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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 quarterly period ended August 3, 2002
----------------
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 0-15385
ONE PRICE CLOTHING STORES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 57-0779028
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer identification No.)
incorporation or organization)
Highway 290, Commerce Park
1875 East Main Street
Duncan, South Carolina 29334
----------------------------------------- -------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (864) 433-8888
-------------------------
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
--- -----
The number of shares of the registrant's common stock outstanding as of
September 3, 2002 was 3,006,019.
INDEX
ONE PRICE CLOTHING STORES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - August 3, 2002,
February 2, 2002 and August 4, 2001
Condensed consolidated statements of operations - Three-month
and six-month periods ended August 3, 2002 and August 4, 2001
Condensed consolidated statements of cash flows - Six-month
periods ended August 3, 2002 and August 4, 2001
Notes to unaudited condensed consolidated financial statements
Independent accountants' report on review of interim financial
information
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
PART I. FINANCIAL INFORMATION
Item I. Financial Statements (Unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
One Price Clothing Stores, Inc. and Subsidiaries
August 3, February 2, August 4,
2002 2002 2001
----------------- ------------------ ----------------
(1)
Assets
CURRENT ASSETS
Cash and cash equivalents $ 2,333,000 $ 2,277,000 $ 3,488,000
Merchandise inventories 53,559,000 54,131,000 52,938,000
Other current assets 11,274,000 10,219,000 10,290,000
----------------- ----------------- ---------------
TOTAL CURRENT ASSETS 67,166,000 66,627,000 66,716,000
----------------- ----------------- ---------------
PROPERTY AND EQUIPMENT, at cost 74,562,000 73,607,000 72,261,000
Less accumulated depreciation 40,125,000 37,992,000 35,068,000
------------------ ------------------ ----------------
34,437,000 35,615,000 37,193,000
------------------ ------------------ ----------------
DEFERRED INCOME TAXES 2,845,000 2,825,000 4,775,000
------------------ ------------------ ----------------
OTHER ASSETS 4,953,000 4,735,000 4,679,000
------------------ ------------------ ----------------
$ 109,401,000 $ 109,802,000 $ 113,363,000
================== ================== ================
Liabilities and Shareholders' Equity
CURRENT LIABILITIES
Accounts payable $ 36,355,000 $ 35,656,000 $ 25,415,000
Revolving credit agreement 30,526,000 32,084,000 30,360,000
Current portion of long-term debt 5,374,000 2,257,000 1,358,000
Income taxes payable 467,000 503,000 191,000
Sundry liabilities 6,159,000 5,614,000 6,806,000
------------------ ------------------ ----------------
TOTAL CURRENT LIABILITIES 78,881,000 76,114,000 64,130,000
------------------ ------------------ ----------------
LONG-TERM DEBT 7,951,000 11,835,000 8,809,000
------------------ ------------------ ----------------
OTHER NON-CURRENT LIABILITIES 2,670,000 2,548,000 2,488,000
------------------ ------------------ ----------------
SHAREHOLDERS' EQUITY
Preferred stock, par value $0.01 --
authorized and unissued 500,000 shares
Common stock, par value $0.01 --
authorized 10,000,000 shares; issued and outstanding
3,006,019, 2,943,769, and 2,942,340, respectively 30,000 29,000 29,000
Additional paid-in capital 11,520,000 11,822,000 11,702,000
Retained earnings 8,390,000 7,844,000 26,595,000
Less: Treasury stock at cost - 7,150, 67,400 and 67,400
shares, respectively (41,000) (390,000) (390,000)
------------------ ------------------ ----------------
19,899,000 19,305,000 37,936,000
------------------ ------------------ ----------------
$ 109,401,000 $ 109,802,000 $ 113,363,000
=================== ================== ================
(1) Derived from audited financial statements
See notes to unaudited condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
One Price Clothing Stores, Inc. and Subsidiaries
Three-Month Period Ended Six-Month Period Ended
------------------------------- -------------------------------
August 3, August 4, August 3, August 4,
2002 2001 2002 2001
-------------- --------------- -------------- --------------
NET SALES $ 90,088,000 $ 93,269,000 $ 177,398,000 $ 184,231,000
Cost of goods sold 56,354,000 59,166,000 110,425,000 116,821,000
-------------- --------------- -------------- --------------
GROSS MARGIN 33,734,000 34,103,000 66,973,000 67,410,000
-------------- --------------- -------------- --------------
Selling, general and administrative expenses 22,350,000 22,814,000 44,130,000 44,517,000
Store rent and related expenses 8,478,000 8,282,000 16,855,000 16,870,000
Depreciation and amortization expense 1,725,000 1,721,000 3,453,000 3,388,000
Interest expense 842,000 760,000 1,753,000 1,767,000
-------------- --------------- -------------- --------------
33,395,000 33,577,000 66,191,000 66,542,000
-------------- --------------- -------------- --------------
INCOME BEFORE INCOME TAXES 339,000 526,000 782,000 868,000
Provision for income taxes 227,000 1,747,000 236,000 1,829,000
-------------- --------------- -------------- --------------
NET INCOME (LOSS) $ 112,000 $ (1,221,000)$ 546,000 $ (961,000)
============== =============== ============== ==============
Net income (loss) per common share - basic $ 0.04 $ (0.41)$ 0.18 $ (0.33)
============== =============== ============== ==============
Net income (loss) per common share - diluted $ 0.04 $ (0.41)$ 0.18 $ (0.33)
============== =============== ============== ==============
Weighted average number of common shares
outstanding - basic 3,004,783 2,942,340 2,996,306 2,942,340
============== =============== ============== ==============
Weighted average number of common shares
outstanding - diluted 3,007,004 2,942,340 3,002,364 2,942,340
============== =============== ============== ==============
See notes to unaudited condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
One Price Clothing Stores, Inc. and Subsidiaries
Six-Month Period Ended
------------------------------------
August 3, August 4,
2002 2001
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 546,000 $ (961,000)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Depreciation and amortization 3,453,000 3,388,000
Provision for compensation - common stock awards 48,000 16,000
Decrease in other non-current assets 99,000 157,000
Increase in other non-current liabilities 198,000 176,000
Deferred income taxes 200,000 1,690,000
Impairment charges and loss on disposal of property and equipment 300,000 467,000
Changes in operating assets and liabilities 413,000 (4,767,000)
------------------ ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,257,000 166,000
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,276,000) (1,022,000)
Purchases of other noncurrent assets (354,000) (336,000)
------------------ ------------------
NET CASH USED IN INVESTING ACTIVITIES (2,630,000) (1,358,000)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayment of ) borrowings from revolving credit agreement (1,558,000) 1,808,000
Repayment of long-term debt (133,000) (105,000)
Debt financing costs incurred (264,000) (328,000)
Payment of capital lease obligations (572,000) (738,000)
Decrease in amount due to related parties (44,000) (77,000)
------------------ ------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (2,571,000) 560,000
------------------ ------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 56,000 (632,000)
Cash and cash equivalents at beginning of period 2,277,000 4,120,000
------------------ ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,333,000 $ 3,488,000
------------------ ------------------
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,602,000 $ 1,558,000
Income taxes paid 131,000 1,044,000
Non-cash investing and financing activities:
Capital leases - 1,417,000
Issuance of common stock awards 108,000 4,000
See notes to unaudited condensed consolidated financial statements
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
One Price Clothing Stores, Inc. and Subsidiaries
NOTE A - BASIS OF PRESENTATION, OPERATIONS AND CERTAIN ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited and
include the accounts of One Price Clothing Stores, Inc. and its subsidiaries,
all of which are wholly-owned (the "Company"). All significant intercompany
accounts and transactions have been eliminated in consolidation.
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.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included. Due
to the seasonality of the Company's sales, operating results for the three-month
and six-month periods ended August 3, 2002 are not necessarily indicative of the
results that may be expected for the year ending February 1, 2003 (fiscal 2002).
For further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended February
2, 2002.
The Company's sales and operating results are seasonal. Historically, sales and
operating results have been higher in the first quarter (February - April) and
second quarter (May - July) and lower in the third quarter (August - October)
and fourth quarter (November - January).
Operations and Strategies
The Company has incurred operating losses during the two most recent fiscal
years. In response to these operating losses, the Company:
o initiated a restructuring plan during the fourth quarter of fiscal 2000
which was completed during fiscal 2001.
o improved its liquidity by amending its credit facilities to obtain a term
loan of $4 million (which matures in fiscal 2003) (See Note C).
o implemented a revised merchandising strategy which focuses the Company's
resources on higher- margin, faster-turning women's and children's apparel
and women's accessories categories and eliminates and/or de-emphasizes
low-margin, slow-turning categories of merchandise (including gifts, home
furnishings, children's accessories, uniforms and men's apparel). The
Company plans to continue this focused merchandising approach during fiscal
2002.
o reduced the number of new store openings while focusing on relocating and
expanding existing stores in proven locations, including several large
stores. The Company plans to continue this store development approach
during fiscal 2002, including the opening or reconfiguration of
approximately ten large stores which will offer the Company's "BestPrice!
Kids" and "BestPrice! Plus" concepts as separate "stores within a store."
o implemented a marketing and advertising strategy involving targeted
programs for specific regions, including direct mail, newspaper inserts,
in-store collateral and electronic media. The Company plans to expand its
marketing and advertising efforts during fiscal 2002.
Management expects that these strategies will contribute to improved
profitability and financial condition during fiscal 2002. However, because there
are certain risks and uncertainties related to achieving these results, there
can be no assurance that these strategies will lead to the expected level of
improvement.
Effect of New Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") 144, "Accounting for the Impairment of
Long-Lived Assets," which supercedes SFAS 121 and the accounting and reporting
provisions of APB 30 related to the disposal of a segment of a business. The
adoption of SFAS 144 on February 3, 2002 had no material effect on the Company's
consolidated financial statements.
The FASB has issued SFAS 146, "Accounting for Costs Associated with Exit or
Disposal Activities," which nullifies the accounting and reporting provisions of
Emerging Issues Task Force ("EITF") 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs in a Restructuring)." This statement is effective for exit or
disposal activities that are initiated after December 31, 2002, with earlier
adoption encouraged. The Company is in the process of reviewing the effect, if
any, that the adoption of SFAS 146 will have on its balance sheet, results of
operations and cash flows.
NOTE B - EARNINGS PER SHARE
Basic earnings per share are computed based upon the weighted average number of
common shares outstanding. Diluted earnings per share are computed based upon
the weighted average number of common and common equivalent shares outstanding.
Common equivalent shares consist of shares under option and warrants. A
reconciliation of basic and diluted weighted average shares outstanding is
presented below:
Three-Month Period Ended Six-Month Period Ended
---------------------------------- ------------------------------------
August 3, August 4, August 3, August 4,
2002 2001 2002 2001
---------------- ---------------- ---------------- ----------------
Weighted average number of common
shares outstanding - basic 3,004,783 2,942,340 2,996,306 2,942,340
Net effect of dilutive stock options - based
on the treasury stock method using the
average market price 2,221 * 6,058 *
---------------- ---------------- ---------------- ----------------
Weighted average number of common
shares outstanding - diluted 3,007,004 2,942,340 3,002,364 2,942,340
=============== =============== =============== ================
*Effect is anti-dilutive for these periods.
NOTE C - CREDIT FACILITIES
The Company has a revolving credit agreement of up to $37,500,000 (including a
letter of credit sub-facility of up to $25,000,000) and a $4,000,000 term loan
with its primary lender through July 2003. Borrowings under the Company's
revolving credit agreement with its primary lender are collateralized by all
assets owned by the Company during the term of the revolving credit agreement
(other than the land, buildings, fixtures and improvements collateralizing the
mortgage loan discussed below). Under the revolving credit agreement, the
borrowings bear interest, at the Company's option (subject to certain
limitations in the agreement), at the Prime Rate or the Adjusted Eurodollar
Rate, as defined in such agreement, plus 1.5% provided that the Company meets
certain minimum net worth requirements as set forth in the revolving credit
agreement.
Maximum borrowings under the revolving credit agreement and utilization of the
letter of credit facility are based on a borrowing base formula determined with
respect to eligible inventory as defined in such agreement. As a result,
availability under the revolving credit agreement fluctuates in accordance with
the Company's seasonal variations in inventory levels. The lending formula may
be revised from time to time in response to changes in the composition of the
Company's inventory or other business conditions. At August 3, 2002, the Company
had approximately $3.0 million of excess availability under the borrowing base
formula. The Company is charged a commitment fee of 0.25% per annum on the
unused portion of the revolving credit agreement. Under the term loan portion of
the revolving credit agreement, the borrowings bear interest at the rate of
15.0% per annum and guarantees certain minimum payments to the lender if the
term loan is fully repaid prior to January 2003.
The Company's revolving credit agreement contains certain covenants which, among
other things, prohibit the Company from paying dividends, restrict the ability
of the Company to incur other indebtedness or encumber or dispose of assets,
limit the amount of its own stock the Company can repurchase, and require the
Company to maintain a minimum level of excess availability of $1,500,000. Under
this revolving credit agreement, the Company is required to maintain a
$5,000,000 minimum level of adjusted working capital (excluding amounts
outstanding under the revolving credit agreement) and to maintain a $25,000,000
minimum adjusted net worth (excluding valuation reserves against the Company's
deferred income tax assets). As of August 3, 2002, adjusted working capital and
adjusted net worth were $18,811,000 and $30,065,000 respectively. Accordingly,
the Company was in compliance with these financial covenants as of August 3,
2002.
The Company has a separate letter of credit facility of up to $8,000,000, which
it amended on June 21, 2002 to extend the expiration date to the earlier of June
30, 2003 or termination of the Company's revolving credit agreement with its
primary lender. Letters of credit issued under the amended agreement are
collateralized by inventories purchased using such letters of credit. Under this
amended agreement, the Company is required to maintain a $5,000,000 minimum
level of adjusted working capital (excluding amounts outstanding under the
revolving credit agreement) and to maintain a $12,000,000 minimum adjusted net
worth. The amended agreement contains other covenants, which are substantially
the same as those within the Company's revolving credit agreement discussed
above. The Company was in compliance with these restrictive covenants as of
August 3, 2002.
The Company's credit facilities require that these financial covenants be
measured on a monthly basis. Management believes that the Company will be in
compliance with all financial covenants during the period of the agreements
based upon achieving its currently forecasted operating results. However,
achievement of these currently forecasted operating results is dependent upon
the Company meeting certain targets of net sales, gross margin and operating
expenses and, as a result, is not certain. If the Company does not achieve its
currently forecasted operating results, it is possible that the adjusted minimum
net worth covenants of the revolving credit agreement and/or separate letter of
credit facility may not be met during the second half of fiscal 2002. The
Company successfully obtained an amendment to its adjusted net worth covenant
under the revolving credit agreement in December 2001 and, if necessary, would
seek additional amendments to this covenant.
The Company entered into a twenty-year mortgage agreement with a commercial bank
in June 1997. The agreement, which had an original balance of $8,125,000, is
secured by the Company's real property located at its corporate offices
including land, buildings, fixtures and improvements. The mortgage agreement,
which had a balance of $7,236,000 at August 3, 2002, is payable in 240
consecutive equal monthly installments (including interest at the rate of 9.125%
per annum) through July 2017. Certain fees may be payable by the Company if the
mortgage loan is repaid prior to June 2014.
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Shareholders of
One Price Clothing Stores, Inc.
Duncan, South Carolina
We have reviewed the accompanying condensed consolidated balance sheets of One
Price Clothing Stores, Inc. and subsidiaries (the "Company") as of August 3,
2002 and August 4, 2001, and the related condensed consolidated statements of
operations and cash flows for the three-month and six-month periods then ended.
These financial statements are the responsibility of the Company's management.
We conducted our reviews 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 making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, 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 reviews, 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 accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Company as of February 2, 2002, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated March 13, 2002, 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 February 2, 2002 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Greenville, South Carolina
August 16, 2002
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Net sales for the three-month period ended August 3, 2002 decreased 3.4% to
$90,088,000 compared with $93,269,000 for the corresponding time period in 2001.
Net sales for the six-month period ended August 3, 2002 decreased 3.7% to
$177,398,000 compared with $184,231,000 for the corresponding time period in
2001. The decrease in year-over-year net sales for both periods presented was
due to operating 13 and 16 fewer stores in the three-month and six-month
periods, respectively, and to the Company's comparable store sales decreases of
2.8% in the second quarter of fiscal 2002 and 2.6% for the six-month period
ended August 3, 2002. A portion of these comparable store sales decreases was
due to the elimination of certain slow-turning and lower-margin categories of
merchandise. Excluding these slow-turning, lower-margin categories, comparable
store sales decreased 1.4% in the second quarter of fiscal 2002 and decreased
1.0% for the six-month period ended August 3, 2002. Management believes that
these comparable store sales decreases were due to continued weakness in
consumer spending on apparel, and compounded further by weak sales in stores in
markets heavily dependent on tourism and in stores located along the Mexican
border. The Company considers stores that have been open 18 months or more to be
comparable, and there were 607 such stores at August 3, 2002.
During the first six months of fiscal 2002, the Company opened five stores and
relocated or expanded fourteen of its stores. In addition, the Company closed
eleven under-performing stores. At August 3, 2002, the Company operated 617
stores, fifteen fewer than at quarter-end last year. The stores are located in
30 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands.
Gross margin as a percentage of net sales increased to 37.4% in the second
quarter of fiscal 2002 and 37.8% in the first six months of fiscal 2002 compared
with 36.6% of net sales in both such periods of fiscal 2001. These increases in
gross margin as a percentage of net sales primarily resulted from a more
profitable mix of merchandise driven by the elimination of slow-turning and
lower-margin categories of apparel and accessories and a reallocation of the
associated working capital to the Company's core women's and children's apparel
categories.
Selling, general and administrative ("SG&A") expenses were 24.8% of net sales in
the second quarter of fiscal 2002 compared with 24.5% of net sales in the second
quarter of fiscal 2001. SG&A expenses were 24.9% of net sales in the first six
months of fiscal 2002 compared with 24.2% of net sales during the same time
period in fiscal 2001. In both periods presented, SG&A expenses decreased in
dollars compared with the corresponding time periods in fiscal 2001 as a result
of reducing payroll and other controllable expenses in the stores. SG&A expenses
were higher as a percentage of net sales in both 2002 periods presented due to
the lack of sales leverage resulting from the comparable store sales decreases
experienced in both periods.
Store rent and related expenses were 9.4% of net sales in the second quarter of
fiscal 2002 compared with 8.9% of net sales in the second quarter of fiscal
2001. Store rent and related expenses for the six-month period ended August 3,
2002 were 9.5% compared with 9.2% for the same period in 2001. This increase in
store rent as a percentage of net sales in both periods was due to an increase
in average store rent year-over-year as well as the lack of sales leverage
resulting from the comparable store sales decreases experienced in both periods.
Store rent and related expenses per average store for the three-month and
six-month periods ended August 3, 2002 increased 4.5% and 2.5%, respectively,
compared with the corresponding periods last year. These increases in average
store rent and related expenses in both periods presented were primarily due to
the Company's continuing store expansion strategy of opening larger stores with
higher rents while closing older stores with lower average rent costs.
Depreciation and amortization expense increased to 1.9% of net sales in both the
second quarter and first six months of fiscal 2002 compared with 1.8% in the
same time periods in fiscal 2001. Depreciation and amortization expense
increased as a percentage of net sales in both periods primarily due to the
Company's investment in information technology during fiscal 2001 and the first
six months of fiscal 2002.
Interest expense increased to 0.9% of net sales in the second quarter of fiscal
2002 compared with 0.8% of net sales in the second quarter of fiscal 2001.
Interest expense was 1.0% in the first six months of fiscal 2002 and fiscal
2001. Year-over-year interest expense increased in the second quarter of fiscal
2002 due to higher average borrowings in fiscal 2002.
The Company's effective income tax rates of 30.2% in the first six months of
fiscal 2002 and 210.7% in the first six months of fiscal 2001 reflect increases
in the Company's valuation allowance against its deferred income tax assets. At
August 3, 2002 the Company's gross deferred income tax assets of $13.0 million
were offset by a valuation allowance of $10.2 million against these deferred
income tax assets. Because management cannot be assured that certain net
operating loss carryforwards, credit carryforwards and net cumulative temporary
differences for U.S. Federal and state income tax purposes will be fully
utilized or realized prior to their expirations, a valuation allowance has been
provided for a substantial portion of the net deferred income tax assets. A
valuation allowance has not been recorded on the remaining net deferred income
tax assets based upon a tax planning strategy that would, based on historical
results, result in the realization of such remaining deferred income tax assets.
Management will continue to assess the adequacy of or the need for the valuation
allowance based upon future operations.
Outlook
During the remainder of fiscal 2002, the Company currently expects to open a
total of two new stores, expand or relocate four existing stores and close
approximately eleven stores. The Company will continue to focus its efforts on
increasing comparable store sales by, among other things, focusing on its
higher-margin core apparel merchandise categories of women's and children's
apparel and women's accessories. In addition, the Company will focus its efforts
on maintaining its tight expense controls. Given the continuing economic
uncertainty and lower demand for apparel, management intends to manage its
inventory levels close to levels for comparable time periods in fiscal 2001.
The Company's sales and operating results are seasonal. Historically, sales and
operating results have been higher in the first quarter (February - April) and
second quarter (May - July) and lower in the third quarter (August - October)
and fourth quarter (November - January).
Liquidity and Capital Resources
Historically, the Company's primary needs for liquidity and capital have been to
fund its new store expansion and the related growth in merchandise inventories.
The Company historically has relied upon cash provided by operations and
borrowed funds from its revolving credit agreement to meet its liquidity needs.
During the two most recent fiscal years, the Company has primarily relied upon
its credit facilities to offset cash used in operations and to open stores.
Because of its relatively fixed cost structure and existing levels of debt,
management considers its primary risk to liquidity to be its ability to generate
adequate levels of net sales and gross margin while effectively controlling
operating expenses. When net sales and gross margin levels have not met plan in
the past, the Company has drawn funds under its credit facilities and/or
negotiated with its lenders to provide additional availability to meet its
liquidity needs. These credit facilities, together with cash provided by
operations, are expected to be sufficient to meet the Company's liquidity and
capital needs during the period of the agreements.
In the first six months of fiscal 2002, net cash provided by operations was
primarily used to fund capital expenditures, including the opening of five new
stores and the relocation or expansion of fourteen stores, and to reduce the
Company's level of borrowings on its revolving credit agreement. In the first
six months of fiscal 2001, net cash was primarily used to fund the Company's
increase in inventories.
The dollar amount of merchandise in the Company's stores at August 3, 2002
increased slightly compared with August 4, 2001. Total merchandise inventories
at the end of the second quarter of fiscal 2002 increased 1.2% compared with the
end of the second quarter of fiscal 2001. Total merchandise inventories at the
end of the second quarter of fiscal 2002 were 0.1% higher on an average store
basis than at February 2, 2002. The level and source of inventories are subject
to fluctuations because of the Company's seasonal operations and business
conditions prevailing at the time.
The level of outstanding documentary letters of credit decreased to $3.5 million
as of August 3, 2002 compared with $7.9 million as of August 4, 2001. The
Company currently expects to continue to pursue purchases of merchandise from
primarily domestic sources, but will purchase merchandise from foreign sources
when it is deemed to be in the best interests of the Company. Accounts payable
increased at the end of the second quarter of fiscal 2002 compared with both the
end of the second quarter of fiscal 2001 and February 2, 2002 due to improved
vendor financing. Total amounts outstanding under the credit facilities
(including the term loan portion of the revolving credit agreement) increased at
the end of the second quarter of fiscal 2002 compared with the second quarter of
fiscal 2001 due to the Company's lower than expected operating performance in
fiscal 2001. Total amounts outstanding under the credit facilities (including
the term loan portion of the revolving credit agreement) decreased at the end of
the second quarter of fiscal 2002 compared with February 2, 2002 primarily due
to the Company's positive results of operations in the first six months of 2002.
The level of accounts payable and amounts outstanding under the credit
facilities are subject to fluctuations based on changes in the Company's
inventory levels and rate of capital expenditures.
The Company's credit facilities consist of a revolving credit agreement and term
loan to meet short-term liquidity needs, a mortgage loan collateralized by the
Company's corporate offices and distribution center and letter of credit
facilities. The Company's revolving credit agreement expires in July 2003, and
is classified in current liabilities in the accompanying balance sheet.
Collectively, the credit facilities contain certain financial and non-financial
covenants with which the Company was in compliance at August 3, 2002. Please
refer to Note C to the unaudited condensed consolidated financial statements for
a more detailed description of the Company's credit facilities.
The Company's credit facilities require that these financial covenants be
measured on a monthly basis. Management believes that the Company will be in
compliance with all financial covenants during the period of the agreements
based upon achieving its currently forecasted operating results. However,
achievement of these currently forecasted operating results is dependent upon
the Company meeting certain targets of net sales, gross margin and operating
expenses and, as a result, is not certain. If the Company does not achieve its
currently forecasted operating results, it is possible that the adjusted minimum
net worth covenants of the revolving credit agreement and/or separate letter of
credit facility may not be met during the second half of fiscal 2002. The
Company successfully obtained an amendment to its adjusted net worth covenant
under the revolving credit agreement in December 2001 and, if necessary, would
seek additional amendments to this covenant.
On August 2, 2000, the Board of Directors authorized the Company to repurchase
up to 285,715 shares of its outstanding common stock at market prices. The
repurchase program authorizes purchases from time to time in the open market or
privately negotiated block transactions and contains no expiration date. The
authorization represented approximately 9.5% of the outstanding common stock of
the Company as of August 2, 2000. As of February 2, 2002, the Company had
repurchased 67,400 shares of its outstanding common stock for an aggregate
purchase price of $392,000 (average of $5.82 per share). During the first six
months of fiscal 2002, the Company awarded 60,250 of these 67,400 shares to
certain of its employees.
In fiscal 2002, the Company plans to spend approximately $3.5 million on capital
expenditures, most of which will be used to open approximately seven new stores,
to remodel, re-fixture, expand and relocate existing stores, and invest in
information technology. The Company spent approximately $2.3 million on property
and equipment during the six-month period ended August 3, 2002. The Company's
liquidity requirements in the foreseeable future are expected to be met
principally through the use of its credit facilities and through cash provided
by operations. If deemed by management to be in the best interest of the
Company, additional long-term debt, equity, capital leases, or other permanent
financing may be considered.
Market Risk and Risk Management Policies
The Company is exposed to market risk from changes in interest rates affecting
its credit arrangements, including a variable-rate revolving credit agreement,
fixed-rate term loan and a fixed-rate mortgage loan agreement, which may
adversely affect the Company's results of operations and cash flows. The Company
seeks to minimize its interest rate risk through its day-to-day operating and
financing activities. The Company does not engage in speculative or derivative
financial or trading activities.
A hypothetical 100 basis point adverse change (increase) in interest rates
relating to the Company's revolving credit agreement would have decreased
pre-tax income for the six months ended August 3, 2002 and August 4, 2001 by
approximately $158,000 and $128,000, respectively.
Effect of New Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") 144, "Accounting for the Impairment of Long-Lived
Assets," which supercedes SFAS 121 and the accounting and reporting provisions
of APB 30 related to the disposal of a segment of a business. The adoption of
SFAS 144 on February 3, 2002 had no material effect on the Company's
consolidated financial statements.
The FASB has issued SFAS 146, "Accounting for Costs Associated with Exit or
Disposal Activities," which nullifies the accounting and reporting provisions of
Emerging Issues Task Force ("EITF") 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (Including
Certain Costs in a Restructuring)." This statement is effective for exit or
disposal activities that are initiated after December 31, 2002, with earlier
adoption encouraged. The Company is in the process of reviewing the effect, if
any, that the adoption of SFAS 146 will have on its balance sheet, results of
operations and cash flows.
Private Securities Litigation Reform Act of 1995
All statements contained in this Quarterly Report on Form 10-Q as to future
expectations and financial results including, but not limited to, statements
containing the words "believes," "anticipates," "expects," "projects," "should,"
"will" and similar expressions, should be considered forward-looking statements
subject to the safe harbor created by the Private Securities Litigation Reform
Act of 1995. The statements may address items such as future sales, earnings
expectations, planned store openings, closings and expansions, future comparable
store sales, future product sourcing plans, inventory levels, planned capital
expenditures and future cash needs. In addition, the Company may issue press
releases and other written communications, and representatives of the Company
may make oral statements which contain forward-looking information. This
Quarterly Report on Form 10-Q may contain such statements and there are a number
of important factors could cause the Company's actual results in fiscal 2002 and
beyond to differ materially from those expressed in such forward-looking
statements. These factors include, but are not limited to, general economic
conditions; fluctuations in interest rates and other economic factors; consumer
preferences; weather patterns; competitive factors; pricing and promotional
activities of competitors; the impact of excess retail capacity and the
availability of desirable store locations on suitable terms; the availability,
selection and purchasing of attractive merchandise on favorable terms; credit
availability, including adequate levels of credit support provided to certain of
the Company's vendors by factors and insurance companies; access to additional
debt or equity financing; the effect of litigation resulting from the Company's
operations; import risks, including potential disruptions and duties, tariffs
and quotas on imported merchandise; regulatory matters, including legislation
affecting wage rates; and other factors described in the Company's filings with
the Securities and Exchange Commission from time to time. The Company does not
undertake to publicly update or revise its forward-looking statements even if
experience or future changes make it clear that any projected results expressed
or implied therein will not be realized.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See required information contained within Item 2 of this Form
10-Q.
Item 4. Controls and Procedures
The period covered by this report ended on August 3, 2002.
Therefore, pursuant to SEC Release Nos. 33-8124 and 34-46427, the information
required by Item 307 of Regulation S-K is not required to be included in this
report.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company received proxies representing 92% of the 3,004,519 shares
outstanding and eligible to vote at the annual meeting of the Company's
shareholders held on June 12, 2002. The following summarizes the votes thereat:
Matter For Against Abstentions Non-Votes
Election of Directors:
Leonard M. Snyder 2,702,429 0 14,759 0
Renee M. Love 2,696,499 0 20,689 0
Laurie M. Shahon 2,696,099 0 21,089 0
Malcolm L. Sherman 2,700,613 0 16,575 0
James M. Shoemaker, Jr. 2,698,713 0 18,475 0
Robert J. Stevenish 2,700,812 0 16,376 0
Allan Tofias 2,700,469 0 16,719 0
Matter For Against Abstentions Non-Votes
Authorization to Reduce
the Number of Authorized Shares of
Company's Common Stock 2,686,823 16,701 13,664 0
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
10(a) Amended and Restated Credit Agreement by and between Carolina First
Bank as Lender and the Registrant, One Price Clothing of Puerto Rico,
Inc. and One Price Clothing - U.S. Virgin Islands, Inc. as Borrowers
dated June 21, 2002.
15 Acknowledgement of Deloitte & Touche LLP, independent accountants.
(b) Reports on Form 8-K
The Company was not required to, and did not, file any report
on Form 8-K for the three-month period ended August 3, 2002.
- --------------------------------------------------------------------------------
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.
ONE PRICE CLOTHING STORES, INC. (Registrant)
Date: September 16, 2002 /s/ Leonard M. Snyder
--------------------------------------------------
Leonard M. Snyder
Chairman of the Board of Directors and Chief
Executive Officer(principal executive officer)
Date: September 16, 2002 /s/ H. Dane Reynolds
--------------------------------------------------
H. Dane Reynolds
Senior Vice President and Chief Financial Officer
(principal financial officer and principal
accounting officer)
CERTIFICATIONS:
I, Leonard M. Snyder, certify that:
1. I have reviewed this quarterly report on Form 10-Q of One Price
Clothing Stores, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
Date: September 16, 2002
/s/ Leonard M. Snyder
- ------------------------
Leonard M. Snyder
Chief Executive Officer
I, H. Dane Reynolds, certify that:
1. I have reviewed this quarterly report on Form 10-Q of One Price
Clothing Stores, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
Date: September 16, 2002
/s/ H. Dane Reynolds
- -----------------------
H. Dane Reynolds
Chief Financial Officer
ONE PRICE CLOTHING STORES, INC. AND SUBSIDIARIES
EXHIBIT 15 - ACKNOWLEDGEMENT OF DELOITTE & TOUCHE LLP, INDEPENDENT ACCOUNTANTS
One Price Clothing Stores, Inc. and Subsidiaries
Duncan, South Carolina
We have made a review, in accordance with standards established by the American
Institute of Certified Public Accountants, of the unaudited interim condensed
consolidated financial information of One Price Clothing Stores, Inc. and
subsidiaries for the three-month and six-month periods ended August 3, 2002 and
August 4, 2001, as indicated in our report dated August 16, 2002; because we did
not perform an audit, we expressed no opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended August 3, 2002, is
incorporated by reference in Registration Statements No. 33-20529, 33-31623,
33-48091, and 33-61803 on Form S-8 pertaining to the 1987 Stock Option Plan, the
1988 Stock Option Plan, the 1991 Stock Option Plan, and the Director Stock
Option Plan, respectively, of One Price Clothing Stores, Inc.
We also are aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act of 1933, is not considered a part of the Registration
Statement prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and 11 of that Act.
DELOITTE & TOUCHE LLP
Greenville, South Carolina
September 16, 2002