UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE THIRTEEN WEEKS ENDED NOVEMBER 2, 1996
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: 1-8057
L. LURIA & SON, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-0620505
(State of incorporation) (I.R.S. Employee Identification No.)
5770 MIAMI LAKES DRIVE, MIAMI LAKES, FLORIDA 33014
(Address of principal executive offices) (Zip Code)
(305) 557-9000
Registrant's telephone number, including area code:
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Common stock, par value $.01 per share: 5,451,588 shares
outstanding as of November 2, 1996
Class B stock, par value $.01 per share: 320 shares
outstanding as of November 2, 1996
L. LURIA & SON, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION Page
Item 1. Financial Statements
Condensed Balance Sheets - November 2, 1996 (Unaudited),
October 28, 1995 (Unaudited), and February 3 ,1996........................................................ 3
Condensed Statements of Operations (Unaudited) for
the thirteen and thirty-nine weeks ended November 2, 1996 and October 28, 1995............................ 4
Condensed Statements of Cash Flows (Unaudited) for
the thirty-nine weeks ended November 2, 1996 and October 28,1995.......................................... 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.......................................................................... 9
Signatures.................................................................................................................. 10
2
Item 1. Financial Statements
L. LURIA & SON, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
November 2, October 28, February 3,
ASSETS 1996 1995 1996
----------- ----------- -----------
(Unaudited) (Unaudited)
Current assets:
Cash and cash equivalents $ 1,467 $ 1,340 $ 4,941
Accounts receivable 1,210 1,252 1,129
Income tax receivable 0 0 3,392
Inventories 85,132 79,540 60,087
Prepaid expenses 3,348 2,809 1,037
Deferred taxes 756 0 756
----------- ----------- -----------
Total current assets 91,913 84,941 71,342
Property, net 28,728 39,738 38,303
Deferred taxes 4,465 0 4,466
Other assets 1,803 204 238
----------- ----------- -----------
Total assets $ 126,909 $ 124,883 $ 114,349
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------
Current liabilities
Short-term bank borrowing $ 27,732 $ 24,150 $ 0
Accounts payable and accrued liabilities 49,290 22,182 44,262
Deferred taxes 1,839 0 1,839
Current portion of long-term debt 206 206 206
----------- ----------- -----------
Total current liabilities 79,067 46,538 46,307
----------- ----------- -----------
Long-term debt 655 791 791
Deferred taxes and other liabilities 5,730 1,995 2,454
Shareholders' Equity:
Preferred stock: $1 par value, 5,000,000 shares authorized;
no shares issued -- -- --
Common stock:
Common: $.01 par value, 14,000,000 shares authorized;
5,451,588 shares issued and outstanding at
November 2, 1996; 4,076,880 shares issued and
outstanding at October 28, 1995; and 4,100,274 issued
and outstanding at February 3, 1996 41 41 41
Class B: $ .01 par value, 6,000,000 shares authorized;
320 shares issued and outstanding at November 2, 1996
1,346,634 shares issued and outstanding at
October 28, 1995 and 1,346,634 shares issued and
outstanding at February 3, 1996. 13 13 13
Additional paid-in capital 18,220 18,230 18,220
Retained earnings 23,183 57,275 46,523
----------- ----------- ------------
Total shareholders' equity 41,457 75,559 64,797
----------- ----------- ------------
Total liabilities and shareholders' equity $ 126,909 $ 124,883 $ 114,349
=========== =========== ============
See accompanying notes to condensed financial statements.
3
L. LURIA & SON, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THIRTEEN WEEKS THIRTEEN WEEKS THIRTY-NINE WEEKS THIRTY-NINE WEEKS
(in thousands, except loss ENDED ENDED ENDED ENDED
per common share) NOVEMBER 2, OCTOBER 28, NOVEMBER 2, OCTOBER 28,
1996 1995 1996 1995
-------------- -------------- ----------------- -----------------
(
Net sales $ 23,581 $ 31,150 $ 80,502 $102,892
Cost of goods sold, buying and
warehousing costs 20,127 24,930 62,050 76,295
-------- -------- -------- --------
Gross margin 3,454 6,220 18,452 26,597
Operating expenses 15,742 13,645 40,572 38,218
-------- -------- -------- --------
Loss from operations (12,288) (7,425) (22,120) (11,621)
Interest (expense), net (550) (392) (1,220) (891)
-------- -------- -------- --------
Loss before income taxes (12,838) (7,817) (23,340) (12,512)
Income tax expense (benefit) 3,947(1) (2,532) 0 (4,292)
-------- -------- -------- --------
Net loss $(16,785) $ (5,285) $(23,340) $ (8,220)
======== ======== ======== ========
Weighted average number of
common shares outstanding 5,452 5,424 5,448 5,416
======== ======== ======== ========
Loss per common share $ (3.08) $ (.97) $ (4.28) $ (1.52)
======== ======== ======== ========
- ------------------
(1) Reflects reversal of the income tax benefit recorded in the first and
second quarters of current fiscal year. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Income
Taxes."
See accompanying notes to condensed financial statements.
4
L. LURIA & SON, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THIRTY-NINE WEEKS THIRTY-NINE WEEKS
ENDED ENDED
NOVEMBER 2, 1996 OCTOBER 28, 1995
---------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
- -------------------------------------
Net loss $ (23,340) $ (8,220)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 2,849 2,968
Deferred tax benefit 0 100
Deferred loss on sale leaseback 1,672 0
Gain on sale of property (87) 0
Decrease in accounts receivable 3,311 382
(Increase) Decrease in inventories (25,045) 3,391
Increase in prepaid expenses (2,311) (93)
(Increase) Decrease in other assets (1,562) 10
(Decrease) Increase in accounts payable and accrued liabilities 5,214 (29,987)
Increase in other liabilities 3,089 0
---------- ---------
Net cash used in operating activities (36,210) (31,449)
---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
- -------------------------------------
Additions to property (4,902) (2,276)
Proceeds from sale of property 372 0
---------- ---------
Net cash applied to investing activities (4,530) (2,276)
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
- -------------------------------------
Borrowing under line of credit agreements 27,732 24,150
Repayments of long-term debt (136) (185)
Proceeds from sale leaseback 9,670 0
---------- ---------
Net cash provided by financing activities 37,266 23,965
---------- ---------
Net decrease in cash and cash equivalents (3,474) (9,760)
Cash and cash equivalents, beginning of period 4,941 11,100
---------- ---------
Cash and cash equivalents, end of period $ 1,467 $ 1,340
========== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
- -------------------------------------------------
Cash paid or (received) during the period for:
Interest (net of amounts capitalized) $ 564 $ 1,045
Income taxes (refund) $ (7,364) $ (292)
See accompanying notes to condensed financial statements.
5
L. LURIA & SON, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
FOR THE THIRTEEN WEEKS ENDED NOVEMBER 2, 1996 AND OCTOBER 28, 1995
GENERAL
The accompanying condensed financial statements have been prepared in accordance
with the instructions to Form 10-Q of the Securities and Exchange Commission and
in accordance with generally accepted accounting principles applicable to
interim financial statements and do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management of L. Luria & Son, Inc. (the
"Company"), the accompanying condensed financial statements reflect all
adjustments necessary to present fairly the financial position of the Company as
of November 2, 1996 and October 28, 1995, and the results of its operations and
cash flows for the periods ended November 2, 1996 and October 28, 1995.
Furthermore, all adjustments were of a normal or recurring nature.
SEASONALITY
The results of operations for the thirteen weeks ended November 2, 1996 are not
indicative of the results to be expected for the entire year because the
Company's operations are seasonal.
ACCOUNTING POLICIES
The accounting policies followed by the Company are set forth in Note 1 to the
Company's financial statements in the 1996 L. Luria & Son, Inc. Annual Report,
which is incorporated by reference in Form 10-K.
COMMITMENTS AND CONTINGENCIES
On November 30, 1995 the Company announced that a Florida Circuit Court jury had
returned a verdict of $13.8 million in favor of the Company in a case in which
the Company alleged that its competitor, Service Merchandise Company, had
tortiuously interfered with the Company's business relationship and business
rights at the Sawgrass Mills Shopping Center in Broward County, Florida. The
Company had executed a letter of intent with the shopping center's landlord, had
successfully negotiated a formal lease, but was unable to obtain execution of
the formal lease by the landlord. The jury decided in favor of the Company in
both of its theories: that the letter of intent was a binding contract with
which Service Merchandise had intentionally interfered and that, at the very
least, the letter of intent created a business relationship with which Service
Merchandise had intentionally and wrongfully interfered. The trial judge has
denied various post-trial motions and entered final judgment in favor of the
Company. Service Merchandise has indicated that it will appeal from the final
judgment. No award amount has been reflected in the financial statements.
The Company has received from the Internal Revenue Service (the "IRS") a
proposed adjustment to the Company's tax liability in connection with its
examination of the Company's 1992, 1993, 1994 and 1995 federal income tax
returns. The IRS has challenged certain deductions that, if disallowed, would
result in additional taxes of approximately $4 million, plus interest and
penalties. A response to the IRS has been submitted. The Company believes that
the tax returns are substantially correct as filed, and intends to vigorously
contest the proposed adjustments. The Company also believes that the amounts
that have been provided for income taxes, net of the Company's net operating
loss, are adequate. See "Income Taxes."
WORKING CAPITAL
The Company has a secured revolving credit arrangement providing for borrowings
based on the value of the Company's inventory. At November 2, 1996, there were
borrowings outstanding under the revolving credit agreement of approximately
$27.7 million and letters of credit outstanding of approximately $2.3 million,
and the unused availability under the revolving credit agreement was
approximately $3.0 million. At November 2, 1996, the Company was not in
compliance with three borrowing covenants. The Company has received waivers of
the covenants from the lender. The Company and the lender have agreed that,
effective December 15, 1996, the maximum borrowings under the credit agreement
shall be $30 million.
6
L. LURIA & SON, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUMMARY
The following table sets forth for the periods indicated percentages which
certain items reflected in the financial data bear to net sales of the Company:
RELATIONSHIPS TO NET SALES
FOR THE PERIODS ENDED
Thirty-nine Weeks
THIRTEEN WEEKS THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS
ENDED ENDED NOVEMBER 2, ENDED
NOVEMBER 2, 1996 OCTOBER 28, 1995 1996 OCTOBER 28, 1995
---------------- ---------------- ----------------- -----------------
Net sales 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Cost of goods sold, buying and
warehousing costs 85.3 80.0 77.1 74.2
----- ----- ----- -----
Gross margin 14.7 20.0 22.9 25.8
Operating expenses 66.8 43.8 50.4 37.1
----- ----- ----- -----
Loss from operations (52.1) (23.8) (27.5) (11.3)
Interest (expense), net (2.3) (1.3) (1.5) (.9)
----- ----- ----- -----
Loss before income taxes (54.4) (25.1) (29.0) (12.2)
Income tax expense (benefit) 16.7(1) (8.1) 0 (4.2)
----- ----- ----- -----
Net loss (71.1)% (17.0)% (29.0)% (8.0)%
===== ===== ===== =====
- ------------------
(1) Reflects reversal of the income tax benefit recorded in the first and
second quarters of current fiscal year. See "-Income Taxes."
NET SALES
For the thirteen weeks ended November 2, 1996, net sales were $23.6 million, a
24.3% decrease compared to the same period last year. Comparable store sales
decreased 19.3%. The Company believes these decreases were primarily
attributable to (i) greater discounts and promoted products sold at lower
margins as the Company reduced its inventory in significant categories in
preparation for new product lines planned for the current year's holiday season
as part of its newly remodeled store merchandise strategy, (ii) implementation
of the Company's newly remodeled store merchandise strategy, including the
renovation of approximately 26 stores during the quarter and realignment and
redistribution of jewelry inventory resulting in limited selection of jewelry
inventory at various times and at various stores throughout the quarter, and
(iii) changes in advertising programs. Sales for the thirty-nine weeks ended
November 2, 1996 decreased $22.4 million or 21.8% compared to the same period
last year, while comparable store sales decreased 23.2%. These comparative
period percentage sales decreases are not expected to improve in the fourth
quarter. As of November 2, 1996, the Company operated 43 stores.
GROSS MARGINS
Gross margins as a percent of net sales for the thirteen weeks ended November 2,
1996 were 14.7%, compared to 20.0% for the prior year. For the thirty-nine weeks
ended November 2, 1996, gross margins as a percent of net sales were 22.9%
compared to 25.8% for the prior year. Gross margins were lower primarily due to
greater discounts and
7
promoted products sold at lower margins as the Company reduced its inventory in
significant categories in preparation for new product lines planned for the
current year's holiday season as part of its newly remodeled merchandise
strategy.
OPERATING EXPENSES
Operating expenses for the current quarter increased as a percent of net sales
to 66.8% this year from 43.8% last year, due primarily to lower sales than last
year. For the thirty-nine week period, operating expenses as a percent of net
sales increased to 50.4% from 37.1% last year. Operating expenses for the
quarter were 15.4% above last year's operating expenses primarily because of
increased payroll, advertising and occupancy costs. The increase in payroll
expense was primarily attributable to (i) the lump sum payment to the Company's
former chief executive officer pursuant to his employment contract, (ii)
increased store payroll to support the renovation of the Company's stores, and
(iii) hiring and training of additional sales staff for new departments to be
introduced in the stores after the renovation of all of the stores has been
completed. Advertising expenses increased primarily as a result of (i) lower
coop accruals from vendors, and (ii) advertising costs associated with promoting
closeout products which were not eligible for offset against vendor advertising
funds. During the second quarter, the Company entered into sale leaseback
transactions for three of its stores. As a result, occupancy costs, excluding
tax and license costs, previously not incurred by the Company for these stores
were incurred in the third quarter and will continue to be incurred throughout
the term of the leases. Approximately $480,000 of carrying costs associated with
previously closed stores has been charged against a reserve set up in fiscal
year 1996, primarily for closed stores.
INCOME TAXES
During the Company's prior fiscal year and the first two quarters of the current
fiscal year, the Company recognized an income tax benefit relating to its net
operating loss, which income tax benefit was netted against the loss for such
periods. The income tax benefit was also reflected as a differed tax asset on
the balance sheet for such periods. As a result of the amount of the continuing
losses experienced by the Company, the Company believes that the income tax
benefit associated with the net operating loss will likely not be recognized in
the immediate future. Accordingly, no income tax benefit or deferred tax asset
has been reflected in the financial statements for the current quarter, and the
tax benefits of approximately $3.9 million reflected in the statements of
operations for the twenty-six weeks ended August 3, 1996 have been reversed and
reflected as an income tax expense for the quarter.
LIQUIDITY AND CAPITAL RESOURCES
The Company had cash and cash equivalents of $1.5 million at November 2, 1996
compared to $4.9 million at February 3,1995. Working capital at November 2, 1996
was $12.8 million compared to $38.4 million at October 28, 1995 and $25.0
million at February 3, 1996. Net cash used by operations at November 2, 1996 was
$36.2 million, primarily due to the net loss of $23.3 million and an increase in
inventory of $25.0 million, partially offset by an increase in accounts payable
of $5.0 million and a decrease in income tax receivables of $3.3 million.
In February 1996 the Company entered into a revolving credit agreement secured
by substantially all assets of the Company. The amount of credit available under
the revolving credit agreement is based on the value of the Company's inventory.
At November 2, 1996, there were borrowings outstanding under the revolving
credit agreement of approximately $27.7 million, letters of credit outstanding
of approximately $2.3 million, and the unused availability under the revolving
credit agreement was approximately $3.0 million. At November 2, 1996, the
Company was not in compliance with three borrowing covenants. The Company has
received waivers of the covenants from the lender. The Company and the lender
have agreed that, effective December 15, 1996, the maximum borrowings under the
credit agreement shall be $30 million.
The Company believes cash and cash equivalents and cash provided by operations,
as well as cash available from the existing credit facility, will be sufficient
to meet the Company's working capital and capital expenditure needs depending on
the rapid achievement in the short term of the following: (i) significantly
improved operating results, (ii) the successful implementation of the Company's
newly remodeled store merchandise strategy, (iii) the successful implementation
of the Company's plans to address its working capital needs,
8
including closing and liquidating under-performing stores, selling the
warehouse/headquarters building, returning excess inventory to vendors and
bringing operating expenses in line with the reduced store count, and (iv) the
Company's compliance with the financial covenants under the existing credit
facility (collectively items (i) through (iv) referred to as the "Recovery
Plan"). The Company's operating results will depend on, among other things, the
success of the Company's strategic plans discussed above, the continued support
of the Company's numerous providers of goods and services, the competitive
environment, the prevailing economic climate and the ability of the Company to
adapt to these conditions. In the event, the Company is unable to make rapid
progress in the short term on this Recovery Plan, it is doubtful that the
Company will have sufficient working capital to meet its obligations as they
become due.
This report contains forward-looking statements that are subject to risks and
uncertainties, including but not limited to risks associated with the
repositioning of the Company and its strategic initiatives. Additional
discussions of factors that could cause actual results to differ materially from
management's projections, forecasts, estimates, anticipations and expectations
are contained in the Company's Current Report on Form 8-K, dated December 17,
1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
10.1 Employment Agreement with Peter Luria
10.2 Employment Agreement with Rachmil Lekach
27.1 Financial Data Schedule
(b) There was one report on Form 8-K filed with the SEC on
August 20, 1996 in regard to the Change in Control of
the Registrant.
9
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
L. LURIA & SON, INC.
Date: December 17, 1996 /S/ Rachmil Lekach
-------------------------------------
Rachmil Lekach
Chief Executive Officer
and Director
Date: December 17, 1996 /S/ Thomas A. Floerchinger
-------------------------------------
Thomas A. Floerchinger
Senior Vice President, Chief Financial Officer
and Principal Accounting Officer
10