UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 30, 1996
____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________ to _______________
Commission File Number: 0-24614
BABY SUPERSTORE, INC.
(Exact Name of Registrant as Specified in Charter)
South Carolina 57-0527831
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1201 Woods Chapel Road 29334
Duncan, South Carolina (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (864)968-9292
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
At December 11, 1996, there were 19,238,908 shares of Common Stock, no par
value, outstanding.
Page 1 of 17
Exhibits Begin on Page 17
1
BABY SUPERSTORE, INC.
FORM 10-Q FOR THE QUARTER ENDED OCTOBER 30, 1996
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited):
a. Condensed consolidated balance sheets as of October 30, 1996 3-4
and January 31, 1996
b. Condensed consolidated statements of operations for the thirteen and
thirty-nine weeks ended October 30, 1996 and October 25, 1995 5
c. Condensed consolidated statements of cash flows for the thirty-nine
weeks ended October 30, 1996 and October 25, 1995 6
d. Notes to unaudited condensed consolidated financial statements - 7-9
October 30, 1996
e. Independent accountant's report on review of interim financial
information 14
Item 2. Management's Discussion and Analysis of Financial 10-13
Condition and Results of Operations
Part II. Other Information
Item 1. Legal Proceedings 15
Item 2. Change in Securities 15
Item 3. Defaults in Senior Securities 15
Item 4. Other Information 15
Item 5. Exhibits and Reports on Form 8-K 15
Signatures 16
2
Part 1 - Financial Information
Item 1. Financial Statements
BABY SUPERSTORE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
October 30, January 31,
1996 1996
(Unaudited) (1)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 44,794 $ 72,353
Marketable securities 38,984 35,292
Receivables 4,975 5,441
Merchandise inventories 100,460 101,402
Prepaid income taxes 8,867 695
Other current assets 107 396
-------- --------
Total current assets 198,187 215,579
-------- --------
PROPERTY AND EQUIPMENT, NET 66,163 52,046
-------- --------
OTHER ASSETS:
Deferred debt issuance costs 2,872 3,350
Deferred income taxes 1,155 444
Utility deposits 330 226
-------- --------
TOTAL ASSETS $268,707 $271,645
======== ========
(1) Derived from audited financial statements.
See notes to unaudited condensed consolidated financial statements.
3
BABY SUPERSTORE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(In thousands, except share data)
October 30, January 31,
1996 1996
(Unaudited) (1)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 51,621 $ 47,400
Accrued expenses 9,553 5,979
Accrued interest 389 1,760
Income taxes payable -- 272
-------- --------
Total current liabilities 61,563 55,411
OTHER DEFERRED CREDITS 2,492 2,381
4 7/8% CONVERTIBLE SUBORDINATED
NOTES DUE 2000 115,000 115,000
-------- --------
TOTAL LIABILITIES 179,055 172,792
-------- --------
SHAREHOLDERS' EQUITY:
Common Stock; no par value, 50,000,000 shares
authorized, 19,237,558 (October 30, 1996)
and 19,223,184 (January 31, 1996)
shares issued and outstanding 71,310 71,108
Retained earnings 18,342 27,745
-------- --------
Total shareholders' equity 89,652 98,853
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $268,707 $271,645
======== ========
(1) Derived from audited financial statements.
See notes to unaudited condensed consolidated financial statements.
4
BABY SUPERSTORE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
Thirteen Weeks Ended Thirty-nine Weeks Ended
October 30, October 25, October 30, October 25,
1996 1995 1996 1995
--------- --------- --------- -------
Net sales $ 111,254 $ 71,653 $ 320,588 $ 203,479
Cost of sales 81,040 51,672 251,039 145,535
--------- --------- --------- ---------
Gross profit 30,214 19,981 69,549 57,944
Selling, general and administrative 29,407 16,617 81,520 45,046
costs
Merger-related charge 1,279 --- 1,279 ---
---------- ------------ ---------- ------------
Income (Loss) from operations (472) 3,364 (13,250) 12,898
Other (income) expense (102) --- (94) 160
Interest expense 1,563 396 4,683 396
Interest income (1,108) (811) (3,332) (1,477)
---------- ---------- --------- ---------
Income (Loss) before income taxes (825) 3,779 (14,507) 13,819
Income tax provision (benefit) 173 1,444 (5,102) 5,280
---------- --------- ---------- --------
Net income (loss) $ (998) $ 2,335 $ (9,405) $ 8,539
========== ========= ========= =========
Income (Loss) per common share $ (0.05) $ 0.12 $ (0.49) $ 0.44
========= ========== ========== ==========
Weighted average common
shares outstanding 19,236 19,732 19,232 19,542
========== ========= ========= ========
See notes to unaudited condensed consolidated financial statements.
5
BABY SUPERSTORE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Thirty-nine Weeks Ended
October 30, October 25,
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (9,405) $ 8,539
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation 6,661 3,580
Amortization of debt issuance costs 478 43
Writedown and loss on disposition of property 452 174
Deferred income taxes (711) 5
Changes in assets and liabilities that provided (used) cash:
Receivables 466 (2,082)
Merchandise inventories 942 (32,814)
Prepaid income taxes (8,172) 425
Prepaid and other assets 172 (11)
Accounts payable 4,221 11,555
Accrued expenses 3,574 2,186
Accrued interest (1,371) 353
Income taxes payable (272) (187)
Other deferred credits 111 110
----------- ----------
Net cash used in operating activities (2,854) (8,124)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property additions (21,217) (16,464)
Purchase of marketable securities (3,693) ---
---------- ------------
Net cash used in investing activities (24,910) (16,464)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Public offering of Common Stock, net of offering expenses --- 28,566
Proceeds from issuance of Common Stock 205 884
Costs incurred in convertible subordinated note offering --- (3,531)
Proceeds from convertible subordinated note offering --- 115,000
Payments to redeem Common Stock --- (2)
------------- --------------
Net cash provided by financing activities 205 140,917
----------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (27,559) 116,329
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 72,353 13,682
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 44,794 $130,011
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ 4,003 $ 5,037
Interest paid $ 5,575 $ ---
See notes to unaudited condensed consolidated financial statements.
6
BABY SUPERSTORE, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
October 30, 1996
1. Basis of presentation:
The accompanying condensed financial statements are unaudited. These
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and the instructions of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements, and should be read in conjunction with the annual report.
In the opinion of management, all adjustments necessary for a fair presentation
of such financial statements have been included. Interim results are not
necessarily indicative of results that may be expected for a full year.
2. Effect of new accounting pronouncement:
The Company was required to adopt Statement of Financial Accounting
Standards (SFAS No. 121) "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" as of February 1, 1996. In accordance
with this statement, the Company evaluates long-lived assets (primarily
leasehold improvements) based on several factors including, but not limited to,
management's plans for future operations, recent operating results and projected
cash flows. When the Company commits to closing specific stores, the leasehold
improvements and certain other fixed assets are written down to fair market
value. The adoption of this statement did not have a material effect
on the Company's financial statements.
3. Inventories:
Inventories are valued at the lower of cost, as determined using the
retail method applied on the average cost basis, or market.
4. Long-term debt:
On September 27, 1995, the Company sold $115 million of 4 7/8%
convertible subordinated notes due 2000. The notes are convertible, at the
security holder's option, into Common Stock at any time on or before October 1,
2000, unless previously redeemed by the Company, at a conversion price of
$53.875 per share. Interest is payable semi-annually on April 1st and October
1st.
7
5. Income taxes:
Income taxes are provided based upon management's estimate of the
annual effective tax rate.
6. Stock split:
The Company effected a three-for-two stock split in the form of a stock
dividend in February 1995. All common share and per share data reflect this
stock split.
7. Stock options and stock purchase plan:
During the quarter ended October 30, 1996, stock options for the
purchase of 394,250 shares of Common Stock were granted at fair market value
under the Stock Incentive Plan, subject to shareholder approval at the next
annual or special meeting of an increase in the shares authorized under the
Stock Incentive Plan.
8. Net income (loss) per common share:
Net income (loss) per common share is computed based upon the weighted
average number of common and common equivalent shares outstanding. Common
equivalent shares are represented by shares under option or warrant.
The 4 7/8% convertible subordinated notes were determined not to be
Common Stock equivalents at the issuance date based on the yield to maturity and
are anti-dilutive under the "if converted" method. Therefore, the common
equivalent shares represented by the 4 7/8% convertible subordinated notes are
excluded from both the primary and fully diluted net income (loss) per share
calculations.
9. Merger agreement:
On October 2, 1996, the Company announced the execution of a definitive
Merger Agreement pursuant to which Toys "R" Us, Inc. will acquire Baby
Superstore,Inc. in an exchange of shares. Under the terms of the Agreement,
Baby Superstore shareholders will receive .8121 of a share of Toys "R" Us stock
for each Baby Superstore share, and Jack Tate, founder, Chairman and Chief
Executive Officer of Baby Superstore, will receive .5150 of a share for each
Baby Superstore share. The Merger, which has been approved by both Boards of
Directors, is subject to approval by Baby Superstore shareholders. The
transaction is anticipated to close around the end of January 1997. Mr. Tate,
holder of approximately 46% of Baby Superstore common stock, has entered into
an agreement to vote, and has granted Toys "R" Us an irrevocable proxy to vote,
his shares in favor of the merger.
8
10. Inventory adjustment:
Recently the Company determined to take steps to strengthen its
internal controls and position the Company for future growth. Among other
things, the Company has undertaken a comprehensive review of its inventory
control system and has initiated implementation of a new system that the Company
believes will enable it to better manage inventory. During the transition to the
new inventory control system, the Company will conduct full physical chain-wide
inventory counts on a quarterly basis until reliability of the system is
assured. The first of these chain-wide counts was completed at the end of July
1996, and resulted in an inventory reduction of approximately $12 million
pre-tax. The Company recorded the entire adjustment in its second quarter. An
additional chain-wide physical inventory was taken at the end of October 1996.
The book to physical adjustment arising from such count required no material
adjustment.
9
BABY SUPERSTORE, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Thirteen Weeks (Third Quarter) Ended October 30, 1996 Compared to Thirteen Weeks
(Third Quarter) Ended October 25, 1995:
During the thirteen weeks ended October 30, 1996, the Company opened
six stores, one of which was a relocation of an existing store, compared to
seven store openings, one of which was a relocation, in the comparable period of
1995. At the end of the thirteen weeks ended October 30, 1996, the Company
operated 73 stores, compared to 52 stores at October 25, 1995. During the
thirteen weeks ended October 30, 1996, sales increased 55% to $111.3 million,
compared to $71.7 million in the same period of the previous fiscal year. This
increase reflects sales from new store openings as well as a 2% decline in
comparable store sales. The Company considers stores that have not expanded and
are older than twelve months as comparable, and there were 40 such stores at
October 30, 1996. Comparable store sales were negatively impacted by opening new
stores in existing markets and by efforts to reduce inventory levels.
Gross profit was $30.2 million, or 27.2% of sales for the thirteen
weeks ended October 30, 1996 compared to $20.0 million, or 27.9% of sales for
the same period of the previous fiscal year. The decrease in gross margin was
due primarily to the increased share of business represented by commodities, a
low margin category.
Selling, general and administrative costs for the thirteen weeks ended
October 30, 1996 were $29.4 million, or 26.4% of sales, compared to $16.6
million, or 23.2% of sales for the same period of the previous fiscal year. The
increase in selling, general and administrative costs was primarily attributable
to necessary increases in infrastructure in such areas as operations, loss
prevention, accounting, inventory control and merchandising. In addition,
selling, general, and administrative costs as a percentage of sales were
adversely impacted by the lower than anticipated comparable store sales.
Merger-related charges incurred during the third quarter of 1996
related to the Toys "R" Us merger totaling $1.3 million, were included in
operating expenses for the period.
As a result of the above factors, the loss from operations for the
thirteen weeks ended October 30, 1996 was $472,000, or (0.4%) of sales, compared
to net income from operations of $3.4 million, or 4.7% of sales, for the same
period of the previous fiscal year.
Net interest expense for the quarter was $455,000, compared to net
interest income of $415,000 in the third quarter of 1995. The increase in
interest expense is due to the $115 million convertible subordinated notes,
issued September 27, 1995 which bear an interest rate of 4 7/8%.
10
Merger-related costs expensed during the quarter are not deductible for
income tax purposes. As a result the Company did not recognize an income tax
benefit for these expenses. Excluding the effect of these non-deductible
charges, the Company's effective income tax rate for the thirteen weeks ended
October 30, 1996 was 38.0%, compared to 38.2% in the comparable period in 1995.
As a result of the factors described above, the net loss for the
thirteen weeks ended October 30, 1996 was $998,000, or ($0.05) per share and
(0.9%) of sales, compared to net income of $2.3 million, or $0.12 per share and
3.3% of sales for the same period in 1995.
Thirty-nine Weeks Ended October 30, 1996 Compared to Thirty-nine Weeks Ended
October 25, 1995:
During the thirty-nine weeks ended October 30, 1996, the Company opened
14 stores, two of which were relocations of existing stores, compared to ten
store openings, including three relocations, in the comparable period of 1995.
During the thirty-nine weeks ended October 30, 1996, sales increased 58% to
$320.6 million, compared to $203.5 million in the same period of the previous
fiscal year. This increase reflects sales from new store openings as well as a
2% increase in comparable store sales. There were 40 stores included in the
comparable store calculation at October 30, 1996.
Gross profit for the thirty-nine weeks ended October 30, 1996 was $69.5
million, or 21.7% of sales, compared to $57.9 million, or 28.5% of sales for the
same period of the previous fiscal year. An inventory adjustment of
approximately $12 million was recorded in the second quarter of 1996. The
reduction related to a variety of circumstances including among others,
markdowns and inventory shrinkage. In addition to the approximate $12 million
second quarter inventory reduction, the Company incurred year-to-date markdowns
far in excess of historical levels. These markdowns were primarily related to
price reductions in national and private label apparel and shoes as well as SKU
reduction initiatives.
Selling, general and administrative costs for the thirty-nine weeks
ended October 30, 1996 were $81.5 million, or 25.4% of sales, compared to $45.0
million, of 22.1% of sales for the same period of the previous fiscal year. As
previously mentioned, the increase in selling, general and administrative
expenses as a percentage of sales is due primarily to infrastructure additions
in operations and home office support personnel.
As a result of the above factors, the loss from operations for the
thirty-nine weeks ended October 30, 1996 was $13.3 million, or 4.1% of sales,
compared to income from operations of $12.9 million, or 6.3% of sales, for the
same period of the previous fiscal year.
Net interest expense for the thirty-nine weeks ended October 30, 1996
was $1.4 million compared to net interest income of $1.1 million for the same
period of the previous fiscal year. This was primarily attributable to interest
expense associated with the Company's 4 7/8%, $115 million convertible
subordinated notes issued on September 27, 1995. The unexpended proceeds are
currently invested principally in cash equivalents or marketable securities
with maturities of one year or less.
11
As a result of the factors described above, the net loss for the
thirty-nine weeks ended October 30, 1996 was $9.4 million or ($0.49) per share
and (2.9%) of sales, compared to $8.5 million net income, or $0.44 per share and
4.2% of sales for the same period of the previous fiscal year.
LIQUIDITY AND CAPITAL RESOURCES:
Net cash used in operating activities was $2.9 million during the
thirty-nine weeks ended October 30, 1996, compared to net cash used of $8.1
million in the same period of 1995. Such decrease was due primarily to inventory
reduction efforts which lowered merchandise inventories during the thirty-nine
weeks ended October 30, 1996.
Net cash flows used in investing activities totaled $24.9 million for
the thirty-nine weeks ended October 30, 1996, compared to $16.5 million for the
same period of the previous fiscal year. This increase in cash usage was
primarily due to the purchase of $3.7 million of marketable securities during
the thirty-nine week period ended October 30, 1996 as well as increased capital
expenditures compared to the same period of 1995. Capital expenditures in 1996
related primarily to costs associated with 14 new store openings while capital
expenditures for the comparable 1995 period included costs to complete the
Company's distribution and home office facility in Duncan, SC, the purchase of
the Company's warehouse in Simpsonville, SC and costs associated with 10 new
store openings.
Net cash flows provided by financing activities were $205,000 during
the thirty-nine weeks ended October 30, 1996, compared to net cash provided of
$140.9 million in the same period of the previous fiscal year. The Company
received $28.6 million from a public offering of Common Stock in March 1995 and
$111.5 million net proceeds from the convertible subordinated note offering in
September 1995.
Cash, cash equivalents and marketable securities totaled $83.8 million
at October 30, 1996. Such amounts were invested principally in Federal agency
discount notes and municipal and corporate debt securities with terms to
maturity of one year or less when purchased.
The Company estimates that capital expenditures for fiscal 1996 will be
approximately $30 to $40 million. During the remainder of fiscal 1996, the
Company plans to open approximately six additional stores, an estimated two of
which are expected to be relocations of existing stores.
Baby Superstore has never paid cash dividends on its Common Stock and
has no intention of paying cash dividends in the foreseeable future.
12
IMPACT OF INFLATION:
The Company does not believe inflation has had or is likely to have a
material adverse effect on its results of operations.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENT:
In October 1995, Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation," was issued and is effective for
the Company on February 1, 1996. As permitted by SFAS No. 123, the Company will
continue to apply APB Opinion No. 25, which recognizes compensation cost based
on the intrinsic value of the equity instrument awarded to its stock based
compensation awards to employees and will disclose the required proforma effect
on net income and earnings per share.
13
INDEPENDENT ACCOUNTANTS' REPORT
The Board of Directors
Baby Superstore, Inc.
We have reviewed the accompanying condensed consolidated balance sheets
of Baby Superstore, Inc. as of October 30, 1996 and the related condensed
consolidated statements of operations and of cash flows for the thirteen and
thirty-nine week periods ended October 30, 1996. These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to such condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet of Baby Superstore, Inc. and
subsidiaries as of January 31, 1996, and the related consolidated statements of
income and of cash flows for the year then ended (not presented herein); and in
our report dated March 29, 1996, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of January 31, 1996 is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
Deloitte & Touche LLP
November 22, 1996
14
BABY SUPERSTORE, INC.
Part II - Other Information
Item 1. LEGAL PROCEEDINGS:
None.
Item 2. CHANGES IN SECURITIES:
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES:
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
None.
Item 5. OTHER INFORMATION:
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K:
a. Exhibits:
10.1* Agreement and Plan of Merger Among Toys "R" Us Inc.,
Baby Superstore, Inc. and Jack Tate
10.2* Shareholders Agreement
10.3 Employment Agreement
10.4 Extended Benefit Agreement
10.5 Amended and Restated 1994 Baby Superstore, Inc.
Stock Incentive Plan
11.1 Computation of net income(loss) per common share
* Filed with Form 8-K dated October 2, 1996.
Incorporated herein by reference.
b. Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated
October 2, 1996 announcing the execution of a definitive
Merger Agreement with Toys "R" Us.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized.
BABY SUPERSTORE, INC.
(Registrant)
Date: December 13, 1996 /s/ Jack P. Tate
------------------------ -------------------------
Jack P. Tate
Chairman of the Board and Chief
Executive Officer
(Principal executive officer of
the Registrant)
Date: December 13, 1996 /s/ Jodi L. Taylor
------------------------ ---------------------------
Jodi L. Taylor
Chief Financial Officer
(Principal financial officer of the
Registrant)
16