UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 1996 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
------------------ TO -----------------
0-24390
Commission file number ...............
TREND - LINES, INC.
......................................................
(Exact name of registrant as specified in its charter)
Massachusetts 04-2722797
................................... ..............................
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
135 American Legion Highway, Revere, Massachusetts 02151
...............................................................
(Address of principal executive office) (Zip Code)
(617) 853 - 0900
.................................................
(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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
NUMBER OF SHARES OUTSTANDING
CLASS OCTOBER 1, 1996
----- -----------------------------------
Class A Common Stock, $.01 par value 6,264,403
Class B Common Stock, $.01 par value 4,780,026 *
* Each share of Class B Common Stock is convertible into a share of Class A
Common Stock.
1
INDEX
Page
----
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
August 31, 1996 (Unaudited) and March 2, 1996 3
Condensed Consolidated Statements of Operations
Three Months and Six Months Ended August 31, 1996
and August 26,1995 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows
Six Months Ended August 31, 1996
and August 26, 1995 (Unaudited) 5
Notes to Condensed Consolidated
Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-11
Part II - Other Information
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12-13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security
Holders 13-14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TREND-LINES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
(Unaudited)
August 31, March 2,
ASSETS 1996 1996
---- ----
CURRENT ASSETS:
Cash $1,454 $436
Accounts receivable, net 9,978 8,319
Refundable income taxes 1,561 4,401
Inventories 70,284 68,885
Prepaid expenses and other current 5,610 5,492
assets -------- --------
Total current assets 88,887 87,533
-------- --------
PROPERTY AND EQUIPMENT, NET 13,334 12,815
OTHER ASSETS 667 310
-------- --------
$102,888 $100,658
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank credit facility $27,169 $18,483
Current portion of capital lease 606 566
obligations
Accounts payable 24,840 30,476
Accrued expenses 5,642 6,602
-------- --------
Total current liabilities 58,257 56,127
-------- --------
CAPITAL LEASE OBLIGATIONS, NET OF
CURRENT PORTION 1,934 2,243
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value -
Class A - Authorized - 20,000,000
shares
Issued and outstanding - 6,264,403 62 62
shares and 6,252,965
shares at August 31, 1996 and March
2, 1996, respectively
Class B - Authorized - 5,000,000
shares
Issued and outstanding - 32 32
4,780,026 shares and 4,790,915
shares at August 31, 1996 and
March 2, 1996, respectively
Additional paid-in capital 41,316 41,316
Retained earnings 1,287 878
-------- --------
Total stockholders' equity 42,697 42,288
-------- --------
$102,888 $100,658
======== ========
See notes to condensed consolidated financial statements.
3
TREND-LINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands)
(Unaudited)
Three months ended Six months ended
------------------ ----------------
August 31, August 26, August 31, August 26,
1996 1995 1996 1995
---- ---- ---- ----
NET SALES $46,827 $36,458 $96,138 $73,834
COST OF SALES 31,604 23,567 64,499 46,813
------- ------- ------- -------
Gross Profit 15,223 12,891 31,639 27,021
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 14,230 10,797 29,926 23,304
------- ------- ------- -------
Income from operations 993 2,094 1,713 3,717
INTEREST EXPENSE, net of 615 636 1,025 964
interest income ------- ------- ------- -------
Income before 378 1,458 688 2,753
provision for income
taxes
PROVISION FOR INCOME TAXES 153 583 279 1,107
------- ------- ------- -------
Net income $225 $875 $409 $1,646
======= ======= ======= =======
NET INCOME PER COMMON SHARE $0.02 $0.09 $0.04 $0.16
======= ======= ======= =======
WEIGHTED AVERAGE COMMON
SHARES
OUTSTANDING 11,298 10,034 11,297 10,006
======= ======= ======= =======
See notes to condensed consolidated financial statements.
4
TREND-LINES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(Unaudited)
Six Months Ended
----------------
August 31, August 26,
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $409 $1,646
Adjustments to reconcile net income
to net cash used in operating
activities -
Depreciation and amortization 831 659
Gain on retirement of property and (18) -
equipment
Changes in current assets and
liabilities-
Accounts receivable (1,659) (2,024)
Refundable income taxes 2,840 -
Inventories (1,399) (12,313)
Prepaid expenses and other (118) (606)
current assets
Accounts payable (5,636) (6,861)
Accrued expenses and other (960) 1,254
current liabilities ------- --------
Net cash used in operating (5,710) (18,245)
activities ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,332) (3,113)
Increase in other assets (357) 284
------- --------
Net cash used in investing (1,689) (2,829)
activities ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from exercise of stock - 19
options
Net borrowings under bank credit 8,686 20,496
facility
Net borrowings (payments) on (269) 622
capital lease obligations ------- --------
Net cash provided by financing 8,417 21,137
activities ------- --------
NET INCREASE IN CASH 1,018 63
CASH, BEGINNING OF PERIOD 436 361
------- --------
CASH, END OF PERIOD $1,454 $424
======= ========
Supplemental Disclosure of Cash Flow
Information:
Cash paid for - Interest $536 $782
======= ========
Income Taxes $133 $1,868
======= ========
Supplemental Schedule of Noncash
Investing and
Financing Activities:
Equipment acquired under capital $- $534
lease obligations ======= ========
See notes to condensed consolidated financial statements.
5
TREND - LINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
------------------------
The information set forth in these financial statements is unaudited and
may be subject to normal year end adjustments. In the opinion of
management, the information reflects all adjustments, which consist of
normal recurring accruals, that are considered necessary to present a fair
statement of the results of operations of Trend-Lines, Inc. (the Company)
for the interim periods presented. The operating results for the six
months ended August 31, 1996 are not necessarily indicative of the results
to be expected for the fiscal year ending March 1, 1997.
The financial statements presented herein should be read in conjunction
with the financial statements included in the Company's Annual Report on
Form 10-K for the year ended March 2, 1996. Certain information in
footnote disclosures normally included in financial statements have been
condensed or omitted in accordance with the rules and regulations of the
Securities and Exchange Commission.
2. Earnings per Share Data
--------------------------
Net income per share for the six months ended August 31, 1996 and August
26, 1995 is computed by dividing net income by the weighted average number
of shares of common stock and common stock equivalents outstanding during
the period. Common stock equivalents are calculated using the treasury
stock method and consist of common stock issuable upon the exercise of
outstanding stock options. Outstanding shares and options have been
adjusted to reflect a three-for-two split of the Class A Common Stock and
a corresponding split of Class B Common Stock (Note 3).
3. Stock Split
--------------
In August, 1995, the Board of Directors approved a three-for-two stock
split of the Class A Common Stock effected in the form of a stock dividend.
The record date for the stock split was August 24, 1995 and the dividend
was paid on September 1, 1995. In July, 1996 the Board of Directors
approved a corresponding three-for-two stock split of the Class B Common
Stock effected in the form of a stock dividend. The stock splits have
been retroactively reflected in the accompanying consolidated statements
and notes for all periods presented.
6
TREND-LINES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
4. Bank Credit Facility
-----------------------
At August 31, 1996, the Company had approximately $27.2 million of
borrowings outstanding and approximately $1.1 million of letters of credit
outstanding. The Company had approximately $8.4 million in available
borrowings under this facility.
On July 3, 1996, the Company entered into a new, three-year revolving
secured credit facility with another institution, pursuant to which the
Company may borrow a maximum of $40 million based on a borrowing formula
related to inventory levels, as defined. The facility bears interest, at
the Company's option, at the bank's reference rate plus .75% or LIBOR plus
2.25%. A commitment fee of .375% per year of the average unused commitment
amount, as defined, is payable monthly.
5. Restructuring Charge
------------------------
In the fourth quarter of fiscal 1995, the Company recorded a restructuring
charge of approximately $1.4 million, representing the costs associated
with reorganizing its operations. These costs include a $954,000 charge
for the rent and related expenses for closing 12 retail store locations and
the severance and related benefits for terminated employees. Additionally,
$443,000 was charged for the consolidation of the Company's distribution
centers.
As of August 31, 1996, 11 retail store locations were closed and
approximately $475,000 was charged against the restructuring reserve for
store closing related activities. In addition, approximately $185,000
associated with the consolidation of the Company's distribution centers
was also charged against the restructuring reserve.
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
---------------------
Net sales for the second quarter of fiscal 1996 increased by $10.4 million,
or 28.4%, from $36.5 million for the second quarter of fiscal 1995 to $46.8
million. Net catalog sales for the second quarter of fiscal 1996 decreased
$.7 million or (4.6)%, from $15.1 million for the second quarter of fiscal
1995 to $14.4 million for the second quarter of fiscal 1996, while retail
sales increased $11.1 million or 52.1% as compared to the second quarter of
fiscal 1995. The decrease in net catalog sales was primarily caused by the
reduced response rate for the Golf Day catalog and to the Company's opening
of retail stores in areas previously only serviced by its catalogs which
has resulted in a decrease in the Company's catalog sales in those areas.
The Company believes that the expansion of its retail store operations will
continue to result in a decrease in its catalog sales. The revenue growth
of retail stores was attributable to the expansion of the Company's retail
store base, which expanded over 28% from 113 locations at the end of the
second quarter of fiscal 1995 to 145 locations at the end of the second
quarter of fiscal 1996. Comparable net store sales for Woodworkers
Warehouse / Post Tool stores and Golf Day stores for the second quarter of
fiscal 1996 increased by 18.4% as compared to the second quarter of fiscal
1995.
Net sales for the first six months of fiscal 1996 increased by $22.3
million, or 30.2%, from $73.8 million for the first six months of fiscal
1995 to $96.1 million for the first six months of fiscal 1996. Comparable
net store sales for Woodworkers Warehouse / Post Tool Stores and Golf Day
for the first six months of fiscal 1996 increased by 12.3% as compared to
the first six months of fiscal 1995. Catalog sales for the first six
months of fiscal 1996 increased $1.4 million , or 4.4%, from $31.9 million
for the first six months of fiscal 1995 to $33.3 million for the six months
of fiscal 1996, while retail sales increased $20.9 million, or 49.9%, as
compared to the first six months of fiscal 1995. The increase in net
catalog sales was primarily attributable to the Trend-Lines catalog being
more promotional and moderate expansion of the Company's Golf Day catalog
circulation during the first quarter.
Gross profit for the second quarter of fiscal 1996 increased 17.5% from
$12.9 million for the second quarter of fiscal 1995 to $15.2 million for
the second quarter of fiscal 1996. As a percentage of net sales, gross
profit decreased 2.9% from 35.4% of net sales for the second quarter of
fiscal 1995 to 32.5% of net sales in the second quarter of fiscal 1996.
The decrease in the Company's gross profit percentage was the result of
promotional catalog and retail activity and the Company's changing sales
mix, which was caused by the increase in retail sales as a percentage of
total sales. The Company's retail store sales generally have lower overall
gross margins than catalog sales.
Gross profit for the first six months of fiscal 1996 increased 16.8% from
$27.0 million for the first six months of fiscal 1995 to $31.6 million for
the first six months of fiscal 1996. As a percentage of net sales, gross
profit decreased 3.7% from 36.6% of net sales for first six months of
fiscal 1995 to 32.9% of net sales for the first six months of fiscal 1996.
The decrease in the
8
Company's gross profit percentage was primarily the result of promotional
catalog and retail activity and the Company's changing sales mix.
Selling, general and administrative expenses for the second quarter of
fiscal 1996 increased 31.5%, or $3.4 million, from $ 10.8 million for the
second quarter of fiscal 1995 to $14.2 million for the second quarter of
fiscal 1996. As a percentage of net sales, selling, general and
administrative expenses increased .7% from 29.6% of net sales in the second
quarter of fiscal 1995 to 30.3% of net sales in the second quarter of
fiscal 1996. Selling, general and administrative expenses increased in
dollar terms and as a percentage of net sales due primarily to the
Company's continuing retail expansion.
Selling, general and administrative expenses for the first six months of
fiscal 1996 increased 28.3%, or $6.6 million, from $23.3 million for the
first six months of fiscal 1995 to $29.9 million for the first six months
of fiscal 1996. As a percentage of net sales, selling, general and
administrative expenses decreased .5% from 31.6% of net sales for the first
six months of fiscal 1995 to 31.1% of net sales for the first six months of
fiscal 1996. The dollar increases in selling, general and administrative
expenses are primarily related to the Company's continuing retail
expansion.
As the result of the above factors income from operations for the second
quarter of fiscal 1996 decreased by $1.1 million, or (54.2)%, from $2.1
million in the second quarter of fiscal 1995 to $1.0 million in the second
quarter of fiscal 1996. As a percentage of net sales, income from
operations decreased 3.7% from 5.7% of net sales in the second quarter of
fiscal 1995 to 2.1% of net sales in the second quarter of fiscal 1996.
As the result of the above factors income from operations for the first six
months of fiscal 1996 decreased $2.0 million, or (54.8)% from $3.7 million
in the first six months of fiscal 1995 to $1.7 million in the first six
months of fiscal 1996. As a percent of net sales, income from operations
decreased 3.3% from 5.0% of net sales in the first six months of 1995 to
1.7% of the net sales in the first six months of fiscal 1996.
Interest expense, net of interest income, for the second quarter of fiscal
1996 decreased by $21,000 from $636,000 in the second quarter of fiscal
1995 to $615,000 in the second quarter of fiscal 1996. The decrease in
interest expense was attributable to the decrease in the Company's average
borrowings, which was partially offset by an increased borrowing rate .
Interest expense, net of interest income, for the first six months of
fiscal 1996 increased by $61,000 from $964,000 in the first six months of
fiscal 1995 to $1,025,000 in the first six months of fiscal 1996, caused by
the increased borrowing rate.
9
Liquidity and Capital Resources
--------------------------------
The Company's working capital decreased by $.8 million, from $31.4 million as of
March 2, 1996 to $30.6 million as of August 31, 1996. During the first six
months of fiscal 1996, net cash used in operating activities was approximately
$6.4 million, net cash used in investing activities was approximately $1.7
million and net cash provided from financing activities was approximately $9.1
million. The net cash used in operating activities resulted primarily from $1.2
million provided by net income and depreciation, $2.8 million provided from
income tax refunds, offset by a decrease in Accounts Payable and accrued
expenses of $7.3 million and a combined $3.1 million increase in inventories,
accounts receivable and prepaid expenses and other current assets. The net cash
used in investing activities was primarily related to purchases of property and
equipment required for the Company's retail expansion. During the first six
months of fiscal 1996, the net cash provided from financing activities was
primarily attributable to $9.4 million in net borrowings under the Company's
bank credit facility, offset by $.3 million in payments under capital leases.
The Company anticipates that in fiscal 1996, it will continue to invest in
leasehold improvements and equipment to support its retail store expansion
plans. In addition, the Company's expansion plans will require the use of cash
to fund increased inventories associated with the operation of additional retail
stores. The Company opened two stores and closed four stores in the second
quarter. For fiscal 1996, the Company currently plans to open approximately 25
to 35 retail stores, including those opened in the last two quarters.
The amount available under the credit facility is $36.7 million, of which $27.2
million (including letters of credit totaling approximately $1.1 million) was
outstanding as of August 31, 1996.
The Company believes that the cash generated from operating activities, trade
credit and available bank borrowings will be sufficient to fund its operations
and its retail store expansion program for the next twelve months, however,
there can be no assurance that this will be the case. See "Safe Harbor Statement
under the Private Securities Litigation Reform Act of 1995".
Impact of Inflation
- -------------------
The Company does not believe that inflation has had a material impact on its net
sales or results of operations.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
- --------------------------------------------------------------------------------
Forward-looking statements in this report, including without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties including without limitation the following: (i) the Company's
plans, strategies,
10
objectives, expectations and intentions are subject to change
at any time at the discretion of the Company; (ii) the Company's ability to open
the planned number of stores will depend upon a number of other factors,
including securing desirable locations, negotiating leases with acceptable
terms, and hiring, training and retraining qualified personnel; (iii) the
Company's plans and results of operations will be affected by the Company's
ability to manage its growth and inventory; (iv) the Company's tool and golf
businesses are highly competitive and the entrance of new competitors into or
the expansion of the operations by existing competitors in the Company's markets
and other changes in the tool or golf retail climate could adversely affect the
Company's plans and results of operations; and (v) other risks and uncertainties
indicated from time to time in the Company's filings with the Securities and
Exchange Commission.
11
TREND - LINES, INC.
Part II - Other Information
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities
At the Annual Meeting of Stockholders of the Company held on July
17, 1996, the stockholders approved certain amendments to the
Restated Articles of Organization of the Company (the "Restated
Articles").
The stockholders approved amendments to the Restated Articles
which generally have the effect of decreasing from two-thirds to
a majority the vote required to amend the Restated Articles, to
amend the By-Laws and to approve mergers and sales of
substantially all of the assets of the Company. Any change in
the rights and preferences of the Class A Common Stock ("Class A
Stock") and Class B Common Stock ("Class B Stock") would still
require the affirmative vote of two-thirds of the total voting
power of the Company.
The stockholders also approved an amendment to the Restated
Articles under which the Company elected not to be governed by a
Massachusetts statute which prohibits a corporation with more
than 200 stockholders from engaging in a "business combination"
with a 5% or more stockholder of the corporation for a period of
three years after the date the person became a 5% holder, subject
to certain exceptions. The stockholders also amended the
Restated Articles to delete a provision generally similar, but
not identical to, the provisions of this Massachusetts statute.
The general effect of these amendments is to make it easier for
the Company to engage in a "business combination" with a 5%
stockholder.
The stockholders also approved an amendment to the Restated
Articles such that shares of Class B Stock surrendered upon
conversion can be reissued in connection with certain dividends
and other distributions of capital stock. Prior to the
amendment, the shares of Class B Stock surrendered upon
conversion were canceled and not available for reissuance. The
general effect of this amendment is to restore converted shares
of class B Stock to the staus of authorized but unissued shares,
available for reissuance in connection with dividends and other
12
distributions of Class B Stock payable with respect to the Class
B Stock, all in accordance with the provisions of the Restated
Articles.
In August 1995, the Company declared a 3-for-2 stock split of the
Class A Stock to be effected in the form of a stock dividend.
The Company suspended the corresponding dividend on the Class B
Stock because there was not a sufficient number of authorized but
unissued shares of Class B Stock to effect a 3-for-2 stock
split. As a result, the conversion ratio of the Class B Stock
was increased from 1 to 1.5 shares of Class A Stock for each
share of Class B Stock. The suspension of such dividend was
agreed by the holders of the Class B Stock with the understanding
that the Company, at the next succeeding annual meeting of
stockholders, would seek to make available additional shares of
Class B Stock so that the suspended dividend could be paid.
Following the amendment of the Restated Articles, the Company
distributed shares of Class B Stock to the holders thereof, in
payment of the suspended 1995 dividend. The dividend had the
effect of restoring the original 1 to 1 conversion ratio.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Submission of Matters to a vote of Security Holders The Annual
Meeting of Stockholders was held July 17, 1996. Proxies for the
Annual Meeting were solicited pursuant to Section 14 of The
Securities and Exchange Act of 1934, as amended and regulations
promulgated thereunder.
At the Annual Meeting, a total of 5,342,983 shares of Class A
Common Stock and 3,193,943 shares of Class B Common Stock were
represented by proxy. Each share of Class A Common Stock has one
vote per share and each share of Class B Common Stock has 10
votes per share. The shares represented were voted in the
following manner upon the proposal put forth at the meeting:
Broker
For Against Abstain Non Vote
To elect Messrs. Stanley D. Black, Ronald L. Franklin,
Norman W. Zagorsky, John A. McGregor, Karl P,
Sniady, Richard A. Mandell and Merrill Zenner as
directors of the Company.
Class A shares 5,169,846 173,137 -0- -0-
Class B shares 3,193,943 -0- -0- -0-
13
Broker
For Against Abstain Non Vote
To amend the Company's Restated Articles
of Organization to eliminate certain
supermajority voting provisions, and
thereby permit approval of certain actions
by the holders of a majority of the
outstanding voting power.
Class A shares 1,831,652 158,898 -0- 3,352,433
Class B shares 3,193,943 -0- -0- -0-
Broker
For Against Abstain Non Vote
To amend the Company's Restated Articles
of Organization to amend the terms of the
Class B Common Stock to provide that the
shares of Class B Common Stock surrendered
upon conversion into Class A Common
Stock are restored to the status of authorized
but unissued stock, available for reissuance
in connection with certain dividends and
other distributions of capital stock.
Class A shares 1,796,976 198,498 -0- 3,347,509
Class B shares 3,193,943 -0- -0- -0-
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
Number
-------
3.0 Restated Articles of Organization, as amended. Filed herewith
10.0 Loan and Security Agreement dated as Filed herewith
of July 3, 1996.
(b) Reports on Form 8-K - not applicable
14
SIGNATURE
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.
TREND-LINES, INC
----------------------
Registrant
Date: October 15, 1996
/s/ Stanley D. Black
-----------------------
Stanley D. Black
(President and Chief Executive
Officer)
/s/ Karl P. Sniady
----------------------
Karl P. Sniady
(Executive Vice President,
Chief Financial Officer)
15