as follows:
Item No. 1 Election of Directors
Votes
For Withhold
--- ---------
Larry C. Barenbaum 3,425,422 150,880
Donald D. Beeler 3,425,422 150,880
Item No. 2 Proposal to increase the number of shares of Common Stock
reserved for issuance under the Company's 1987 Stock Incentive Plan from
510,000 to 710,000 shares.
Votes
----------------------------------------------------------
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
2,474,844 333,046 5,650 1,062,762
Item No. 3 Proposal to ratify the appointment of Price Waterhouse LLP as
the Company's independent auditor for the Company's current fiscal year.
Votes
------------------------------------------------------------
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
3,554,702 19,100 2,500 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 11--Statement Re: Computation of Per Share Earnings
Exhibit 27--Financial Data Schedules (submitted for SEC use only)
(b) Reports on Form 8-K
The following reports on Form 8-K were filed with the Securities
and Exchange Commission.
Date of Report Item Reported
-------------- -------------
July 2, 1996 The Company reported that it had filed a
Filed July 17, voluntary petition for reorganization under
1996 Chapter 11 of the Federal Bankruptcy Code in
the United States Bankruptcy Court for the
District of Delaware.
December 3, 1996 The Company reported that the Federal
Filed January 14, Bankruptcy Court for the District of Delaware
1997 had confirmed the Second Amended Plan of
Reorganization.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: January 10, 1997
BRAUN'S FASHIONS CORPORATION
By /S/ STEPHEN W.CLARK
--------------------------------------
Stephen W. Clark
Vice President &
Chief Financial Officer
Signing on behalf of the
registrant and as
principal financial
officer.
20