SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
(Mark One)
[X] Annual report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended January 31, 1997 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _______ to________
Commission File Number 0-21598
OLD AMERICA STORES, INC.
(Exact name of registrant as specified in its charter)
Delaware 811 North Collins Freeway 13-3487813
(State or other jurisdiction of Highway 75 North (IRS Employer
incorporation or organization) PO Box 370 Identification No.)
Howe, Texas 75459
(Address of principal executive offices)
Registrant's telephone number, including area code: (903) 532-3000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $.01 per share
(Title of Class)
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 twelve months (or such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of April 11, 1997, was $12,218,369.
At April 11, 1997, an aggregate of 3,520,437 shares of the registrant's Common
Stock, value of $ .01 each (the "Common Stock"), and 1,012,842 shares of
registrant's Nonvoting Common Stock, value of $ .01 each (the "Nonvoting Common
Stock"), were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's definitive proxy statement in connection with the Annual
Meeting of Stockholders to be held on June 19, 1997, to be filed with the
Commission pursuant to Regulation 14A, is incorporated by reference into
Part III of this report.
OLD AMERICA STORES, INC.
FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 31, 1997
TABLE OF CONTENTS
PART I
-------
Page
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Item 1. Business 1
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
--------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 9
Item 6. Selected Consolidated Financial Data 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 11
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 14
PART III
---------
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners and Management 15
Item 13. Certain Relationships and Related Transactions 15
PART IV
--------
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 16
OLD AMERICA STORES, INC.
FORM 10-K FOR THE FISCAL YEAR ENDED JANUARY 31, 1997
PART I
ITEM 1. BUSINESS
GENERAL
Old America Stores, Inc., incorporated in Delaware in October 1988,
together with its wholly owned subsidiaries, Old America Store, Inc., and Old
America Wholesale, Inc. (collectively, "Old America" or the "Company"), is a
specialty retailer of framing, floral, craft, and decorative accent products.
The Company's stores feature picture frames and silk and dried flowers, together
with free framing and floral arranging services. Old America also offers a
broad selection of decorative accent products, craft supplies, and seasonal
merchandise for do-it-yourself home decorators and craft hobbyists. A wide
selection of high quality products, free framing and flower arranging services
and everyday low prices make each store a one-stop location for value-oriented
customers seeking merchandise for home decorating or creative hobbies.
A typical Old America store is organized into thirty-six merchandise sub-
departments and offers approximately 28,000 individual items or stock-keeping
units (SKU's). Stores typically range in size from 18,000 to 22,000 gross
square feet and are generally located in strip malls near major thoroughfares.
The Company's typical customer is female and has an annual household income of
$25,000 or more. The Company believes that customers who regularly shop at Old
America stores account for a substantial portion of its sales and estimates that
approximately 70% of its customers shop at its stores at least monthly.
BUSINESS STRATEGIES
The Company's success is dependent upon the execution of the following key
elements of its merchandising and operating strategies:
Strong Frame, Floral and Seasonal Presentations. Old America offers its
customers very broad selections of merchandise in its framing and floral
departments, and in its merchandise for Spring, Fall and Christmas seasons.
Typically, Old America is the dominant offering in the frame and floral
categories in its markets. Those strengths are complemented by new store
layouts implemented during late 1994 and 1995 that consolidate the Company's
large presentation of seasonal merchandise into a central "power aisle". The
store layout was further refined in fiscal 1996 as evidenced in its nine new
stores opened in the second half of the fiscal year.
High Quality Merchandise at Value Pricing. The Company carries a broad mix
of high quality, traditional and contemporary merchandise that appeals to a wide
range of craft hobbyists and do-it-yourself home decorators. The Company
regularly introduces new products and promotional items to maintain a fresh look
for customers and meet their constantly changing interests and tastes. The
Company's policy is to position itself as a source of "real values" to its
customers everyday through low pricing supplemented with promotionally
advertised sale pricing. The Company showcases its everyday low price
philosophy through its price pledge program. This program assures customers
that the item offered will be lower than the same product offered by competition
and that the item will always be in stock.
High Margin Product Mix. The Company emphasizes those items in its product
mix on which it typically realizes higher margins, such as frames and flowers.
The Company believes that it usually presents the dominant offering of frames
and flowers in each market, and that it derives a smaller share of its sales
from lower margin arts and crafts products than do competing chains.
Free Services. Unlike most of its competitors, the Company offers free
framing, including while-you-wait service for ready-made frames, and free floral
arranging services when frames and floral container and materials are purchased
at Old America. These services enable customers to obtain custom home decorating
items for no more than the cost of do-it-yourself items. The Company believes
that offering these free services increases the volume of sales of high margin
frames and flowers and, in addition, leads to impulse buys of other merchandise.
1
Stringent Cost Controls. The Company places significant emphasis on
controlling costs at every level of its operations. Purchasing and distribution
policies are designed to achieve the most advantageous pricing and terms
consistent with the Company's quality standards.
Careful New Store Site Selection. Cities are selected for store locations
based on the demographic characteristics of the area and the availability of
suitable space. While the Company has no plans to increase the number of net
new stores in fiscal 1997, management intends relocating up to sixteen of its
present stores which are located in lower traffic, "C" locations to higher
traffic "A" locations. This strategy is expected to significantly improve
average store revenues.
Low Store Opening and Operating Costs. On average, the Company's initial
net cash investment in fixtures and inventory in a new average-size store is
approximately $575,000. The Company believes that this initial investment is
below its major competitors. Traditional rental costs for the Company's stores
also are significantly below most of its competitors, reflecting Old America's
strategy of locating in small and medium-sized towns. The Company, however,
anticipates an increase of approximately $2 per square foot for the new, higher
traffic sites targeted in fiscal 1997.
Motivated Employees. Management and compensation practices at the Company
are designed to focus on and reward profitability. A substantial portion of
the compensation of all senior executives is contingent on the Company's
earnings before interest and taxes. Store and regional managers receive a
substantial portion of their annual income through bonuses based upon annual
operating income at the store and regional levels, respectively. The Company
also offers an employee stock purchase plan to all eligible full-time employees
and offers an employee stock option plan to create additional equity-linked
compensation for management.
MERCHANDISE OFFERINGS AND MERCHANDISING
The following chart illustrates the mix of the Company's fiscal 1996 net
sales by major product category:
[CHART APPEARS HERE]
Picture Frames and Prints. Old America offers a comprehensive line of
custom and ready-made frames, together with free framing, including while-you-
wait service for ready-made frames, when materials are purchased at the store.
A broad selection of prints and framed art is also available.
Silk and Dried Flowers. Old America is one of the leading retailers of
silk and dried flowers in the United States. The Company believes that it offers
the broadest selections of these items in any market in which it competes,
together with free flower arranging service when materials are purchased at the
store. In-store floral designers create unique arrangements that are sold as
finished products to customers and serve as sources of ideas for custom
arrangements created for customers' particular needs. Floral designers also
create special, seasonal floral arrangements for sale during holiday periods.
Arts and Crafts Supplies. Old America offers a comprehensive array of
supplies for crafters, ranging from supplies for painters to kids' crafts for
children, as well as assorted materials for other craft projects. Old America
also offers hobby instruction manuals. The Company has significantly increased
its product offerings which cater to children and teenagers.
2
Home Decorative Accents. Old America focuses on home decorative accents as
a "point of difference" from other retailers in the Arts and Crafts Industry.
Decor items in the wall and table top areas may be "bundled" with frame and
floral products enabling our customers to create a distinctive "look" in their
homes. Old America offers a wide variety of baskets, brass and pottery. These
items are largely used in floral arrangements and for other decorative purposes
around the home. The home decor category has also seen a significant increase
in demand for all types of candles for the home. Expansion of the home decor
area will allow Old America to add many new product lines in the future.
Seasonal Products. Old America carries a variety of specialty decorative
and craft items for major holidays such as Christmas, Easter, Halloween, and
Valentine's and Mother's Days as part of its broader seasonal merchandising
program. These products include Christmas lights and ornaments, figurines, room
decorations and similar items. In addition, the Company's floral department
sales reflect a broad array of merchandise for the three major seasons of the
year, Spring, Fall and Christmas.
Other Merchandise. Old America also offers (i) a wide selection of
candles and potpourri, decorative materials, greeting cards and novelty items,
and (ii) promotional items and other special purchases that appeal to Old
America customers.
The continued introduction of new products is a high priority because the
Company believes that it has a high proportion of repeat customers, making it
essential that each store's product mix always has a fresh appearance.
Promotional items, although a small proportion of total sales, are particularly
important in this regard. New products and product categories are introduced on
a test basis, with successful items extended throughout the chain.
Furthermore, each of the Company's thirty-six product sub-departments is
subjected to regular review of sales productivity, profit margins, sales trends
and future consumer demand. Individual products are reviewed regularly by
management for possible discontinuance.
In late 1995, the Company completed its store renovation program that
commenced in late 1994. These store upgrades allowed the Company to continue
two strategic merchandising steps designed to increase store productivity,
inventory turnover, and overall financial performance:
. Power Aisle. The introduction of the wide center aisle of our stores
known as the "Power Aisle" gives Old America Stores the ability to turn
its fastest selling merchandise more quickly. The Power Aisle features
the fastest selling items of each season in a "mass" look. These
seasonal best sellers will be featured in conjunction with the entire
seasonal assortment adjacent to them thus providing our customers a new
look in our stores a minimum of three times each year (Spring, Fall and
Christmas).
. Stronger Seasonal Offerings. Building on the Power Aisle layout, Old
America Stores in 1996 presented deeper displays of merchandise for the
three long-lived seasons in the crafts industry, Spring, Fall and
Christmas, as well as more limited but concentrated offerings for other
holidays such as Easter and Halloween.
The Company executed two very important initiatives in fiscal 1996.
These were as follows:
. POS Installation. The Company completed the installation of
Point-of-Sale ("POS") hardware and software in all stores by the
end of quarter three. This store system is integrated into a full-
featured merchandising and warehouse system installed at the
Company's headquarters.
. Product Plan-O-Grams. A significant number of product categories
were given a specific store presentation plan in order to identify
the best SKU's and maintain a high level of in-stock positions.
As a result of SKU-level information obtained from the Company's new POS
system and implementation of plan-o-grams for key vendors in quarter three, the
Company identified a significant amount of non-go-forward merchandise which was
marked down/discounted for quick sell through during quarter four. These
markdowns reduced pretax earnings in quarter four by approximately $10.3
million.
3
GROWTH STRATEGY
Old America has grown from a single store in 1980 to a chain of 102 stores
located primarily in the Southeastern, Midwestern and Southwestern United
States. Two stores were acquired in connection with the 1988 acquisition of
the Company; the remainder were opened by the Company. The Company opened ten
new stores in 1992, twelve net new stores in 1993, seventeen net new stores in
1994, three net new stores in 1995 and nine new stores in 1996. The Company also
relocated two stores and closed one store during 1996. Historically, growth at
Old America has been derived largely from the addition of new stores to the
chain, together with modest increases in sales at existing locations.
Historically, the addition of new store locations has been a central part
of the Company's growth plan, as shown in the table below:
NUMBER OF RETAIL STORES
-------------------------------------------
FY 1992 FY 1993 FY 1994 FY 1995 FY 1996
------- ------- ------- ------- -------
Number of Stores, Beginning of Year 52 62 74 91 94
Store Openings 11 13 17 4 9
Store Closings 1 1 0 1 1
-- -- -- -- ---
Number of Stores, End of Year 62 74 91 94 102
== == == == ===
New store openings declined in fiscal 1995 as a result of the Company's
focus on remodeling existing stores. While the Company opened nine new stores in
fiscal 1996, it is management's intention to open no net new stores in fiscal
1997. Instead, the Company intends relocating up to sixteen of its present
stores. These relocations may be in another city or even in another state,
however, management believes the cost of such relocation will not be substantial
since inventory, fixtures, signage and POS equipment can be moved with minimal
expense. Store relocations will be principally in the Southeastern United
States, and will continue to be focused on small and medium sized cities. The
Company is currently considering a substantial number of cities that meet its
demographic standards for store relocations.
Going forward, the Company's initial net cash investment in a new 20,000
square foot store will be approximately $575,000. The Company's new store plan
anticipates approximately $385,000 for initial merchandise, net of payables, and
approximately $190,000 for leasehold improvements, furniture, fixtures and pre-
opening costs, although actual expenditures often vary, depending upon the size
of the store and the condition of the building prior to occupancy. It is
management's intent going forward to require its new landlords to fund the cost
of tenant leasehold improvements, reducing the Company's initial cash outlay.
The Company plans to target smaller and medium sized cities which the
Company believes are underserved. In prior years, the Company has pursued a
clustering strategy in proven retail markets in larger cities such as Phoenix,
Arizona, and Minneapolis, Minnesota, to exploit fully the available market and
spread advertising and other operating costs across a number of stores.
Clustering will not be an important part of the Company's store expansion
strategy in the future, however. Cities are selected for store locations based
on the demographic characteristics of the area and the availability of suitable
space, with principal emphasis on:
. Median annual household income of at least $32,000
. Appropriate size site available with easy access to a major thoroughfare
. Target total rents of approximately $5-7 per square foot
. Favorably competitive environment, and
. Demographics comparing favorable to existing store locations
Historically, the Company manufactured certain new store fixtures and
internally staffed and managed necessary store finish-out. In 1996, the Company
outsourced new store finish-out to reputable contractors with proven retail
construction experience. Management plans to continue this strategy in fiscal
1997 as well as require the landlord to complete tenant improvements prior to
occupancy. The Company has typically been able to open a new store within
4
approximately twelve weeks after possession of the leased premises. Initial
merchandising is performed by buyers at the Company's headquarters. Selection
and training of new employees is principally handled by the newly-assigned store
manager, who is usually transferred from another store in the chain. Frame shop
personnel and floral arrangers receive special training by experienced employees
drawn from existing stores to ensure that these service functions operate
consistently throughout the chain.
RETAIL STORE OPERATIONS
The Company's stores range in size from 12,000 to 41,000 gross square
feet, based on the trade area population, with the typical store in the range of
18,000 to 22,000 square feet. About 75% of the gross square footage is devoted
to selling space, with the remainder devoted largely to framing and floral
arranging service areas and delivery, storage and office areas. Substantially
all inventory at the store level is on the selling floor. The Company's stores
are typically located in strip shopping centers. All stores are located near
major thoroughfares, are easily accessible to customer traffic, have ample
parking and present a relaxed, pleasant environment that maximizes customer
exposure to merchandise.
A typical Old America store is staffed by a manager, an assistant
manager, managers for both the frame and floral departments and an appropriate
number of other employees. Store managers are responsible for various
functions at the store level, including merchandise display and ordering,
merchandise promotion, customer service and relations, store appearance and
personnel scheduling. Assistant managers assist the store manager in his or
her duties, but focus primarily on merchandising, customer service and day-to-
day activity on the retail sales floor.
Management of store operations is organized into nine geographic
regions, each overseen by a regional manager who reports to the Director of
Store Operations. Regional managers are expected to visit each store in the
region at least monthly and are primarily responsible for store profitability
and ensuring that Company policies on inventory stock levels, customer service,
store appearance, personnel and other matters are observed. In 1995, the
Company implemented a detailed procedures manual and employee training program
designed to ensure uniformity of procedures among all stores and to establish
the means to train and evaluate all new employees in the Company.
PURCHASING
The Company's purchasing strategy is to negotiate directly with its vendors
and develop long-term relationships with them in order to obtain the most
advantageous pricing and terms consistent with the Company's quality standards.
The Company has centralized all of its initial purchasing decisions at corporate
headquarters, thereby maintaining strict control over the quality and
consistency of merchandise offered. The Company has a buying staff of four
associates, plus support staff. The Company's purchasing committee establishes
an approved list of products and suppliers, to which new merchandise is
regularly added, and places initial purchase orders. Store managers replenish
goods for their stores from the approved list according to overall inventory
limits established by the Company. Within these controls, store managers have
the authority to tailor stock levels to meet local tastes and sales demand and
to recommend that the purchasing committee approve the purchase of unique items
for their local markets. While this decentralized purchasing method has the
advantages of empowering local management and encouraging a degree of product
customization in each store, the Company introduced an advanced information
system during fiscal 1996 that centralizes certain aspects of its purchasing and
inventory management. This system includes point-of-sale (POS) scanner
technology that is linked to perpetual inventory records. All sales and
inventory information are transmitted to headquarters on a daily basis. This
allows the Company's corporate staff to more closely monitor product sales,
product margins, and inventory levels both on an individual store and Company-
wide basis. While store management continues to be involved in product mix and
ordering decisions, all purchase orders are processed at the Company's
headquarters. The Company expects this system to increase sales and
profitability by allowing management to emphasize more optimal product mixes,
reducing excess inventory and increasing the Company's ability to buy product on
more favorable terms. The Company began rollout of the new system in the Summer
of 1996 and completed the rollout during the Fall of 1996. The entire system
investment is approximately $3.5 million. The Company expects to begin
realizing the benefits of the system in fiscal 1997.
The Company has become an important customer for certain of its
suppliers, thereby helping it source products at a competitive cost. However,
no one vendor accounted for more than 6% of the total merchandise purchased by
the Company in fiscal 1996, and the Company believes that multiple suppliers
exist for all of its principal products.
5
MARKETING, ADVERTISING AND PROMOTION
Advertising focuses primarily on newsprint and free-standing color
inserts. In fiscal 1996, the Company invested approximately $7.5 million in
advertising. Item advertising, which is focused on special purchases, seasonal
merchandise and special sales events, is controlled by the corporate office and
constituted 95% of all advertising in fiscal 1996. Management's strategy in
fiscal 1997 is to reduce the number of color inserts circulated, thereby
significantly reducing its advertising costs.
Throughout the year, the Company conducts in-store promotions to attract
destination shoppers and shoppers from nearby stores. Special sales events and
promotions occur before Easter, Mother's Day and Halloween, at the start of each
Christmas buying season and during the relatively slow September period.
Beginning in fiscal 1994, the Company initiated more aggressive in-store
merchandising efforts on a year-round basis. Among these programs are new
seasonal, promotional and every day signage to direct consumers to featured
merchandise. For 1997, the Company will be enhancing its in-store signage to
better identify its key departments and special offerings.
HEADQUARTERS AND DISTRIBUTION FACILITY
The Company's headquarters is located in Howe, Texas, which is
approximately 55 miles north of Dallas. Attached to the Company's home office
is a 96,000 square foot merchandise distribution center. Most of the Company's
inventory items are purchased initially under a master agreement by the
purchasing committee, reordered by store managers and shipped by suppliers
directly to the stores. In 1996, the Company initiated a cross dock system at
its distribution facility. The Company has only one distribution center and
believes that it is adequate to support the Company's present requirements.
EMPLOYEES
The Company currently has approximately 700 full-time and 1,500 part-
time employees that will escalate to 2,000 or more part-time employees at peak
selling periods during the year. Managers of new stores are always drawn from
managers or assistant managers of existing stores. Assistant managers are
recruited from existing employees and from applicants outside the Company.
Outside candidates typically have management experience at other retail stores.
The Company believes that an ample supply of skilled management candidates
exists to meet its expansion plans.
COMPETITION
The Company's retail industry sector is highly competitive. The
Company competes against small and specialized outlets, variety stores,
furniture stores and multi-regional and national chains. This market has been
served primarily by individual stores, regional chains or small departments in
variety store chains. During the past decade, a few specialty retailers such
as the Company recognized the opportunity to exploit this growing and highly
fragmented market by offering a broad merchandise mix and highly competitive
pricing made possible by volume purchasing. This trend has led to the
development of multi-regional or national chains, including the Company.
Michaels Stores, Inc., is the Company's principal competitor. The
Company's other competitors include M.J. Designs, Inc., Hobby Lobby Stores Inc.,
Ben Franklin Retail Stores, Inc., and General Host Corporation's Frank's Nursery
& Crafts, Inc. In addition, mass merchandisers, such as Kmart Corporation, Wal-
Mart and specialty retailers such as Pier 1 Imports, Inc., typically carry some
merchandise that competes with the Company's product offerings.
Management believes that Old America is able to effectively compete
against these other companies by: (i) providing the highest level of customer
service in the industry such as providing free assistance in framing and
creating silk flower arrangements; (ii) emphasizing silk flowers and framing
which represent the fastest growing and highest margin segments in the industry;
and (iii) operating with the lowest cost structure in the industry.
6
EXECUTIVE OFFICERS
The following table sets forth certain information at the date of this
document about the executive officers of the Company:
NAME AGE POSITION
- --------------------------- --- ----------------------------------------------
Richard W. Tredinnick 47 Director, President and Chief Executive
Officer
Jim D. Schultz 44 Senior Vice President, Secretary, Treasurer
and Chief Financial Officer
Jerry R. Payton 49 Senior Vice President and Chief Operating
Officer
Ron Mitchum 50 Vice President - Merchandising
James M. Stroud 51 Vice President - Advertising and Marketing
Roy W. Morton 57 Vice President - Human Resources
Paul D. Sammons 40 Vice President - Controller
Phillip B. Greene 27 Vice President - Management Information
Systems
Richard W. Tredinnick. Mr. Tredinnick became a director, President
and Chief Executive Officer of the Company in August 1994. Previously, he had
been President of Northwest Fabrics & Crafts, a division of ConAgra, Inc., and
had held various senior executive positions, from 1987 to 1994, including
Executive Vice President-Operations and Distribution, at Country General
Stores, another ConAgra division. Prior to joining ConAgra, Mr. Tredinnick held
store management positions with The Wholesale Club, Kohl's Department Stores,
and Kmart Corporation.
Jim D. Schultz. Mr. Schultz became Vice President, Secretary,
Treasurer and Chief Financial Officer of the Company in August 1995. He was
promoted to Senior Vice President in April 1997. Prior to joining the Company,
Mr. Schultz served as Senior Vice President/Director of Accounting, Finance &
MIS from 1993 to 1995 at Tandycrafts, Inc. Prior to joining Tandycrafts, Inc.,
Mr. Schultz was a partner at Price Waterhouse from 1988 to 1993 and a manager
from 1979 to 1987. Prior to joining Price Waterhouse, Mr. Schultz held staff
and senior positions with Arthur Young & Co. from 1974 to 1979.
Jerry R. Payton. Mr. Payton became Vice President of Store Operations
in January 1997. He was promoted to Senior Vice President and Chief Operating
Officer in April 1997. Prior to joining Old America, Mr. Payton was Vice
President of Merchandising and an equity partner of Michael's of Canada. Prior
to that, Mr. Payton was involved in operations with Michael's (USA) until 1990
when he became Vice President of Merchandising.
Ron Mitchum. Mr. Mitchum became Vice President of Merchandising in January
1996. From 1992 through 1995, Mr. Mitchum was with the Mitchum Group and
provided consulting services to various warehouse clubs. From 1991 through
1992, Mr. Mitchum was the Vice President of Merchandising at Bizmart, Inc., and
from 1985 through 1991 served in various positions in the buying department of
The Wholesale Club.
James M. Stroud. Mr. Stroud became Vice President of Advertising and
Marketing in January 1997. Prior to joining the Company, Mr. Stroud held
various management positions and was most recently Vice President of Advertising
for Dupey Management Corporation (MJ Designs) from 1985 to 1996.
Roy W. Morton. Mr. Morton became Vice President of Human Resources of the
Company in September 1995. Prior to joining the Company, Mr. Morton served as
general manager of Richman Gordman 1/2 Price Stores from 1987 to 1994. Prior
to Richman Gordman, Mr. Morton was Vice President/General Manager of Peavey
Ranch & Home, a ConAgra division.
Paul D. Sammons. Mr. Sammons became Vice President - Controller in December
1996. Mr. Sammons has been the controller for Old America Stores since April
1990. Prior to joining the Company, Mr. Sammons served as manager of internal
audit at Campbell Taggart, Inc., a subsidiary of Anheuser-Busch Companies, Inc.,
from 1984 to 1990. From 1981 to 1984, Mr. Sammons was a senior auditor with
Central and Southwest Services, Inc. From 1979 to 1981, Mr. Sammons was a staff
accountant with Arthur Andersen & Co.
7
Phillip B. Greene. Mr. Greene became Vice President of Information Systems
in November 1996. Mr. Greene was Director of Information Systems from September
1995 to November 1996. Prior to joining the Company, Mr. Greene held various
technical positions from 1993 to 1995 at Tandycrafts Inc. Prior to joining
Tandycrafts, Mr. Greene was Technology Coordinator for Price Waterhouse from
1989 to 1993.
ITEM 2. PROPERTIES
Since its founding in 1980, the Company has grown from a single store to a
chain of 102 stores located in 25 states primarily in the Southeastern,
Midwestern and Southwestern United States. The Company's store locations are
shown below:
State Number of Stores State Number of Stores
- ------------ ---------------- -------------- ----------------
Alabama 5 Mississippi 2
Arizona 10 New Mexico 1
California 1 North Carolina 7
Colorado 2 Ohio 2
Florida 14 Oregon 1
Georgia 7 South Carolina 8
Idaho 1 Tennessee 4
Iowa 1 Texas 6
Kansas 1 Virginia 4
Kentucky 4 Washington 1
Louisiana 12 Wisconsin 2
Michigan 1 Wyoming 1
Minnesota 4
The Company owns its headquarters and distribution facilities, which are
located on an approximate 20-acre tract of land in Howe, Texas.
All of the Company's stores are operated under lease agreements with non-
affiliated third parties, which typically provide for initial lease terms of
three to five years, with renewal options generally allowing for an additional
ten to twenty years beyond the initial lease terms. No third party leases more
than three stores to the Company other than the Kmart Corporation, which leases
eighteen stores to the Company.
ITEM 3. LEGAL PROCEEDINGS
The Company and an officer and director of the Company are presently named
defendants in a lawsuit which alleges breach of contract and fraud. The
plaintiff alleges damages in excess of $10,000,000. The Company has filed a
motion for summary judgment to dismiss all complaints named in the suit and is
awaiting the court's ruling. The Company believes the claims are without merit
and intends to vigorously defend itself regarding the claims.
The Company is also a defendant from time to time in routine lawsuits
incidental to its business. The Company believes that none of such current
proceedings, individually or in the aggregate, will have a material adverse
effect on the operations, financial position or cash flows of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the stockholders of the Company
during the fourth quarter of the fiscal year ended January 31, 1997.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Common Stock of the Company is traded in the NASDAQ National Market
System under the symbol "OASI". Public trading of the Common Stock commenced
on May 5, 1993. Prior to that date, there was no public market for the Common
Stock.
The following table sets forth, for the periods indicated, the high and low
closing sales prices for the Common Stock, as reported by NASDAQ.
High Low
------- ------
Fiscal Year Ended January 31, 1996:
First Quarter $13.75 $12.13
Second Quarter 14.75 10.50
Third Quarter 11.75 8.38
Fourth Quarter 9.50 7.75
Fiscal Year Ended January 31, 1997:
First Quarter $ 9.38 $ 7.38
Second Quarter 9.00 7.00
Third Quarter 8.25 5.00
Fourth Quarter 5.63 3.88
Fiscal Year Ending January 31, 1998:
First Quarter $ 5.75 $ 4.43
On April 25, 1997, the closing sale price of the Common Stock as reported
by NASDAQ was $5.25 per share. As of April 25, 1997, there were approximately
105 shareholders of record of the Common Stock and three shareholders of record
of the Company's non-voting common stock.
The Company has never paid cash dividends. Management presently intends to
retain any earnings for the operation and expansion of the Company's business
and does not anticipate paying cash dividends in the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial and
operating data for the Company. The selected consolidated financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and notes thereto included elsewhere in this document. The Company's fiscal
year is from February 1 through January 31. Accounting periods consist of
thirteen (13) 28-day periods with the first, second and fourth quarters
containing three periods each, and the third quarter containing four periods.
9
1996 1995 1994 1993 1992
------------ ----------- ----------- ----------- -----------
(dollars in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Net sales............................... $ 135,775 $ 134,606 $ 117,943 $ 95,953 $ 83,462
Cost of sales (including occupancy 95,267 84,010 73,630 58,060 50,011
costs)................................. ---------- ---------- ---------- ---------- ----------
Gross profit............................ 40,508 50,596 44,313 37,893 33,451
Selling, general &
administrative expenses............... 46,224 40,344 34,410 27,743 23,739
Depreciation............................ 2,706 2,175 1,461 1,087 829
Financial advisory fees (1)............. - - - 92 400
Amortization of goodwill &
intangibles.......................... 527 517 456 934 1,194
Nonrecurring expenses(2)................ - - - 336 72
Interest expense, net................... 1,777 1,325 832 1,248 4,100
---------- ---------- ---------- ---------- ----------
Income (loss) before provision
for income taxes and extraordinary
item................................ (10,726) 6,235 7,154 6,453 3,120
Income tax expense (benefit)............ (4,290) 2,324 3,000 2,573 1,412
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary item. (6,436) 3,911 4,154 3,880 1,708
Extraordinary item (net of taxes)....... - - - 943 -
---------- ---------- ---------- ---------- ----------
Net income (loss)....................... $ (6,436) $ 3,911 $ 4,154 $ 2,937 $ 1,708
========== ========== ========== ========== ==========
EARNINGS PER COMMON SHARE DATA:
Net income (loss)....................... $(1.42) $0.87 $0.92 $0.73 $0.99
========== ========== ========== ========== ==========
Common shares and equivalents
outstanding.......................... 4,521,558 4,513,322 4,512,778 4,018,266 1,724,748
========== ========== ========== ========== ==========
STORE DATA:
Stores at beginning of period........... 94 91 74 62 52
Stores opened during period............. 9 4 17 13 11
Stores closed during period............. 1 1 0 1 1
---------- ---------- ---------- ---------- ----------
Stores at end of period................. 102 94 91 74 62
========== ========== ========== ========== ==========
Comparable stores:
Net sales increase (decrease)(3)..... (2.8%) 1.9% 5.5% 1.4% 5.8%
Average store net sales.............. $ 1,437 $ 1,438 $ 1,551 $ 1,543 $ 1,531
BALANCE SHEET DATA:
Working capital......................... $ 38,138 $ 37,751 $ 29,165 $ 23,799 $ 14,907
Total assets............................ 96,624 87,991 76,060 60,602 49,922
Total short-term debt................... 29 26 39 59 2,307
Total long-term debt.................... 23,571 16,779 8,534 3,823 26,236
Stockholders' equity.................... 45,498 51,842 47,735 43,527 1,828
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(1) Includes management fees paid to Overseas Partners Inc. ("Overseas
Partners", which is associated with a stockholder), $400,000 in 1992, and
$92,000 in 1993.
(2) Primarily represents expenses incurred in connection with assisting a
former controlling stockholder in his efforts to liquidate his investment
in the Company. In addition, a payment was made in 1993 to Overseas
Partners of $300,000 to terminate a management agreement.
(3) Comparable stores are stores that were open for all of both periods being
compared.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
"Selected Consolidated Financial Data" and the consolidated financial statements
and related notes thereto included elsewhere in this document.
GENERAL
Old America is a leading specialty retailer of home decorating
products and arts and crafts items. Since its founding in 1980, the Company
has grown from a single store to a chain of 102 stores. New store openings
have principally been funded by equity capital, borrowings and internally
generated cash flows. Key factors affecting net sales include new store
openings, the number of stores in operation and their relative maturity,
competition and changes in merchandise mix and product presentation.
The Company has had significant sales increases from 1991 through
1995. Such increases were attributable to sales at new stores i.e., stores
opened after the prior comparable period began and, to a lesser extent, to
increases in sales at comparable stores i.e., stores open for all of both
periods being compared. Sales increases in fiscal 1996 were less than prior
years due to the Company experiencing a comparable store sales decline of 2.8%
which was partially offset by revenues from nine new stores opened in the second
half of the year.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statement of operations data of the Company expressed as a percentage of sales:
Fiscal Year
-----------------------
1996 1995 1994
-----------------------
STATEMENT OF OPERATIONS DATA:
Net sales............................... 100.0% 100.0% 100.0%
Cost of sales (including occupancy 70.2 62.4 62.4
costs)................................. ----- ----- -----
Gross profit............................ 29.8 37.6 37.6
Selling, general & administrative 34.0 30.0 29.2
expenses...............................
Depreciation............................ 2.0 1.6 1.2
Amortization of goodwill & intangibles.. 0.4 0.4 0.4
Interest expense, Net................... 1.3 1.0 0.7
----- ----- -----
Income (loss) before provision for (7.9) 4.6 6.1
income taxes...........................
Provision for income taxes (benefit).... (3.2) 1.7 2.5
----- ----- -----
Net income (loss)....................... (4.7)% 2.9% 3.5%
===== ===== =====
COMPARISON OF FISCAL 1996 WITH FISCAL 1995
Fourth Quarter Charges. The Company's operations were negatively impacted
in fiscal 1996 as a result of management's decision in the fourth quarter to
writedown/discount a significant amount of merchandise which was deemed to be
discontinued merchandise. This decision was reached as a result of information
derived from the Company's new POS system completed in the third quarter as well
as the plan-o-gramming of merchandise for key vendors in quarter three. These
fourth quarter charges reduced earnings by $10.3 million. The Company also
recorded a $1.5 million charge for the writedown of leasehold improvements and
the possible buyout costs associated with the relocation of up to sixteen
underperforming store locations scheduled for fiscal 1997. Finally, an
additional charge of $300,000 was also recorded for severance payments for three
executives terminated in the fourth quarter and $300,000 to write off cash
registers in stores which were replaced with the Company's new POS system.
Net Sales. Net sales in fiscal 1996 increased $1,169,000 or 0.9% from
$134,606,000 in fiscal 1995. Comparable store sales decreased $3,451,000 or
2.8% for the same stores open for the previous fiscal year. The increase in
total net sales is attributable to the addition of eight net new stores opened
in fiscal 1996 which contributed $4,656,000 in net sales. The decrease in same
store sales primarily relates to discounting during the year that amounted to
$10,304,000 as compared to
11
discounts of $2,109,000 in 1995. Discounting was used extensively in 1996 to
meet competitive pressures and enhance the sales of discontinued merchandise.
Gross Profit. Gross profit in fiscal 1996 decreased $10,088,000 or 19.9%
to $40,508,000 or 29.8% of net sales, from $50,596,000 or 37.6% of net sales in
fiscal 1995. This decrease in gross profit was attributable to the
markdown/discounting of discontinued merchandise which reduced gross margin by
approximately $10.3 million in the fourth quarter of 1996.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased $5,881,000 or 14.6% to $46,224,000 or 34.0% of
net sales, from $40,344,000 or 30.0% in fiscal 1995. This 4.0% increase
primarily represents a charge of $1.5 million to write off leasehold costs and
accrue for estimated buy-out costs for stores identified as underperforming that
will be relocated in fiscal 1997. In addition, a charge of $600,000 was
recorded for severance costs related to the termination of three executives of
the Company and the write off of store cash registers replaced when POS was
installed in all stores.
Interest Expense. Interest expense increased $451,000 from $1,325,000 in
fiscal 1995 to $1,776,000 in fiscal 1996. This increase reflects increased
borrowings used to finance the Company's operating losses and to fund the
opening of 9 new stores.
Net Income. Net income decreased $10,346,000 from income of $3,911,000 in
fiscal 1995 to a loss of $6,436,000 in fiscal 1996. Income tax benefit was
$4,290,000 or 40.0% of pretax earnings, which is higher than the statutory rate
due to the effects of state income taxes, and to the add back of the
amortization of goodwill, which is not deductible for income tax purposes.
COMPARISON OF FISCAL 1995 WITH FISCAL 1994
Net Sales. Net sales in fiscal 1995 increased $16,662,000 or 14.1% from
$117,943,000 in fiscal 1994. Comparable store sales increased $2,027,000 or
1.9% over the same stores open for the previous fiscal year. The balance of the
increase in sales over the prior year is attributable to the addition of three
net new stores opened in fiscal 1995, plus the maturation of the seventeen new
stores opened in fiscal 1994, which together contributed $14,595,000 in
increased net sales in fiscal 1995.
Gross Profit. Gross profit in fiscal 1995 increased $6,283,000 or 14.2% to
$50,596,000 or 37.6% of net sales, from $44,313,000 or 37.6% of net sales in
fiscal 1994. Although a change did not occur in the percent to sales
relationship of gross profit, the dollar increase reflects the increase in net
sales of 14.1%.
Selling, General and Administrative Expenses. Selling, General and
Administrative Expenses increased $5,943,000 or 17.2%, to $40,344,000 or 30.0%
of net sales, from $34,410,000 or 29.2% of net sales in fiscal 1994. This 0.8%
increase primarily reflects increased advertising and marketing costs, which
include the free-standing color insert advertising program initiated in fiscal
1995.
Interest Expense. Interest expense increased $493,000, from $832,000 in
fiscal 1994 to $1,325,000 in fiscal 1995. This increase represents the effect
of additional borrowings for 4 new stores and the cost of remodeling 79 stores
during fiscal 1995.
Net Income. Net Income decreased $243,000 from $4,154,000 to $3,911,000 in
fiscal 1995. Income tax expense was $2,324,000, or 37.3% of pretax earnings,
which is higher than the statutory rate due to the effects of state income
taxes, and to the add back of the amortization of goodwill, which is not
deductible for income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary needs for liquidity are to maintain inventory
for the Company's existing stores, to support seasonal inventory demands, and to
fund the costs of opening new stores, including capital improvements, initial
inventory and pre-opening costs. In fiscal 1996, the Company relied on
internally generated funds, credit made available by suppliers and its revolving
credit line to finance operating losses, inventory growth for new stores and
capital expenditures related to new store openings and the installation of POS
in all stores.
12
Inventories have continued to grow as a result of the new stores opened in
the past several years. The fiscal 1996 merchandise inventories, including the
distribution center, were $56,906,000 or $558,000 per store based on 102
operating locations, which represents a 1.1% decrease in average store inventory
over the fiscal 1995 average of $564,000 per store. The decrease in the fiscal
1996 average store inventory is due to a $10.3 million inventory markdown of
non-go-forward merchandise in the fourth quarter of 1996.
Capital expenditures were $4,833,000 in fiscal 1996, $6,711,000 in fiscal
1995, and $5,311,000 in fiscal 1994. Capital outlays in fiscal 1996 were
largely for fixtures and leasehold improvements at new store sites and capital
expenditures related to store computer enhancements.
Historically, the amount borrowed under the Company's revolver has varied
based on the Company's seasonal requirements and the level of new store
openings, generally reaching a maximum amount outstanding during the beginning
of the fourth quarter of each fiscal year. The outstanding balance as of
January 31, 1997 was $23,571,000 and $16,750,000 on January 31, 1996.
The Company's present revolving credit facility, which expires in May 1999,
allows for advances of up to 50% of the Company's inventories to a maximum of
$30,000,000. The facility bears interest at prime or LIBOR plus 2.5 %, at the
Company's option. The facility is secured by all the assets of the Company.
Under the facility, the Company is required to comply with certain covenants and
is also prohibited from paying dividends. As a result of fourth quarter charges
discussed above, the Company was in non-compliance at year end regarding certain
financial covenants contained in its credit facility. Subsequent to year end,
the Company's lenders agreed to waive or amend such covenants, and, accordingly,
the Company is presently in compliance with all covenants under the agreement.
The Company believes that cash from operations and income tax refunds related to
the Company's fiscal 1996 losses, together with borrowings under the revolving
loan facility, will be sufficient to fund the relocation of up to sixteen stores
planned for fiscal 1997.
SEASONALITY
The Company's business is seasonal, with its highest sales levels occurring
in its third and fourth quarters. These quarters, which include the Halloween
and Christmas seasons, have accounted for an average of approximately 61% of net
sales during the past three full years. Inventory and working capital
requirements are also seasonal, with the Company's highest levels occurring in
the third and fourth quarters.
The following table shows net sales, in thousands, for the Company in each
quarter during fiscal 1996, 1995 and 1994:
Fiscal Year 1996 1995 1994
- ------------ ----------------------------------------------------------
Net Sales Percent Net Sales Percent Net Sales Percent
--------- ------- --------- ------- --------- -------
First Quarter $27,139 20.0 $27,651 20.5 $22,265 18.9
Second Quarter 24,935 18.4 25,900 19.2 22,398 19.0
Third Quarter 37,901 27.9 39,595 29.4 34,939 29.6
Fourth Quarter 45,800 33.7 41,459 30.8 38,341 32.5
Year-to-year comparisons of quarterly net sales are affected by a variety
of factors, including the timing and duration of holiday selling seasons, the
timing of new store openings, promotional mark-downs and weather conditions.
INFLATION
The Company's primary costs, merchandise and labor, are somewhat affected
by a number of factors that are beyond the Company's control, including the
price of merchandise, the competitive climate and general and regional economic
conditions. As is typical in the Company's industry, the Company has generally
been able to maintain margins by adjusting its selling prices. As a result,
inflation has not had a material adverse effect on the Company's results of
operations or financial condition.
13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is contained in a separate section of
this Report. See "Index of Financial Statements and Schedules" on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants on accounting
and financial disclosure during the year.
14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the directors and executive officers of the
Company is set forth in the Proxy Statement to be delivered to stockholders in
connection with the Company's Annual Meeting of Stockholders to be held on June
19, 1997 (the "Proxy Statement"), under the headings "Election of Directors",
"Executive Officers" and "Disclosure Pursuant to Section 16 of the Exchange
Act", which information is incorporated herein by reference. The name, age and
position of each executive officer of the Company is set forth under "Executive
Officers" in Item 1 of this report, which information is incorporated herein by
reference.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning executive compensation is set forth in the Proxy
Statement under the heading "Executive Compensation", which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial owners
and management is set forth in the Proxy Statement under the heading "Security
Ownership of Certain Beneficial Owners, Directors and Management", which
information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information concerning certain relationships and related transactions
is set forth in the Proxy Statement under the headings "Executive Compensation",
which information is incorporated herein by reference.
15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial statements:
The financial statements filed as a part of this report are listed in the
Index to Consolidated Financial Statements on page F-1.
(2) Financial statement schedule:
No schedules have been filed separately because such information is
included in the Financial Statements or is not required.
(3) Exhibits:
The exhibits filed as a part of this report are listed under "Exhibits" at
subsection (c) of this Item 14.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed in the fourth quarter of 1996.
(c) Exhibits:
3.1 Restated Articles of Incorporation of the Registrant. (2)
3.2 Restated Bylaws of the Registrant. (2)
10.1 Credit Agreement dated as of May 31, 1996, between Old America Store,
Inc., as borrower, Old America Stores, Inc., and Old America Wholesale,
Inc., as guarantors The National Bank of Canada and Compass Bank, as
lenders, and The National Bank of Canada, as agent (the "Agent"), together
with the related (i) Guaranty Agreement dated as of the same date from Old
America Stores, Inc., in favor of the Agent, (ii) Guaranty Agreement dated
as of the same date from Old America Wholesale, Inc., in favor of the
Agent, (iii) Security Agreement dated as of the same date between Old
America Store, Inc., and the Agent, (iv) Security Agreement dated as of the
same date between Old America Stores, Inc., and the Agent, (v) Security
Agreement dated as of the same date between Old America Wholesale, Inc.,
and the Agent, and (vi) Licensing Agreement dated as of the same date
between Old America Stores, Inc., Old America Wholesale, Inc., and the
Agent. (1)
10.2 Registration Rights Agreement dated as of July 23, 1992, among the Company
and certain stockholders thereof. (2)
10.3 1992 Stock Option Plan of the Company, as amended, together with forms of
Incentive Stock Option Agreement and Non-Qualified Stock Option Agreement
under the 1992 Stock Option Plan of the Company. (3)
10.4 1993 Non-Employee Directors of Stock Option Plan of the Company and form of
Stock Option Agreement under such plan. (4)
10.5 Agreement, Consent and Waiver dated May 5, 1993, between the Company, Old
America and certain stockholders of the Company. (5)
10.6 Form of director and officer indemnification agreement used by the
Company. (2)
10.7 Employment Agreement dated August 1, 1996, between the Company and Richard
W. Tredinnick. (1)
10.8 Employment Agreement dated August 1, 1996, between the Company and Jim D.
Schultz (1)
10.9 Employment Agreement dated April 14, 1997, between the Company and Jerry R.
Payton. (1)
22 List of subsidiaries. (2)
24 Consent of Deloitte & Touche LLP (1)
27 Financial data schedule
- ---------
(1) Filed herewith.
(2) Previously filed as an exhibit to the Registrant's Registration Statement
No. 33-58388 on Form S-1 and incorporated herein by reference.
(3) Previously filed as an exhibit to the Company's Registration Statement No.
33-68878 on Form S-8 and
16
incorporated herein by reference.
(4) Previously filed as an exhibit to the Company's Registration Statement
No. 33-68880 on Form S-8 and incorporated herein by reference.
(5) Previously filed as an exhibit to the Company's Fiscal Year 1993 Form 10-K
and incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OLD AMERICA STORES, INC.
By: /s/ Richard Tredinnick
------------------------
Richard Tredinnick
President and
Chief Executive Officer
Dated: May 1, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Company and in
the capacities indicated and on the dates indicated.
Signature Capacity Date
- ------------------------ -------------------------------- -----------
/s/ Richard Tredinnick President and Chief May 1, 1997
- ------------------------ Executive Officer
Richard Tredinnick (Principal Executive Officer)
/s/ Jim D. Schultz Senior Vice President, Secretary May 1, 1997
- ------------------------ Treasurer and Chief Financial
Jim D. Schultz Officer (Principal Financial
and Accounting Officer)
/s/ Peter G. Gould Chairman of the Board and May 1, 1997
- ------------------------ Director
Peter G. Gould
/s/ George L. Bragg Director May 1, 1997
- ------------------------
George L. Bragg
/s/ Arnold H. Dreyfuss Director May 1, 1997
- ------------------------
Arnold H. Dreyfuss
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
OLD AMERICA STORES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Page
-----
Independent Auditors' Report F-2
Consolidated Balance Sheets as of January 31, 1997 and 1996 F-3
Consolidated Statements of Operations for each of the three years in
the period ended January 31, 1997 F-5
Consolidated Statements of Stockholders' Equity for each of the
three years in the period ended January 31, 1997 F-6
Consolidated Statements of Cash Flows for each of the three years
in the period ended January 31, 1997 F-7
Notes to Consolidated Financial Statements F-8
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Old America Stores, Inc.
Howe, Texas
We have audited the accompanying consolidated balance sheets of Old America
Stores, Inc. and subsidiaries as of January 31, 1997, and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended January 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Old America Stores, Inc. and
subsidiaries at January 31, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended January 31,
1997, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Dallas, Texas
April 15, 1997
F-2
OLD AMERICA STORES, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
JANUARY 31,
-------------------------
ASSETS 1997 1996
-------------------------
CURRENT ASSETS:
Cash $ - $ 1,239,117
Receivables, net of allowance 5,947,955 1,067,416
Merchandise inventories 56,906,255 53,002,040
Prepaid expenses and other 1,891,893 1,444,053
----------- -----------
Total current assets 64,746,103 56,752,626
----------- -----------
Property and equipment, at cost, net 17,755,770 17,045,822
Intangible assets and deferred charges,
net 13,639,227 13,778,800
Other assets 482,916 413,830
----------- -----------
$96,624,016 $87,991,078
=========== ===========
(Continued)
F-3
OLD AMERICA STORES, INC.
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
JANUARY 31,
-------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
-------------------------
CURRENT LIABILITIES:
Accounts payable $21,813,553 $12,242,614
Accrued salaries and wages 1,190,131 1,940,484
Other accrued liabilities 3,510,308 2,815,273
Income taxes payable - 1,425,151
Current obligations under capital
leases 29,043 25,979
Deferred income taxes 65,000 552,000
----------- -----------
Total current liabilities 26,608,035 19,001,501
----------- -----------
Long-term debt 23,570,850 16,750,000
Long-term obligations under capital
leases - 28,670
Deferred income taxes 947,000 369,000
----------- -----------
Total long-term liabilities 24,517,850 17,147,670
----------- -----------
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Common Stock, par value $.01; 6,000,000
shares authorized; 3,514,500 and
3,502,226 shares issued and outstanding 35,145 35,022
Nonvoting Common Stock, par value
$.01; 1,500,000 shares authorized;
1,012,842 shares issued and outstanding 10,128 10,128
Additional paid-in capital 42,350,728 42,258,917
Retained earnings 3,102,130 9,537,840
----------- -----------
Total stockholders' equity 45,498,131 51,841,907
----------- -----------
$96,624,016 $87,991,078
=========== ===========
See notes to consolidated financial statements. (Concluded)
F-4
OLD AMERICA STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
YEARS ENDED JANUARY 31,
----------------------------------------------
1997 1996 1995
----------------------------------------------
Net sales $135,775,116 $134,605,779 $117,943,394
Cost of sales ( including occupancy
costs) 95,267,160 84,009,597 73,630,238
------------ ------------ ------------
Gross profit 40,507,956 50,596,182 44,313,156
------------ ------------ ------------
Expenses:
Selling, general and administrative 46,224,244 40,344,126 34,409,822
Depreciation 2,706,128 2,175,368 1,461,187
Amortization of goodwill and
intangibles 527,050 516,731 456,192
------------ ------------ ------------
Income (loss) before interest and
income tax expense (benefit) (8,949,466) 7,559,957 7,985,955
Interest expense, net 1,776,244 1,325,251 832,149
------------ ------------ ------------
Income (loss) before income tax expense
(benefit) (10,725,710) 6,234,706 7,153,806
Income tax expense (benefit) (4,290,000) 2,324,000 3,000,000
------------ ------------ ------------
Net income (loss) $ (6,435,710) $ 3,910,706 $ 4,153,806
============ ============ ============
Weighted average shares outstanding 4,521,558 4,513,322 4,512,778
============ ============ ============
Net income (loss) per share $(1.42) $0.87 $0.92
============ ============ ============
See notes to consolidated financial statements.
F-5
OLD AMERICA STORES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
NONVOTING
COMMON STOCK COMMON STOCK ADDITIONAL TOTAL
------------------- ------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
--------- -------- --------- -------- ------------ ------------ --------------
Balance, January 31, 1994 3,447,156 $34,472 1,012,842 $10,128 $42,008,719 $ 1,473,328 $43,526,647
Issuance of stock 22,699 227 - - 54,797 - 55,024
Net Income - - - - - 4,153,806 4,153,806
--------- ------- --------- ------- ----------- ----------- -----------
Balance, January 31, 1995 3,469,855 34,699 1,012,842 10,128 42,063,516 5,627,134 47,735,477
Issuance of stock 32,371 323 - - 195,401 - 195,724
Net Income - - - - - 3,910,706 3,910,706
--------- ------- --------- ------- ----------- ----------- -----------
Balance, January 31, 1996 3,502,226 35,022 1,012,842 10,128 42,258,917 9,537,840 $51,841,907
Issuance of stock 12,274 123 - - 91,811 - 91,934
Net Loss - - - - - (6,435,710) (6,435,710)
--------- ------- --------- ------- ----------- ----------- -----------
Balance, January 31, 1997 3,514,500 $35,145 1,012,842 $10,128 $42,350,728 $ 3,102,130 $45,498,131
========= ======= ========= ======= =========== =========== ===========
See notes to consolidated financial statements.
F-6
OLD AMERICA STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
YEARS ENDED JANUARY 31,
----------------------------------------
1997 1996 1995
----------------------------------------
Cash flows from operating activities:
Net income (loss) $(6,435,710) $ 3,910,706 $ 4,153,806
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities:
Depreciation and amortization 3,233,178 2,692,099 1,917,379
Loss on sale of equipment 101,158 - -
Write-off of leasehold improvements 1,016,132 - -
Deferred income taxes 91,000 599,000 302,000
Net change in operating assets and
liabilities:
Increase in receivables (4,880,539) (669,424) (153,009)
Increase in merchandise inventories (3,904,215) (7,365,632) (10,056,546)
Decrease (increase) in prepaid expenses (447,840) 346,387 (799,863)
Decrease (increase) in other assets (456,564) (104,779) (150,345)
Increase (decrease) in accounts payable 9,570,939 (1,866,393) 6,572,840
Increase (decrease) in other
liabilities (55,318) (360,245) 785,928
Increase (decrease) in income taxes
payable (1,425,151) 1,221,770 (1,103,217)
----------- ----------- ------------
Net cash provided by (used for)
operating activities (3,592,930) (1,596,511) 1,468,973
----------- ----------- ------------
Cash flows from investing activities:
Purchases of property and equipment,
net
Additions to property and equipment (4,833,365) (6,710,890) ( 5,310,751)
Proceeds from sale of equipment 300,000 - -
----------- ----------- ------------
Net cash used for
investing activities (4,533,365) (6,710,890) (5,310,751)
----------- ----------- ------------
Cash flows from financing activities:
Borrowings under revolving loans, net 6,820,850 8,269,979 4,750,000
Payments under capital leases (25,606) (38,592) (59,242)
Proceeds from issuance of stock 91,934 195,724 55,024
----------- ----------- ------------
Net cash provided by
financing activities 6,887,178 8,427,111 4,745,782
----------- ----------- ------------
Net increase(decrease)
in cash (1,239,117) 119,710 904,004
Cash, beginning of period 1,239,117 1,119,407 215,403
----------- ----------- ------------
Cash, end of period $ - $ 1,239,117 $ 1,119,407
=========== =========== ============
Cash payments for income taxes $ 1,585,000 $ 1,054,000 $ 3,792,000
=========== =========== ============
Cash payments for interest $ 1,742,000 $ 1,213,000 $ 780,000
=========== =========== ============
See notes to consolidated financial statements.
F-7
OLD AMERICA STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 31, 1997, 1996 AND 1995
- -------------------------------------------
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies of Old America Stores, Inc. and
its subsidiaries is presented to assist in evaluating the Company's financial
statements included in this report. These policies conform to generally
accepted accounting principles. The preparation of financial statements in
conformity with generally accepted accounting principles requires that
management make estimates and assumptions which impact the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates and assumptions.
Organization and Business-The consolidated financial statements include the
accounts of Old America Stores, Inc. and its wholly-owned operating
subsidiaries, Old America Store, Inc. and Old America Wholesale, Inc.
(collectively, the "Company"). All material intercompany balances and
transactions have been eliminated. The Company is a specialty retailer of
home decorating products and arts and crafts items and had 102 operating
retail locations in 25 states throughout the United States at the end of
1996.
Fiscal Year-Fiscal years ended January 31, 1997, 1996, and 1995, are
referred to in the financial statements as 1996, 1995 and 1994,
respectively.
Fair Value of Financial Instruments-The Company has certain financial
instruments consisting primarily of cash, accounts receivable, and debt.
The carrying values of substantially all of the financial instruments
approximate their respective fair values.
Merchandise Inventories-Inventories are recorded at the lower of cost
(first-in, first-out, as determined by the retail method) or market.
Property and Equipment-The Company records depreciation of its headquarters
building and warehouse, leasehold improvements, and furniture, fixtures and
equipment using the straight-line method over their estimated useful lives.
Intangible Assets and Deferred Charges-Cost in excess of the fair value of
net assets acquired is amortized using the straight-line method over forty
years. Financial costs incurred in connection with the issuance of debt
are being amortized using the straight-line method over the term of the
related debt, which approximates the interest method.
The Company periodically reviews the net realizable value of its intangible
assets, as well as all long-lived assets, by comparing the expected future
net operating cash flows, undiscounted and without interest charges, to the
carrying amount of the underlying assets.
Preopening Costs-The Company defers certain costs related to the initial
merchandising and set-up of store facilities incurred prior to the opening
of a store. These costs are amortized over a period of one year from the
date of the store opening. As of January 31, 1997 and 1996, preopening
expenses of approximately $238,000 and $140,000, respectively, were
included in prepaid expenses and other. During 1996, 1995 and 1994,
approximately $202,000, $1,113,000, and $1,055,000 respectively, of such
costs had been amortized and are included in the statements of operations
as occupancy costs.
Advertising Costs-Advertising costs are expensed at the beginning of the
ad period. During fiscal 1996, 1995 and 1994, advertising expense was
$7,460,000, $5,591,000 and $3,749,000, respectively.
Income Taxes-Deferred tax assets and liabilities are recorded based on the
difference between the tax basis of assets and liabilities and their
carrying amounts for financial reporting purposes, referred to as
F-8
temporary differences. Provision is made for deferred taxes relating to
temporary differences in the recognition of income and expense for
financial reporting and for income tax purposes.
Earnings Per Share-Earnings per share is calculated by dividing the net
income by the weighted average shares of common stock outstanding during
the year. Options and warrants issued, when dilutive, are considered as
exercised for all periods presented using the treasury stock method. The
Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 128 "Earnings Per Share" which is
effective for years ending after December 15, 1997. The Company does not
believe adoption will have a material impact on the calculation of
historical earnings per share.
2. PROPERTY AND EQUIPMENT
Major classifications of property and equipment are:
JANUARY 31,
------------------------
USEFUL LIVES 1997 1996
------------ ---------- -----------
Land $ 157,000 $ 157,000
Building 30 years 1,740,183 1,701,976
Leasehold improvements 3-10 years 7,815,595 7,766,943
Furniture, fixtures and equipment 3-10 years 16,019,639 13,173,996
Assets under capital lease 5 years 227,230 227,230
----------- -----------
25,959,647 23,027,145
Less accumulated depreciation and
amortization (8,203,877) (5,981,323)
---------- -----------
$17,755,770 $17,045,822
=========== ===========
3. INTANGIBLE ASSETS AND DEFERRED CHARGES
Components of intangible assets and deferred charges are as follows:
JANUARY 31,
---------------------------
1997 1996
------------ ------------
Cost in excess of fair value of net assets acquired $16,788,040 $16,789,040
Financing costs 572,850 189,455
----------- -----------
17,360,890 16,978,495
Less accumulated amortization (3,721,663) (3,199,695)
----------- -----------
$13,639,227 $13,778,800
=========== ===========
4. LONG-TERM DEBT
The Company has a revolving credit facility, which expires May 1999, with a two
bank group (the "Agreement") which provides the Company with a $30,000,000
revolving loan. The Agreement allows the Company to borrow up to 50% of the
carrying value of its merchandise inventories. Interest under the facility is
charged at the prime rate or the London Interbank Offering Rate (LIBOR) plus
2.5%, at the Company's option. Under terms of the Agreement, the Company paid
the lenders an origination fee of fifty basis points (.5%) at closing. The
Company will also pay a yearly fee of 37.5 basis points (.375%) on the unused
portion of the revolver. Any draws under the facility are secured by the assets
of the Company.
Under the Agreement, the Company is required to comply with certain covenants
and is also prohibited from paying dividends. As a result of fourth quarter
charges taken, (See note 10) the Company was in non-compliance at year end
F-9
regarding certain financial covenants contained in the Agreement. Subsequent to
year end, the Company's lenders agreed to waive or amend such covenants, and,
accordingly, the Company is presently in compliance with all covenants.
5. INCOME TAXES
Income tax expense (benefit) consists of the following:
1996 1995 1994
----------- ---------- ----------
Federal:
Current $(3,708,000) $1,518,000 $2,150,000
Deferred 81,000 547,000 262,000
State:
Current (673,000) 207,000 548,000
Deferred 10,000 52,000 40,000
----------- ---------- ----------
$(4,290,000) $2,324,000 $3,000,000
=========== ========== ==========
The reasons for the differences between income tax expense and the amount
computed by applying the statutory federal income tax rate to earnings
before income taxes are as follows:
1996 1995 1994
----------- ---------- ----------
Income tax expense at statutory rate $(3,646,740) $2,175,023 $2,432,294
Goodwill amortization 191,319 172,630 159,172
State income taxes (675,090) 136,620 377,721
Other (159,489) (160,273) 30,813
----------- ---------- ----------
$(4,290,000) $2,324,000 $3,000,000
=========== ========== ==========
Deferred income taxes have been provided for temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities. Following is a summary of the types and amounts of the tax effect
(currently 34%) of the existing temporary differences as of January 31.
1996 1995
Deferred Tax Deferred Tax
(Assets)/Liabilities (Assets)/Liabilities
-------------------- --------------------
Insurance accruals $ (63,000) $ (75,000)
Vacation accruals (96,000) (89,000)
Rent accruals (255,000) (287,000)
Preopening expenses 93,000 53,000
Prepaid supplies 510,000 390,000
Property and equipment, net 1,188,000 607,000
Inventory 268,000 251,000
Store closings (585,000) -
Other (48,000) 71,000
---------- ---------
Net deferred tax liability 1,012,000 921,000
Less: current portion (65,000) (552,000)
---------- ---------
Deferred tax liability $ 947,000 $ 369,000
========== =========
F-10
6. COMMITMENT AND CONTINGENCIES
The Company is obligated under various capital leases for certain computer
equipment, which expire during 1997. Future minimum lease payments under
capital leases are as follows:
Minimum
Lease Payments
--------------
Total minimum capital lease payments $30,433
Less: Amount representing interest 1,390
-------
Present value of minimum lease payments $29,043
=======
The Company leases retail space and computer equipment pursuant to non-
cancelable operating leases that expire at various dates through 2016. The
future minimum lease payments under such operating leases are as follows:
Year Ending:
1997 $ 7,839,000
1998 6,772,000
1999 5,209,000
2000 3,923,000
2001 3,170,000
Thereafter 13,286,000
-----------
$40,199,000
===========
The total future minimum lease payments exclude contingent rentals which are
based upon sales volume and owner expense reimbursements. Contingent rentals
for fiscal 1996, 1995 and 1994 were approximately $597,000, $398,000, and
$437,000, respectively. Lease agreements frequently include renewal options and
require that the Company pay for utilities, taxes and insurance. Rent expense,
including contingent rental amounts, was $ 7,926,000, $7,506,000, and $6,089,000
for fiscal 1996, 1995, and 1994, respectively.
The Company and an officer and director of the Company are presently named
defendants in a lawsuit which alleges breach of contract and fraud. The
plaintiff's complaint claims damages in excess of $10,000,000. The Company has
filed a motion for summary judgment to dismiss all complaints named in the suit
and is awaiting the court's ruling. The Company believes the claims are without
merit and intends to vigorously defend itself regarding the claims.
The Company is also subject to various legal proceedings which arise in the
ordinary course of business. The Company believes none of these proceedings,
individually or in the aggregate, will have a material adverse effect on the
business, financial condition, results of operations or cash flows of the
Company.
7. STOCK OPTION PLAN
In July 1992, the Company adopted the 1992 Stock Option Plan (the "1992 Plan").
The 1992 Plan provides that officers and key employees of the Company may be
granted either nonqualified stock options or incentive stock options for the
purchase of shares of the Company's Common Stock (limited to 427,000 shares as
of January 31, 1997). Incentive stock option prices may not be less than 100%
of fair market value on the date of grant, whereas nonqualified options may be
issued at prices no less than par value. All nonqualified options have been
issued at fair market value at the date of grant. The options granted generally
become exercisable in equal installments on the first through fourth
anniversaries of the date of grant and remain exercisable until the tenth
anniversary of the date of grant, when they expire. Options which are canceled
are available for reissuance under the plan.
In 1996, the Board canceled 365,204 options previously granted with option
prices ranging from $8.25 to $13.375 and issued 257,014 replacement options at
an option price of $7.50.
In 1993, the Company adopted the Directors' 1993 Stock Option Plan (the
"Directors' Plan"). The Directors' Plan provides for the grant of options only
to directors of the Company who are not full-time employees of the Company. Up
to 60,000
F-11
shares may be granted under the Directors' Plan. Options are granted pursuant to
a fixed formula, such that each eligible director is granted (i) an initial
option to acquire 5,000 shares of common stock and (ii) on each February 15
after the date on which he becomes a director (while such director is still in
office), an option to acquire 2,000 shares of common stock. The exercise price
of the options is equal to the fair market value of the common stock on the date
of grant, and all options are immediately exercisable. Options expire ten years
from the date of grant.
The following table presents the stock option transactions for the Company
relating to the 1992 Plan and the Director's Plan:
1992 Directors
Plan Plan
--------- ---------
Options outstanding and exercisable,
January 31, 1994 ($4.77 to $16.25 per share) 237,981 20,000
Options granted ($9.50 to $13.375 per share) 204,208 8,000
Options canceled ($16.25 per share) (135,922) -
-------- ------
Options outstanding and exercisable,
January 31, 1995 ($4.77 to $13.375 per share) 306,267 28,000
Options granted ($8.25 to $11.25 per share) 105,150 8,000
Options exercised ($4.77 per share) (25,906) -
Options canceled (27,334) -
-------- ------
Options outstanding and exercisable,
January 31, 1996 ($8.25 to $13.375 per share) 358,177 36,000
Options granted ($5.25 to $7.50 per share) 377,014 6,000
Options canceled (438,026) (9,000)
-------- ------
Options outstanding and exercisable,
January 31, 1996 ($5.25 to $11.75 per share) 297,165 33,000
======== ======
The Company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees," in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123, "Accounting for Stock-Based Compensation," requires the use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB No. 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized in the Company's financial
statements.
Pro forma information regarding net income and earnings per share is required by
SFAS No. 123. This information is required to be determined as if the Company
had accounted for its employee stock options granted subsequent to December 31,
1994, under the fair value method. The fair value of options granted in 1995
and 1996 reported below has been estimated at the date of grant using the Black-
Scholes option pricing model with the following weighted average assumptions:
1996 1995
------ ------
Expected life (in years) 5 6
Risk-free interest rate 6% 6.5%
Volatility 48% 48%
Dividend yield 0 0
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's options have characteristics significantly different from those of
traded options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in the opinion of management, the
existing models do not necessarily provide a reliable single measure of the fair
value of its options. The weighted average estimated fair value of shares
granted during 1996 and 1995 was $3.55 and $6.41, respectively.
F-12
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
1996 1995
----------- ----------
Pro forma net income (loss) $(6,799,996) $3,751,869
Pro forma earnings (loss) per share $ (1.50) $ .83
In 1993, an employee stock purchase plan (the "Plan") was created which allows
participating employees to purchase common shares at prices equal to 85% of the
market price of such stock, determined based on the lesser of market price at
the beginning of the measurement period and the end of the measurement period.
All employees employed for more than ninety days are eligible to participate in
the Plan. The Plan expires either when 50,000 shares have been issued under the
Plan or July 31, 1998, whichever occurs first. Purchases are made at the end of
each semiannual option period. 4,891 shares were issued during 1994, 6,465
shares were issued in 1995, and 12,274 shares were issued in 1996 under the
Plan.
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company recorded significant fourth quarter charges related to the markdown
of certain discontinued merchandise. These inventory markdowns reduced earnings
by $10.3 million during the quarter. The Company also recorded a $1.5 million
charge for the writedown of leasehold improvements and the possible buyout costs
associated with the relocation of up to sixteen underperforming store locations
scheduled for fiscal 1997. Finally, an additional charge of $300,000 was also
recorded for severance payments for three executives terminated in the fourth
quarter and $300,000 to write off cash registers in stores which were replaced
with the Company's new POS system.
The following summarizes the unaudited quarterly results of operations for the
years ended January 31, 1997 and January 31, 1996 (in thousands, except per
share data):
Fiscal year ended January 31, 1997
-----------------------------------------------
April 22 July 13 November 2 January 31
--------- --------- ---------- ----------
Net Sales $27,139 $24,935 $37,901 $45,800
======= ======= ======= =======
Gross Profit $10,377 $ 9,211 $13,764 $ 7,156
======= ======= ======= =======
Net Income (loss) $ 119 $ (313) $ (613) $(5,629)
======= ======= ======= =======
Net income per share $ 0.03 $ (0.07) $(0.14) $ (1.24)
======= ======= ======= =======
Fiscal year ended January 31, 1996
-----------------------------------------------
April 24 July 17 November 6 January 31
--------- --------- ---------- ----------
Net Sales $27,651 $25,900 $39,595 $41,459
======= ======= ======= =======
Gross Profit $10,134 $ 8,988 $14,960 $16,514
======= ======= ======= =======
Net Income $ 664 $ 101 $ 8 $ 3,138
======= ======= ======= =======
Net income per share $ 0.15 $ 0.02 $ - $ 0.69
======= ======= ======= =======
F-13