1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT
For the Quarter Ended: Commission File Number:
September 29, 1996 0-21258
CHICO'S FAS, INC.
(Exact name of registrant as specified in charter)
Florida 59-2389435
(State of Incorporation) (I.R.S. Employer Identification No.)
11215 Metro Parkway, Fort Myers, Florida 33912
(Address of principal executive offices)
941-277-6200
(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, 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 practical date.
At November 5, 1996, there were 7,882,287 shares outstanding of Common Stock,
$.01 par value per share.
2
CHICO'S FAS, INC.
Index
Page
PART I - Financial Information
Item 1. Financial Statements (Unaudited):
Condensed Balance Sheets - September 29, 1996 and December 31, 1995 . . . . . . . . . . . . . . . . 3
Condensed Statements of Income for the Thirteen and Thirty-Nine Week Periods Ended
September 29, 1996 and October 1, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Statements of Cash Flows for the Thirty-Nine Weeks Ended
September 29, 1996 and October 1, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
3
CHICO'S FAS, INC.
Condensed Balance Sheets
(Unaudited)
As of As of
9/29/96 12/31/95
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 3,463,613 $ 1,099,929
Receivables, net 695,508 571,482
Inventories 9,055,363 6,775,374
Prepaid expenses 419,643 376,987
Deferred taxes 982,000 867,000
------------- -------------
Total Current Assets 14,616,127 9,690,772
------------- -------------
Land, Building and Equipment:
Cost 20,867,841 20,067,061
Less accumulated depreciation and amortization (4,501,419) (3,847,093)
------------- -------------
Land, Building and Equipment, Net 16,366,422 16,219,968
------------- -------------
Other Assets:
Deferred taxes 516,000 540,000
Other assets 631,135 558,540
------------- -------------
Total Other Assets 1,147,135 1,098,540
------------- -------------
$ 32,129,684 $ 27,009,280
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,439,157 $ 2,035,074
Accrued liabilities 2,452,779 2,467,231
Accrued income taxes 333,748 -
Current portion of notes payable and lease obligations 495,205 652,264
------------- -------------
Total Current Liabilities 6,720,889 5,154,569
------------- -------------
Noncurrent Liabilities:
Notes and capital leases payable 5,200,336 3,683,099
Credit line payable - 722,942
Deferred rent 1,476,970 1,489,720
------------- -------------
Total Noncurrent Liabilities 6,677,306 5,895,761
------------- -------------
Stockholders' Equity:
Common stock 78,821 77,825
Additional paid-in capital 7,544,891 7,087,636
Retained earnings 11,107,777 8,793,489
------------- -------------
Total Stockholders' Equity 18,731,489 15,958,950
------------- -------------
$ 32,129,684 $ 27,009,280
============= =============
Page 3
See Accompanying Notes
4
CHICO'S FAS, INC.
Condensed Statements of Income
(Unaudited)
Thirty-Nine Weeks Ended Thirteen Weeks Ended
9/29/96 10/1/95 9/29/96 10/1/95
----------------- ----------------- ----------------- ----------------
Net Sales by Company Stores $ 46,676,048 $ 43,255,773 $ 14,975,845 $ 14,569,307
Net Sales to Franchisees 1,421,912 2,200,480 666,893 699,776
----------------- ----------------- ----------------- --------------
NET SALES 48,097,960 45,456,253 15,642,738 15,269,083
Cost of Goods Sold 19,742,150 19,738,706 6,088,713 6,528,042
----------------- ----------------- ----------------- --------------
Gross Profit 28,355,810 25,717,547 9,554,025 8,741,041
General, Administrative and Store
Operating Expenses 24,208,523 22,836,637 8,116,977 7,664,398
----------------- ----------------- ----------------- --------------
Income from Operations 4,147,287 2,880,910 1,437,048 1,076,643
Interest Expense, Net 290,997 439,226 92,161 150,000
----------------- ----------------- ----------------- --------------
Income Before Taxes 3,856,290 2,441,684 1,344,887 926,643
Provision for Income Taxes 1,542,000 976,000 538,000 351,000
----------------- ----------------- ----------------- --------------
NET INCOME $ 2,314,290 $ 1,465,684 $ 806,887 $ 575,643
================= ================= ================= ==============
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE $ 0.29 $ 0.19 $ 0.10 $ 0.07
================= ================= ================= ==============
Weighted average common and
common equivalent shares
outstanding 8,093,786 7,894,796 8,148,704 7,875,100
================= ================= ================= ==============
Page 4
See Accompanying Notes
5
CHICO'S FAS, INC.
Condensed Statements of Cash Flows
(Unaudited)
Thirty-Nine Weeks Ended
9/29/96 10/1/95
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,314,290 $ 1,465,684
-------------- --------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,359,857 1,237,536
Deferred taxes (91,000) 24,000
Loss on disposal of property and equipment 195,046 23,260
Decrease in deferred rent (12,750) (29,619)
Change in assets and liabilities:
(Increase) decrease in receivables, net (124,026) 11,761
Increase in inventories (2,279,989) (1,614,889)
Increase in prepaids and other assets (10,395) (42,280)
Increase (decrease) in accounts payable 1,404,083 (372,446)
Decrease in accrued liabilities (14,454) (282,887)
Increase in accrued income taxes 333,748 187,351
-------------- --------------
Total adjustments 760,120 (858,213)
-------------- --------------
Net cash provided by operating activities 3,074,410 607,471
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets - 16,327
Purchases of land, buildings and equipment (1,573,522) (832,972)
-------------- --------------
Net cash used in investing activities (1,573,522) (816,645)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 458,251 8,167
Credit line (payments) receipts (722,942) 631,072
Principal payments on debt (4,227,322) (511,807)
Borrowings under noncurrent debt 5,587,500 -
Deferred finance costs (232,691) (137,544)
-------------- --------------
Net cash provided by (used in) financing activities 862,796 (10,112)
-------------- --------------
Net increase (decrease) in cash and cash equivalents 2,363,684 (219,286)
CASH AND CASH EQUIVALENTS - Beginning of Period 1,099,929 805,979
-------------- --------------
CASH AND CASH EQUIVALENTS - End of Period $ 3,463,613 $ 586,693
============== ==============
Page 5
See Accompanying Notes
6
CHICO'S FAS, INC.
Notes to Condensed Financial Statements
(Unaudited)
September 29, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying unaudited condensed financial statements of Chico's
FAS, Inc. (the "Company") have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. For further information, refer
to the financial statements and notes thereto for the year ended
December 31, 1995, included in the Company's Annual Report on Form 10-K
filed on March 29, 1996. The December 31, 1995 balance sheet amounts
were derived from audited financial statements included in the
Company's Annual Report.
Operating results for the thirty-nine weeks ended September 29, 1996
are not necessarily indicative of the results that may be expected for
the entire fiscal year.
Net Income Per Common and Common Equivalent Share
Net income per common and common equivalent share is computed by
dividing net income by the weighted average number of common and common
equivalent shares outstanding during the periods, adjusted to include
the number of additional shares (248,125 and 118,732 for the
thirty-nine weeks ended September 29, 1996 and October 1, 1995,
respectively, and 267,195 and 98,125 for the thirteen weeks ended
September 29, 1996 and October 1, 1995, respectively) that would have
been outstanding if the stock options granted had been exercised, with
the proceeds being used to buy shares from the market (i.e., the
treasury stock method). Net income per common and common equivalent
share represents both primary and fully diluted per share information.
2. RENEWED CREDIT FACILITIES
In September 1996 the Company renewed its $6 million letter and line of
credit facilities such that the facilities now expire in May, 1998. In
addition, the letter of credit facility was increased to $4 million and
the line of credit was modified to include any portion of the total $6
million facility which remains available after a reduction for any
outstanding letters of credit and after taking into account further
limits imposed by a borrowing base formula dependent on inventory
levels. The collateral and interest rates did not change.
Page 6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - THIRTEEN WEEKS ENDED SEPTEMBER 29, 1996 COMPARED TO
THE THIRTEEN WEEKS ENDED OCTOBER 1, 1995.
Net Sales. Net sales by Company-owned stores for the thirteen weeks ended
September 29, 1996 increased by approximately $407,000, or 2.8%, over net sales
by Company-owned stores for the comparable thirteen weeks ended October 1,
1995. The increase was the result of approximately $600,000 additional sales
from the new (or reacquired) stores not yet included in the Company's
comparable store base (net of prior year sales of approximately $344,000 from
six stores closed in 1995), and by a comparable Company-owned store net sales
decrease of approximately $193,000.
Net sales to franchisees for the thirteen weeks ended September 29, 1996
decreased approximately $33,000, or 4.7% compared to net sales to franchisees
for the thirteen weeks ended October 1, 1995. The Company believes that the
decrease in net sales to franchisees was primarily caused by the Company
acquiring five franchises in 1995 and one franchise closing in early 1996
accounting for approximately $21,000 of the decrease.
Gross Profit. Gross profit for the thirteen weeks ended September 29, 1996 was
$9.6 million, or 61.1% of net sales, compared with $8.7 million, or 57.2% of
net sales for the thirteen weeks ended October 1, 1995. The increase in the
gross profit percentage primarily resulted from a revised merchandising
strategy for the Company's outlet stores which resulted in significantly higher
margins for these seven stores.
General, Administrative and Store Operating Expenses. General, administrative
and store operating expenses increased to $8.1 million, or 51.9% of net sales,
in the thirteen weeks ended September 29, 1996 from $7.7 million, or 50.2% of
net sales, in the thirteen weeks ended October 1, 1995. The increase in
general, administrative and store operating expenses was, for the most part,
the result of increases in store operating expenses, including store
compensation, occupancy and other costs associated with additional store
openings. The increase in these expenses as a percentage of net sales was
principally due to an increase in marketing costs. To a lesser degree, the
increase resulted from current period expenses associated with a Company-wide
refixturing program and from an increase in accruals for contributions to the
Company's retirement plan.
Interest Expense, Net. Net interest expense decreased to approximately $92,000
in the thirteen weeks ended September 29, 1996 from approximately $150,000 in
the thirteen weeks ended October 1, 1995. This decrease was primarily a
result of increased interest income due to improved cash flow generated from
the Company's improved profitability.
Net Income. As a result of the factors discussed above, net income reflects an
increase of 40.2% to approximately $807,000 in the thirteen weeks ended
September 29, 1996 from net income of approximately $576,000 in the thirteen
weeks ended October 1, 1995.
Page 7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS - THIRTEEN WEEKS ENDED SEPTEMBER 29, 1996 COMPARED TO
THE THIRTEEN WEEKS ENDED OCTOBER 1, 1995. (CONTINUED)
Comparable Company Store Net Sales. Comparable Company store net sales
decreased by 1.3% in the thirteen weeks ended September 29, 1996 when compared
to the comparable period in fiscal 1995. Comparable Company store net sales
data is calculated based on the change in net sales of currently open
Company-owned stores that have been operated as a Company store for at least
thirteen months (106 stores).
The Company believes that the decrease in comparable Company store net sales
resulted from the introduction of the Company's fall line, including darker
colors and heavier fabrics, too early in the summer transition season. The
Company also believes that some of the changes that the Company implemented in
merchandise design, construction, fabric and product assortment tended to
focus on a less resort-wear based customer. As a result, the Company believes
that it needs additional time to carry out more effective and focused marketing
efforts in order to promote its new merchandise look. The Company believes this
change in merchandise direction provides the Company with access to a larger
customer base in the 35-55 age group.
RESULTS OF OPERATIONS - THIRTY-NINE WEEKS ENDED SEPTEMBER 29, 1996 COMPARED TO
THE THIRTY-NINE WEEKS ENDED OCTOBER 1, 1995.
Net Sales. Net sales by Company-owned stores for the thirty-nine weeks ended
September 29, 1996 increased by $3.4 million, or 7.9%, over net sales by
Company-owned stores for the comparable thirty-nine weeks ended October 1,
1995. The increase was the result of approximately $968,000 in additional
sales generated through a warehouse sale held at the Company's headquarters and
at a temporary outlet store located in Florida that has since been closed, $1.6
million in additional sales from the new (or reacquired) stores not yet
included in the Company's comparable store base (net of prior year sales of
$1.5 million from six stores closed in 1995), and by a comparable Company-owned
store net sales increase of approximately $824,000.
Net sales to franchisees for the thirty-nine weeks ended September 29, 1996
decreased approximately $779,000, or 35.4% compared to net sales to franchisees
for the thirty-nine weeks ended October 1, 1995. The decrease in net sales to
franchisees was principally caused by an approximate $423,000 decrease in net
sales to franchisees resulting from the acquisition of five franchises by the
Company during 1995 and the closing of one franchise in early 1996. Management
believes the balance of the decrease in net sales to franchisees resulted in
part from conservative buying positions established by the franchisees as the
Company began delivering its new designs and styles in late March 1996,
combined with increased returns of older merchandise in anticipation of a new,
more restrictive return policy which became effective in July 1996.
Gross Profit. Gross profit for the thirty-nine weeks ended September 29, 1996
was $28.4 million, or 59.0% of net sales, compared with $25.7 million, or 56.6%
of net sales for the thirty-nine weeks ended October 1, 1995. The increase in
the gross profit percentage primarily resulted from improved gross margins
related to the Company's new spring and summer goods, and an increase in the
Company's outlet gross margins due to a change in its merchandising strategies.
To a lesser degree, the increase in gross profit percentage was caused by an
increase in the proportion of net sales by Company-owned stores as compared to
the net sales to franchisees (which sales carry lower gross margins).
Page 8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
RESULTS OF OPERATIONS - THIRTY-NINE WEEKS ENDED SEPTEMBER 29, 1996 COMPARED TO
THE THIRTY-NINE WEEKS ENDED OCTOBER 1, 1995. (CONTINUED)
General, Administrative and Store Operating Expenses. General, administrative
and store operating expenses increased to $24.2 million, or 50.3% of net sales,
in the thirty-nine weeks ended September 29, 1996 from $22.8 million, or 50.2%
of sales, in the thirty-nine weeks ended October 1, 1995. The increase in
general, administrative and store operating expenses was, for the most part,
the result of increases in store operating expenses, including store
compensation, occupancy and other costs associated with additional store
openings. The increase in these expenses as a percentage of net sales was
principally due to increased marketing costs.
Interest Expense, Net. Net interest expense decreased to approximately
$291,000 in the thirty-nine weeks ended September 29, 1996 from approximately
$439,000 in the thirty-nine weeks ended October 1, 1995. This decrease was
primarily a result of increased interest income due to improved cash flow
generated from the Company's improved profitability since the beginning of
1996.
Net Income. As a result of the factors discussed above, net income reflects an
increase of 57.9% to $2.3 million in the thirty-nine weeks ended September 29,
1996 from net income of $1.5 million in the thirty-nine weeks ended October 1,
1995. The income tax provision represented an effective rate of 40.0% for both
the thirty-nine weeks ended September 29, 1996 and October 1, 1995.
Comparable Company Store Net Sales. Comparable Company store net sales
increased by 2.0% in the thirty-nine weeks ended September 29, 1996 when
compared to the comparable period in fiscal 1995. Comparable Company store net
sales data is calculated based on the change in net sales of currently open
Company-owned stores that have been operated as a Company store for at least
thirteen months (106 stores).
The Company believes that the increase in comparable Company store net sales
reflects improvements in the merchandise offered by the Company, including
changes in merchandise design, construction, fabric and product assortment. In
addition, the Company believes the increase is also attributable to an increase
in average price points and a general improvement in the women's retail apparel
environment in the second quarter of 1996.
In March 1996 the Company moved to a more full price environment in its
Company's front-line stores, while continuing inventory clearance via a local
warehouse sale which was not included in the comparable store sales base.
During 1995, inventory was still being cleared via sidewalk sales at individual
Company-owned stores. Due to this change in inventory clearance strategies,
the Company excluded approximately $176,000 in the first thirty-nine weeks of
1995 local store sales to more accurately portray its year-over-year sales. See
the Company's Annual Report on Form 10-K and Annual Report to Stockholders for
the fiscal year ended December 31, 1995 for a more detailed description of the
comparable company store sales trends appearing on page 6 of the Annual Report
to Stockholders, and the status of the Company's transition plan appearing on
page 2 and 3 of the Company's Annual Report on Form 10-K; such portions of the
Annual Report to Stockholders and Annual Report on Form 10-K are incorporated
by reference into this Quarterly Report.
Page 9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary ongoing capital requirements are for funding capital
expenditures related to new store openings, refixturing and remodeling of
existing stores and merchandise inventory purchases.
During the first thirty-nine weeks of fiscal 1996 and the first thirty-nine
weeks of fiscal 1995, the Company's primary source of working capital was cash
flow from operations of $3.1 million and approximately $607,000, respectively.
The increase in cash flow from operations was primarily due to an increase in
accounts payable in fiscal 1996 of $1.4 million principally related to large
receipts of merchandise near the end of the quarter for which payment had not
yet been made. This compares to a decrease in accounts payable of
approximately $372,000 in fiscal 1995 due to payments of the final liabilities
related to the Company's new combined corporate headquarters, distribution
center and woodshop. Approximately $849,000 of the increase in cash flow was
due to improved overall profitability of the Company. This increase in cash
flow from operations was partially offset by an increase in inventories of $2.3
million, in the first thirty-nine weeks of fiscal 1996, as compared to an
increase of $1.6 million, in the first thirty-nine weeks of fiscal 1995.
In early January 1996, the Company obtained a seven year $5.6 million mortgage
facility from a lender which was in addition to the Company's then current $6
million working capital line and letter of credit facility made available by
another lender. The proceeds of the mortgage facility were used in part to
repay the $3.9 million balance of certain term and note facilities that had
been put in place in 1994 and were used in part to provide $1.6 million of cash
to serve as collateral (along with inventories and accounts receivable which
serve as collateral for both the line and letter of credit facilities) for its
letter of credit facility. As part of this refinancing, the collateral
deposits previously provided by certain shareholders to secure the letter of
credit facility were no longer required. The Company also repaid approximately
$327,000 of other indebtedness in the first thirty-nine weeks of fiscal 1996.
During the third quarter of 1996, the Company's $6 million credit facilities
were renewed with maturity in May, 1998.
Also, during the first thirty-nine weeks of fiscal 1996, the Company repaid
approximately $723,000 under its available working capital credit lines, while
in the first thirty-nine weeks of fiscal 1996, the Company borrowed
approximately $631,000 under its then available credit lines.
The Company has aggressively pursued a strategy during fiscal 1995, and
continuing into 1996, to expand and shift its vendor base to new vendors in
Hong Kong, Turkey, Guatemala, Peru, India and the U.S. This shift in vendor
base has been implemented by the Company for several reasons. First,
management was concerned that the quality and timeliness of deliveries from its
vendor base were not measuring up to the standards required for the new line of
merchandise. Second, management determined that it was important to make
further efforts to reduce its reliance on a limited number of suppliers.
Although the Company has achieved satisfactory results on the merchandise
received thus far from these new vendors, there can be no assurance that the
Company will achieve its goal of continuing to improve the quality and
timeliness of deliveries. In addition, this shift to new vendors has increased
the Company's needs for documentary letters of credit. As of September 29,
1996, the Company had issued and outstanding letters of credit which totaled
$2.2 million. The Company has letter of credit facilities totaling $4.0
million available under the recently renewed credit facilities which now mature
in May 1998. See "Item 1-Business" appearing on pages 12 through 15 of the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1995 for additional information about the impact of the shift in vendors and
the business and political risks associated with these vendors' countries; such
portions of the Annual Report on Form 10-K are incorporated by reference into
this Quarterly Report.
Page 10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company invested $1.6 million, during the first thirty-nine weeks of fiscal
1996 for capital expenditures principally associated with the opening of seven
new Company stores, the remodeling of eight existing Company stores and the
costs of new fixtures for a Company-wide refixturing program to convert all
Company stores from principally folded merchandise displays to principally
hanging displays. This refixturing effort was essentially completed with
capital expenditures of approximately $675,000. The Company further intends to
expand its store remodeling program in 1997 to include up to 30 stores for the
first six months of 1997, with a similar program for the last six months, if
management believes this is appropriate at that time. The 1997 remodeling
program would include replacing certain floors, installing hanging panel units
and other general refurbishment as deemed necessary. The cost per store is
estimated to be between $15,000 and $50,000 with an estimated 30 store cost of
between $600,000 to $900,000 The Company also closed, during this period, the
temporary store located in Florida which was used as an outlet and one store
whose lease had expired which the Company elected not to renew.
During the first quarter of 1996, one of the Company's former officers
exercised 71,540 stock options at the price of $4.08. In addition, during the
first thirty-nine weeks of fiscal 1996, several other employees exercised 7,046
options at various prices ranging from $5.50 to $8.75 and the Company sold
21,037 shares at a price of $3.83 under its Employee Stock Purchase Plan. The
proceeds from these issuances of stock amounted to approximately $458,000. In
1995, the proceeds from issuance of stock under its Employee Stock Purchase
Plan amounted to approximately $8,000.
During the first thirty-nine weeks of fiscal 1995, the Company invested
approximately $833,000 for capital expenditures associated with the opening of
five new Company stores and remodeling at four stores. During this time frame,
the Company also acquired the assets and franchise rights for five franchise
locations in exchange for two year notes of approximately $324,000, net of
receivables due to the Company. These transactions are not included in the
condensed statement of cash flows since they were noncash transactions. In
addition, the Company also repaid approximately $512,000 of indebtedness.
In the first quarter of fiscal 1995, the Company also received from a
franchisee a thirty month note of approximately $274,000 in exchange for past
due receivables to assist the franchisee through a transition period and in an
effort to help support the operations of the franchisee's most recently opened
franchised store. The note is current, with approximately $152,000 of
principal remaining to be paid.
The Company plans to open approximately 13-14 new stores in fiscal 1996, 7 of
which were open as of September 29, 1996. Previously the Company had indicated
that it was considering testing the sale of folk art and other lifestyle
accessories in one or more of its Company stores in 1996. The Company has
decided that it will postpone this test until at least late 1997 to allow it to
concentrate on its transition and new store opening programs. The Company
believes that the liquidity needed for its planned new store growth, remodel
program and maintenance of proper inventory levels associated with this growth
will be funded primarily from cash flow from operations. The Company further
believes that this liquidity will be sufficient, based on currently planned new
store openings, to fund anticipated capital needs over the near-term, including
scheduled debt repayments. If cash flow from operations should prove to be
less than anticipated or if there should arise a need for additional letter of
credit capacity due to establishing new and expanded sources of supply, or if
the Company were to increase the number of new Company stores planned to be
opened in future periods, the Company might need to seek other sources of
financing to conduct its operations or pursue its expansion plans and there can
be no assurance that such other sources of financing would be available.
Page 11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
SEASONALITY AND INFLATION
The Company has historically experienced, and expects to continue to
experience, seasonal fluctuations in its sales and net income. Historically, a
greater portion of the Company's sales have been realized during the period
from approximately November 1 through March 31, thus impacting the first and
fourth quarters. Historically, sales generated during this period have had a
significant impact on the Company's results of operations. Fewer of the
Company's new stores have been opened in warm-weather tourist locations and, as
a result, the difference in sales and net income during the first three
quarters of the fiscal year has been reduced. Moreover, performance during the
first quarter of 1995 and during the first quarter of 1996 was negatively
impacted by separate transitions needed to clear out the old merchandise and
prepare for the arrival of new designs and styles.
Even though the Company is not as dependent on the Christmas selling season as
many other retailers are, sales in the months of November and December are
still expected to continue to represent, in the future, a greater portion of
the Company's sales. If for any reason the Company's sales during November and
December do not represent increased sales activity as compared with the
remainder of the year, or if there is a decrease in availability of working
capital in the months prior to November and December, the Company's
profitability could be materially and adversely affected. The Company's
quarterly results of operations may also fluctuate significantly as a result of
a variety of factors, including the timing of new stores openings, the net
sales contributed by new stores, and store closings.
Although the operations of the Company are influenced by general economic
conditions, the Company does not believe that inflation has had a material
effect on the results of operations during the first thirty-nine weeks of
fiscal 1996 and during the first thirty-nine weeks of fiscal 1995.
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Shareholders of the Company was held on June 11,
1996. There were 7,854,038 shares of Common Stock entitled to vote. The
following matters were voted upon at the meeting:
(a) Board of Directors proposal to approve the reduction in the number of
members of the Board of Directors from seven members to five members
through the elimination of two Class II Director positions.
Voting Results: For the proposal: 7,081,819
Against the proposal: 92,912
Abstentions: 18,141
(b) Election of Director --
Votes Votes
For Withheld
----- --------
Class III - Term Expiring in 1998:
Marvin J. Gralnick 7,197,447 65,726
The terms of office for the other directors continued after the meeting as
follows: W. Keith Schilit (1997), Charles J. Kleman (1997), Helene B. Gralnick
(1998), and Verna K. Gibson (1998).
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (Continued)
(c) Board of Directors proposal to ratify the appointment of Arthur
Andersen LLP as independent certified public accountants.
Voting Results: For the proposal: 7,235,521
Against the proposal: 10,630
Abstentions: 17,022
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: 10.7 First Amendment to Third Amended and Restated
Credit Agreement
10.8 Lease Termination & Settlement Agreement
27 Financial Data Schedule (for SEC use only)
(b) Reports on
Form 8-K: The Company did not file any reports on
Form 8-K during the Thirteen weeks ended
September 29, 1996
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 11, 1996 By: /s/ Marvin Gralnick
-------------------------------
Marvin Gralnick
Chief Executive Officer
(Principal Executive Officer)
Date: November 11, 1996 By: /s/ Charles J. Kleman
--------------------------------
Charles J. Kleman
Chief Financial Officer
(Principal Financial and
Accounting Officer)
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