UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 4, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-24178
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BEST PRODUCTS CO., INC.
(Exact name of registrant as specified in its charter)
Virginia 54-0853592
(State or other jurisdiction (I. R. S. Employer Identification No.)
of incorporation or organization)
1400 Best Plaza, Richmond, Virginia 23227-1125
(Address of principal executive offices) (Zip Code)
(804) 261-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES X NO
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practical date.
As of May 31, 1996, the registrant had 31,019,969 common shares
outstanding. Additionally 322,360 common shares will be issued upon the
settlement of certain claims which are currently unresolved.
BEST PRODUCTS CO., INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements Pages
Statements of Operations for the thirteen weeks ended May 4, 1996 and April 29, 1995 3
Balance Sheets as of May 4, 1996 and February 3, 1996 4
Statements of Cash Flows for the thirteen weeks ended May 4, 1996 and April 29, 1995 5
Notes to Financial Statements 6
ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 7-8
PART II - OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K 9
SIGNATURES 9
2
BEST PRODUCTS CO., INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Thirteen weeks ended
----------------------------------------
May 4, April 29,
1996 1995
-------------- ---------------
(Dollar amounts in thousands, except per share amounts)
Net sales $ 269,791 $ 272,759
Cost of goods sold 211,610 206,167
------------ ------------
Gross margin 58,181 66,592
Selling, general and administrative expenses 79,777 72,212
Depreciation and amortization 5,503 3,618
Interest expense, net 7,546 4,194
------------ ------------
Loss before income tax benefit (34,645) (13,432)
Income tax benefit -- 5,373
------------ ------------
Net loss $ (34,645) $ (8,059)
============ ============
Net loss per common share $ (1.11) $ (0.25)
============ ============
Weighted average common shares outstanding 31,342,108 31,660,711
============ ============
See accompanying notes to financial statements.
3
BEST PRODUCTS CO., INC.
BALANCE SHEETS
May 4, February 3,
1996 1996
---------- ----------
(Dollar amounts in thousands)
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 9,607 $ 29,003
Merchandise inventories 476,937 481,847
Other current assets 25,628 19,796
--------- ---------
Total current assets 512,172 530,646
Property and equipment, net 174,827 173,239
Other assets, net 10,141 12,755
--------- ---------
Total Assets $ 697,140 $ 716,640
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings $ 47,926 $ --
Current maturities of long-term debt
and capital lease obligations 22,714 20,895
Accounts payable 107,375 128,834
Accrued expenses and other 44,349 44,426
Accrued insurance 12,105 10,870
Accrued restructuring charges 26,633 28,400
--------- ---------
Total current liabilities 261,102 233,425
Long-term debt 120,206 129,833
Capital lease obligations 80,518 83,312
Other liabilities 14,885 14,996
--------- ---------
Total Liabilities 476,711 461,566
--------- ---------
Stockholders' Equity
Common stock 31,342 31,345
Additional paid-in capital 297,646 297,643
Retained earnings (accumulated deficit) (105,219) (70,574)
--------- ---------
223,769 258,414
Loans under Stock Purchase Loan Plan (3,340) (3,340)
--------- ---------
Total Stockholders' Equity 220,429 255,074
--------- ---------
Total Liabilities and Stockholders' Equity $ 697,140 $ 716,640
========= =========
See accompanying notes to financial statements.
4
BEST PRODUCTS CO., INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Thirteen weeks ended
--------------------------
May 4, April 29,
1996 1995
----------- -----------
(Dollar amounts in thousands)
Cash Provided By (Used For):
Operating Activities
Net loss $ (34,645) $ (8,059)
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 5,503 3,618
Deferred income taxes -- (5,373)
Deferred finance cost amortization 1,500 --
Changes in operating assets and liabilities:
Merchandise inventories 4,910 20,069
Other current assets (944) (4,790)
Accounts payable (21,459) (25,638)
Accrued expenses and other (609) (15,699)
Other, net 2,884 895
--------- ---------
Net cash used for operating activities (42,860) (34,977)
--------- ---------
Investing Activities
Purchases of property and equipment (6,734) (6,383)
Other investing activities (738) (4,994)
--------- ---------
Net cash used for investing activities (7,472) (11,377)
--------- ---------
Financing Activities
Short-term borrowings, net 47,926 --
Net payments on capital lease obligations (2,759) (1,107)
Payments on long-term debt (7,843) (564)
Payments for deferred financing costs and other (6,388) --
--------- ---------
Net cash provided by (used for) financing activities 30,936 (1,671)
--------- ---------
Decrease in cash and cash equivalents (19,396) (48,025)
Cash and cash equivalents at beginning of period 29,003 136,770
--------- ---------
Cash and cash equivalents at end of period $ 9,607 $ 88,745
========= =========
See accompanying notes to financial statements.
5
BEST PRODUCTS CO., INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. The Company
Best Products Co., Inc. (the "Company") is a specialty retailer
offering category-dominant assortments of jewelry and home furnishings and
operates 169 stores in 23 states. The home furnishings category includes
ready-to-assemble furniture, housewares/tabletop, leisure/juvenile/fitness and
electronics.
2. Opinion of Management
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments (consisting of normal recurring accruals and
accounting estimates) considered necessary to present fairly the Company's
financial position as of May 4, 1996 and February 3, 1996 and its results of
operations and cash flows for the thirteen weeks ended May 4, 1996 and April 29,
1995. The accompanying unaudited financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do not include
all disclosures normally required by generally accepted accounting principles
nor those normally disclosed in the annual financial statements; however,
management considers the disclosures adequate to make the information presented
not misleading.
The accompanying financial statements should be read in conjunction
with the annual financial statements and notes thereto filed in the Company's
annual report on Form 10-K for the fiscal year ended February 3, 1996.
3. Interim LIFO Estimates
Quarterly estimates of the last-in, first-out ("LIFO") provision are
based on estimates of year-end inventory levels, the inflation rate, purchases
and sales for a fiscal year.
4. Per Share Information
Per share amounts have been computed based upon the weighted average
shares of common stock currently outstanding. Stock options and warrants issued
are not considered for purposes of computing per share amounts since their
effect would be anti-dilutive.
5. Seasonality
Operating results are subject to significant seasonal fluctuations. Net
earnings (loss) of any quarter are seasonally disproportionate to sales since
many operating expenses are relatively constant throughout a year. As a
consequence, interim results should not be relied upon as necessarily indicative
of results for any entire year.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth the results of operations for the
thirteen weeks ended May 4, 1996 and April 29, 1995, expressed in dollars and as
a percentage of net sales:
(Unaudited)
Thirteen weeks ended
----------------------------------------------------------------------------
May 4, April 29, May 4, April 29,
1996 1995 1996 1995
-------------- -------------- ------------ -------------
(Dollar amounts in millions, except per share amounts) (% of net sales)
Net sales $ 269.8 $ 272.8 100.0% 100.0%
Cost of goods sold 211.6 206.2 78.4% 75.6%
------------- ------------ ----- -----
Gross margin 58.2 66.6 21.6% 24.4%
Selling, general and
administrative expenses 79.8 72.2 29.6% 26.5%
Depreciation and
amortization 5.5 3.6 2.0% 1.3%
Interest expense, net 7.5 4.2 2.8% 1.5%
------------- ------------ ----- -----
Loss before income
tax benefit (34.6) (13.4) (12.8)% (4.9)%
Income tax benefit - 5.3 - % 1.9%
------------- ------------ ----- -----
Net loss $ (34.6) $ (8.1) (12.8)% (3.0)%
============= ============ ===== =====
Net loss per common
share $ (1.11) $ (0.25)
============= ============
Weighted average common
shares outstanding 31,342,108 31,660,711
Comparison of thirteen weeks ended May 4, 1996 and April 29, 1995
Net sales. Net sales for the thirteen weeks ended May 4, 1996 decreased
$3.0 million primarily due to a 6.4% decrease in same store sales compared to
fiscal 1995. The Company attributes the decrease in same store sales
primarily to lower sales due to the planned exiting of selected low margin
rate categories.
Gross margin. Gross margin decreased $8.4 million for the first quarter
of fiscal 1996 compared to the first quarter of fiscal 1995. This decrease
is primarily due to lower margin rates experienced in conjunction with the
exiting of selected categories of merchandise and a higher percentage of
sales occurring at promotional prices.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased to 29.6% of sales compared to 26.5% during
the first quarter of fiscal 1995. The increase is primarily due to lower
same store sales and higher expenses associated with 15 new stores that
opened in the later part of fiscal 1995.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Depreciation and amortization. Depreciation and amortization expense
increased $1.9 million for the first quarter of fiscal 1996 over the same
period in fiscal 1995. The increase is primarily attributable to
depreciation on 15 new stores placed in service in the later part of fiscal
1995.
Interest expense, net. Interest expense, net for the first quarter of
fiscal 1996 increased $3.3 million compared to the same period of fiscal
1995. The increase is due primarily to interest expense on short-term
borrowings in the first quarter of fiscal 1996.
Income tax benefit. No current or deferred income tax expense or
benefit was recorded for the first quarter of fiscal 1996 due to the
uncertainty regarding the ability of the Company to realize its net operating
loss carryforwards. A benefit of $5.3 million was recognized for the first
quarter of fiscal 1995 in anticipation of the Company earning income for
fiscal 1995.
Net loss and net loss per share. The Company's net loss for the
thirteen weeks ended May 4, 1996 was $34.6 million or $1.11 per share
compared to a net loss of $8.1 million or $.25 per share for fiscal 1995.
The increased loss is attributed primarily to the decrease in same store
sales and gross margin rates, higher selling, general and administrative
expenses, and higher interest, depreciation and amortization during the first
quarter of fiscal 1996 compared to the same period of fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
As of May 4, 1996, the Company's cash and cash equivalents were $9.6
million compared to $29.0 million as of February 3, 1996. The decrease is
primarily attributed to normal seasonal declines in cash balances, the
decline in same store sales and margin during the first quarter of fiscal
1996 and capital expenditures.
Net cash used for operating activities was approximately $42.9 million
for the thirteen weeks ended May 4, 1996. The use of cash is primarily due
to the seasonal nature of the Company's business and the decline in same
store sales and margin.
Seasonality. As a retailer, the Company's business is very seasonal,
with approximately 34% of its annual net sales occurring in the nine-week
period of November and December. As a result, substantially all of the
Company's operating earnings occur in the fourth fiscal quarter. Similar to
many other retailers, the Company's performance is sensitive to the overall
U.S. economic cycle and related economic conditions which influence consumer
trends and spending patterns. Net earnings (loss) for any quarter are
seasonally disproportionate to net sales since many operating expenses are
relatively constant throughout the fiscal year. As a consequence, interim
results should not be relied upon as necessarily indicative of results for an
entire fiscal year.
Summary. The Company believes cash and cash equivalents and cash
provided by operations, as well as cash available from the existing credit
facility, will be sufficient to meet the Company's working capital and
capital expenditure needs depending on the Company's operating results and
the Company's continued compliance with the financial covenants under the
existing credit facility. The Company's operating results will depend on,
among other things, the success of the Company's initiatives to restructure
its business, its ability to reduce costs, the continued support of the
Company's numerous providers of goods and services, the competitive
environment, the prevailing economic climate and the ability of the Company
to adapt to these conditions.
This report contains forward-looking statements that are subject to risks
and uncertainties, including but not limited to risks associated with the
repositioning of the Company, its strategic initiatives, and customer and vendor
support for such changes. Additional discussions of factors that could cause
actual results to differ materially from management's projections, forecasts,
estimates, anticipations and expectations are contained in the Company's Current
Report on Form 8-K for June 18, 1996.
8
BEST PRODUCTS CO., INC.
Part II - Other Information
ITEM 6: Exhibits and Reports on Form 8-K
a. Exhibits
10.1 1996 Working Capital Facility Amendment dated April 5, 1996.
10.2 1996 Working Capital Facility Amendment dated June 12, 1996.
10.3 Employment Agreement between the Company and Daniel H. Levy dated
April 23, 1996.
b. Reports on Form 8-K
1. A Current Report on Form 8-K for June 18, 1996 was filed with the
Securities and Exchange Commission on June 18, 1996 to report, under item 5,
a discussion of strategic initiatives for 1996.
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.
BEST PRODUCTS CO., INC.
Date: June 18, 1996 /s/ Frederick G. Kraegel
-----------------------------
Frederick G. Kraegel
Senior Vice President and Chief
Financial Officer
(Principal financial officer and
duly authorized officer)
June 18, 1996 /s/ Sharyn P. Hunt
-----------------------------
Sharyn P. Hunt
Vice President and Controller
(Principal accounting officer)
9
EXHIBIT INDEX
Exhibit
Number Description
10.1 1996 Working Capital Facility Amendment dated April 5, 1996.
10.2 1996 Working Capital Facility Amendment dated June 12, 1996.
10.3 Employment Agreement between the Company and Daniel H. Levy
dated April 23, 1996.