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 May 3, 2003.
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
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(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
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
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The number of shares of the registrant's common stock outstanding as of June 18,
2003 was 3,014,753.
INDEX
ONE PRICE CLOTHING STORES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - May 3, 2003, February
1, 2003 and May 4, 2002
Condensed consolidated statements of operations - Three-month
periods ended May 3, 2003 and May 4, 2002
Condensed consolidated statements of cash flows - Three-month
periods ended May 3, 2003 and May 4, 2002
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 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
May 3, February 1, May 4,
2003 2003 2002
------------------ ------------------ ----------------
Assets (1)
CURRENT ASSETS
Cash and cash equivalents $ 1,033,000 $ 2,034,000 $ 3,201,000
Merchandise inventories 53,353,000 49,277,000 57,760,000
Other current assets 10,545,000 7,073,000 11,611,000
------------------- ------------------ ---------------
TOTAL CURRENT ASSETS 64,931,000 58,384,000 72,572,000
------------------- ------------------ ---------------
PROPERTY AND EQUIPMENT, at cost 76,328,000 75,457,000 74,375,000
Less accumulated depreciation 43,893,000 42,476,000 38,848,000
------------------ ------------------ ---------------
32,435,000 32,981,000 35,527,000
------------------ ------------------ ---------------
DEFERRED INCOME TAXES 954,000 1,007,000 2,916,000
------------------ ------------------ ---------------
OTHER ASSETS 5,280,000 4,967,000 4,668,000
------------------ ------------------ ---------------
$ 103,600,000 $ 97,339,000 $ 115,683,000
================== ================== ===============
Liabilities and Shareholders' Equity
CURRENT LIABILITIES
Accounts payable $ 48,465,000 $ 38,183,000 $ 40,113,000
Revolving credit agreement 33,972,000 32,863,000 33,159,000
Current portion of long-term debt 1,552,000 1,489,000 2,625,000
Income taxes payable 496,000 433,000 401,000
Sundry liabilities 6,998,000 6,649,000 6,119,000
------------------ ------------------ ---------------
TOTAL CURRENT LIABILITIES 91,483,000 79,617,000 82,417,000
------------------ ------------------ ---------------
LONG-TERM DEBT 9,846,000 10,371,000 10,917,000
------------------ ------------------ ---------------
OTHER NON-CURRENT LIABILITIES 3,502,000 3,231,000 2,588,000
------------------ ------------------ ---------------
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
3,014,753, 3,006,019, and 3,004,519, respectively 30,000 30,000 30,000
Additional paid-in capital 11,581,000 11,581,000 11,503,000
(Accumulated deficit) retained earnings (12,801,000) (7,450,000) 8,278,000
Less: Treasury stock at cost - 7,150, 7,150 and 8,650
shares, respectively (41,000) (41,000) (50,000)
------------------ ------------------ ---------------
(1,231,000) 4,120,000 19,761,000
------------------ ------------------ ---------------
$ 103,600,000 $ 97,339,000 $ 115,683,000
================== ================== ===============
(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
-------------------------------
May 3, May 4,
2003 2002
-------------- ---------------
NET SALES $ 77,178,000 $ 87,310,000
Cost of goods sold, exclusive of depreciation and
amortization shown separately below 49,951,000 54,071,000
-------------- ---------------
GROSS MARGIN 27,227,000 33,239,000
-------------- ---------------
Selling, general and administrative expenses 21,410,000 21,780,000
Store rent and related expenses 8,679,000 8,377,000
Depreciation and amortization expense 1,676,000 1,728,000
Interest expense 790,000 911,000
-------------- ---------------
32,555,000 32,796,000
-------------- ---------------
(LOSS) INCOME BEFORE INCOME TAXES (5,328,000) 443,000
Provision for income taxes 24,000 9,000
-------------- ---------------
NET (LOSS) INCOME $ (5,352,000) $ 434,000
============== ===============
Net (loss) income per common share - basic $ (1.78) $ 0.15
============== ===============
Net (loss) income per common share - diluted $ (1.78) $ 0.14
============== ===============
Weighted average number of common shares
outstanding -- basic 3,014,753 2,987,829
============== ===============
Weighted average number of common shares
outstanding - diluted 3,014,753 2,997,534
============== ===============
See notes to unaudited condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
One Price Clothing Stores, Inc. and Subsidiaries
Three-Month Period Ended
---------------------------------------
May 3, May 4,
2003 2002
------------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (5,352,000) $ 434,000
Adjustments to reconcile net income to net cash provided by Operating
activities:
Depreciation and amortization 1,676,000 1,728,000
Provision for compensation - common stock awards - 22,000
(Increase) decrease in other non-current assets (2,000) 113,000
Increase in other non-current liabilities 331,000 97,000
Loss on disposal of property and equipment and impairment charges 193,000 181,000
Changes in operating assets and liabilities 3,206,000 (304,000)
------------------- -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 52,000 2,271,000
------------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,160,000) (1,670,000)
Purchases of other non-current assets (157,000) (187,000)
------------------- -----------------
NET CASH USED IN INVESTING ACTIVITIES (1,317,000) (1,857,000)
------------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from revolving credit agreement 1,109,000 1,075,000
Repayment of long-term debt (186,000) (77,000)
Debt financing costs incurred (326,000) (36,000)
Payment of capital lease obligations (276,000) (411,000)
Decrease in amount due to related parties (57,000) (41,000)
------------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 264,000 510,000
------------------- -----------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,001,000) 924,000
Cash and cash equivalents at beginning of period 2,034,000 2,277,000
------------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,033,000 $ 3,201,000
=================== =================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 747,000 $ 806,000
Income taxes paid 261,000 131,000
Non-cash investing and financing activity:
Issuance of common stock awards - 106,000
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 AND SIGNIFICANT 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 inter-company
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
period ended May 3, 2003 are not necessarily indicative of the results that may
be expected for the year ending January 31, 2004 (fiscal 2003). 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 1, 2003
(fiscal 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).
Effect of New Accounting Pronouncements
In April 2003, Statement of Financial Accounting Standards ("SFAS") No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities,"
was issued which amends and clarifies the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities under SFAS No. 133. It requires, among other things, that
contracts with comparable characteristics be accounted for similarly and
clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative and when a derivative contains a
financing component that warrants special reporting in the statement of cash
flows. SFAS No. 149 is effective generally for contracts entered into and
modified after June 30, 2003. Because the Company presently has no derivative
instruments, adoption is expected to have no effect on its financial statements
or disclosures.
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." This Statement establishes new standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). This Statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company has not completed its evaluation of what, if any, the impact
this Statement will have on the Company's financial statements or disclosures.
Stock-Based Compensation
The Company applies the principles of Accounting Principles Board ("APB")
Opinion 25 in accounting for employee stock option plans (the intrinsic value
method). The exercise price of the options granted during the fiscal periods
presented was fair market value. Accordingly, under APB 25, no compensation cost
has been recognized in the Company's financial statements for the three-month
periods ended May 3, 2003 and May 4, 2002. Had compensation cost been determined
on the basis of SFAS 123, "Accounting for Stock-Based Compensation,"
compensation expense would have been recorded based on the estimated fair value
of stock options granted during the fiscal periods presented. The total fair
value of stock options granted was estimated at $21,000 and $70,000 for the
three-month periods ended May 3, 2003 and May 4, 2002, respectively, based upon
the Black-Scholes option pricing model.
Had compensation cost for the Company's stock option plans been determined based
on the estimated fair value at the grant dates for awards under those plans
consistent with the method of SFAS 123 (as amended), the Company's compensation
cost (net of tax), net (loss) income and net (loss) income per common share,
basic and diluted, would have been affected as indicated in the pro-forma
amounts below:
Three-Month Period Ended
-----------------------------------------
May 3, May 4,
2003 2002
---------------- ----------------
Compensation costs recognized using APB Opinion 25 $ -- $ --
Compensation costs if recognized under SFAS 123,
net of income taxes of $0 and $0 $ 21,000 $ 70,000
Net (loss) income Actual $ (5,352,000) $ 434,000
Pro-forma $ (5,373,000) $ 364,000
Net (loss) income per share - basic Actual $ (1.78) $ 0.15
Pro-forma (1.79) $ 0.12
Net (loss) income per share - diluted Actual $ (1.78) $ 0.14
Pro-forma $ (1.79) $ 0.12
NOTE B - FINANCIAL RESULTS AND LIQUIDITY
Pending Equity Investment and Enhancements to Credit Facilities
As part of its plan to improve its overall liquidity and capital resources, as
more fully discussed below, the Company has recently entered into a stock
purchase agreement with an investment firm for a $7,000,000 investment of new
equity in the Company. In addition, the Company has reached an agreement in
principle with its existing lenders to amend its existing credit facility to,
among other things, increase the maximum credit from $44,650,000 to $54,650,000,
Closing of the stock purchase and the enhanced working capital facility is
subject to certain conditions, including the Company obtaining certain
concessions from its existing vendors and finalization of documentation
reflecting the agreed upon enhancements to its existing credit facility. Subject
to satisfying these conditions, the stock purchase and related transactions are
expected to close on or before June 30, 2003. However, there can be no assurance
that the stock purchase or amendment to increase the credit facility will be
completed.
Operations and Strategies
The Company has incurred operating losses during its three most recent fiscal
years and the quarter ended May 3, 2003, and as of May 3, 2003, the Company had
a substantial working capital deficit. These recent losses have been exacerbated
by difficult economic conditions existing in the retail market within which the
Company operates. The Company responded to this recurring loss situation by:
o signing a stock purchase agreement with an investment firm to purchase
$7,000,000 of newly issued shares of common and preferred stock in the
Company, subject to certain conditions (See above);
o agreeing in principle with its existing lenders to increase the maximum
amount available under its credit facility to $54,650,000, amending its
credit facility to revise the amortization schedule of its existing
$3,150,000 term loan and adding the Company's credit card receivables
to the borrowing base, subject to certain conditions (See above);
o refocusing the store development strategy by reducing 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 2003,
including the opening or reconfiguration of approximately nine large
stores which will offer the Company's "BestPrice! Kids" and "BestPrice!
Plus" concepts as separate "stores within a store" (the "tri-box
store");
o implementing a revised merchandising strategy which focuses 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 2003;
o implementing a marketing and advertising strategy involving targeted
programs for specific regions, including direct mail, newspaper
inserts, in-store collateral and electronic media.
o implementing changes in its distribution system to increase
efficiencies including increasing the amount of floor-ready merchandise
and thereby reducing processing costs; and
o initiating efforts to reduce selling, general and administrative
expense.
Since the end of fiscal 2002, the Company has experienced a negative sales trend
as compared with the same period in prior fiscal years, even after adjusting for
the decrease in the number of stores the Company operates. The Company's net
sales for the first seventeen weeks of fiscal 2003 were 12.6% below those for
the same seventeen weeks of fiscal 2002 which is well below the level of sales
assumed in the Company's fiscal 2003 business plan. Comparable store sales for
the first seventeen weeks of fiscal 2003 decreased 10.7% as compared with the
same period in fiscal 2002 and the Company has experienced similar sales trends
during the first two weeks of fiscal June. This difficult sales trend has
occurred in one of the historically strongest net sales periods of the Company's
fiscal year.
The current sales trend has negatively affected the Company's liquidity and
capital resources in the first quarter of 2003. If this sales trend continues to
persist in the second quarter of 2003, historically the largest sales volume and
most profitable quarter of the Company's fiscal year, the Company may not
continue to be in compliance with its covenants under its credit facility with
its primary lender. This credit facility subjects the Company to certain
covenants requiring a minimum level of quarterly earnings before interest,
taxes, depreciation and amortization (EBITDA), a minimum quarterly gross profit
percentage and certain sales and inventory receipt levels that are measured
monthly. There can be no assurance that the Company's primary lender would waive
any instances of non-compliance with financial covenants or amend the credit
agreement to adjust such financial covenants. As a result, if the trend of
declining net sales continues, the Company's results of operations and its
liquidity and capital resources could continue to be negatively affected as
funds may not be available under its revolving credit facility and its cash flow
may not be sufficient to meet the Company's cash needs to operate its business.
The Company has developed a plan to address these issues. This plan is designed
to provide for additional equity being invested in the Company and to
restructure current financing arrangements (see "Pending Equity Investment and
Enhancements to Credit Facilities" above), continue focusing merchandising
efforts on its higher-margin, core apparel items, reduce operating expenses, and
continue its investment in its tri-box store concept while identifying
under-performing stores for closure. The Company's ability to meet all
obligations as they come due for fiscal 2003, including planned capital
expenditures, is dependent upon the success in achieving the objectives of this
plan. Additionally, achieving the results contained within the fiscal 2003
business plan will require a reversal of the current negative sales trend. If
the current negative sales trend being experienced is not reversed, or if the
Company is not successful in obtaining a new equity investment in amounts and
terms acceptable to the Company, meeting obligations as they come due will
require additional cash generated from operations, including increases in
outstanding amounts of trade accounts payable. There can be no assurance that,
should this be necessary, the Company will be successful in extending the
balance in trade accounts payable and still procure inventory in the quantities
and mix required to achieve its forecasted level of sales. There also can be no
assurance that the Company will be successful in achieving the objectives of its
plan as outlined above, its forecasted results of operations and financial
condition, and in meeting its obligations as they come due. The existence of the
uncertainties as to the Company's ability to achieve these objectives, raises
substantial doubt as to the Company's ability to continue as a going concern.
Management expects that these strategies will contribute to improved results of
operations and financial condition during the remainder of fiscal 2003. However,
because there are certain risks and uncertainties related to achieving these
results, including the success of the development of the tri-box store
development concept, the availability of first quality merchandise from vendors
on acceptable terms and the availability of sufficient capital to execute these
plans, there is no assurance that these strategies will lead to the expected
level of improvement.
NOTE C - 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 (when
dilutive) outstanding. Common equivalent shares consist of shares under option
and warrants. Amounts shown do not reflect the effect of the pending investment
of new equity discussed in "Pending Equity Investment and Enhancements to Credit
Facilities," herein. A reconciliation of basic and diluted weighted average
shares outstanding is presented below:
Three-Month Period Ended
-----------------------------------
May 3, May 4,
2003 2002
--------------- ----------------
Weighted average number of common
shares outstanding - basic 3,014,753 2,987,829
Net effect of dilutive stock options - based
on the treasury stock method using the
average market price -- 9,705
--------------- ----------------
Weighted average number of common
shares outstanding - diluted
3,014,753 2,997,534
=============== ================
Common stock equivalents of 364,637 for the quarter ended May 3, 2003 were
excluded from the computation of diluted earnings per share because such common
stock equivalents were anti-dilutive.
NOTE D - CREDIT FACILITIES
The Company has a credit facility with its primary lender that includes a
revolving credit agreement of up to $40,000,000 (including a letter of credit
sub-facility of up to $25,000,000) through July 2005. 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 agreement (other than
the land, buildings, fixtures and improvements collateralizing the mortgage loan
discussed below). Amounts outstanding under the revolving credit agreement of
$33,972,000 and $33,159,000 as of May 3, 2003 and May 4, 2002, respectively, are
classified as current liabilities in the accompanying consolidated balance
sheets. 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 plus 0.5% or the Adjusted Eurodollar Rate, as defined in such
agreement, plus 2.25%. The credit facility also includes a $4,000,000 term loan.
At May 3, 2003, a balance of $3,150,000 remained on this term loan, of which
$550,000 is classified in current liabilities and $2,600,000 is classified in
long-term debt in the consolidated balance sheet. A final principal payment on
the term loan of $2,150,000 is due in July 2004. This summary of terms does not
reflect the potential enhancements to the Company's credit facilities described
in "Pending Equity Investment and Enhancements to Credit Facilities" herein.
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 facility 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 May 3, 2003, the Company
had approximately $2.4 million of excess availability under the borrowing base
formula (see also the related debt covenant discussed below). 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.
The Company's revolving credit agreement contains certain financial and
non-financial covenants, which the Company amended in April and May 2003. Among
other things, these covenants prohibit the Company from paying dividends,
restrict the ability of the Company to incur additional 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. With the amendments referred to above, the Company
was in full compliance with covenants both as of quarter end and since
quarter-end.
The Company's amended credit agreement with its primary lender contains
financial covenants, measured monthly, that require the Company to meet certain
required levels of sales and establishes minimum levels of inventory purchases.
In addition, beginning in the second quarter of fiscal 2003, the Company is
subject to certain covenants, which will be measured quarterly, requiring a
minimum level of earnings before interest, taxes, depreciation and amortization
(EBITDA) and a minimum gross profit percentage. Achieving results of operations
and financial condition for fiscal 2003 at levels that result in the Company
complying with all financial covenants depends upon the Company meeting certain
targets of net sales, gross margin and operating expenses. If the Company is not
successful in achieving these targets, the Company may not satisfy certain
financial covenants during fiscal 2003. The Company has been successful in
obtaining amendments to its credit agreement with its primary lender in the past
and, if necessary, would seek additional amendments or waivers to the
requirements of current covenants. There can be no assurance that the Company
would be successful in obtaining an amendment or waiver from its primary lender
should it not be in compliance with a financial covenant during fiscal 2003.
The Company also has an agreement with a commercial bank to provide a separate
letter of credit facility of up to $8,000,000 which expires on the earlier of
June 30, 2003 or termination of the Company's revolving credit agreement with
its primary lender. Under this agreement, which was amended in January and April
2003, the Company is required to maintain a $5,000,000 minimum level of adjusted
working capital (computed without regard to borrowings outstanding under the
revolving credit agreement). Letters of credit issued under the agreement are
collateralized by inventories purchased using such letters of credit. The
Company does not plan to renew this facility and, after June 30, 2003, the
Company expects to utilize a portion of the proposed increase in the maximum
credit of its revolving credit agreement for letters of credit previously
provided under this separate letter of credit facility. See "Pending Equity
Investment and Enhancements to Credit Facilities" herein.
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 principal balance outstanding of $6,910,000 at May 3, 2003, is
payable in 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 May 3, 2003
and May 4, 2002, and the related condensed consolidated statements of operations
for the three-month periods then ended and the related condensed consolidated
statements of cash flows for the three-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.
The accompanying condensed consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
B to the condensed consolidated financial statements and Note B to the annual
financial statements for the year ended February 1, 2003 (not presented herein),
certain conditions raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note B to the respective consolidated financial statements.
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 1, 2003, 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 May 16, 2003, we expressed an
unqualified opinion on those consolidated financial statements, and included an
explanatory paragraph concerning matters that raise substantial doubt about the
Company's ability to continue as a going concern. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of February 1, 2003 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
June 19, 2003
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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," "plans" 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 the
anticipated benefits from the support and participation of its proposed new
equity partner, 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. There are a number of important factors that could
cause the Company's actual results in fiscal 2003 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; the military action
in Iraq and its effect on consumer spending; 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 and in "Certain Considerations,"
contained herein. In addition, there is no guarantee that the Company will be
successful in meeting the closing conditions necessary for the completion of the
investment of new equity in the Company or the enhancements to its working
capital facility contemplated in this report. 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.
FINANCIAL SUMMARY
The following table sets forth, for the periods ended May 3, 2003 and May 4,
2002, certain financial statement elements expressed as a percentage of net
sales:
Period Ended
--------------------------------------------
May 3, 2003 May 4, 2002
--------------------- ----------------------
PERCENTAGE OF NET SALES
Net sales 100.0% 100.0%
Cost of goods sold, exclusive of depreciation and
amortization shown separately below 64.7% 61.9%
------ ------
Gross margin 35.3% 38.1%
------ ------
Selling, general and administrative expenses 27.7% 24.9%
Store rent and related expenses 11.2% 9.6%
Depreciation and amortization expense 2.2% 2.0%
Interest expense 1.0% 1.0%
------ ------
42.2% 37.6%
------ ------
(Loss) income before income taxes (6.9%) 0.5%
Provision for income taxes -% -%
------ ------
Net (loss) income (6.9%) 0.5%
====== ======
Stores in operation at period-end 590 623
====== ======
Results of Operations
Net sales for the three-month period ended May 3, 2003 decreased 11.6% compared
with the same time period in 2002. The decrease in year-over-year net sales was
primarily due to a comparable store sales decrease of 10.0% in the first quarter
of fiscal 2003 and to operating thirty fewer stores in the current three-month
period. Management believes that this comparable store sales decrease was due
primarily to the continued cool and wet weather in many of its markets as well
as consumer economic uncertainty due, in part, to the conflict in Iraq. The
Company considers stores that have been open 18 months or more to be comparable,
and there were 583 such stores at May 3, 2003.
During the first quarter of fiscal 2003, the Company relocated or expanded seven
of its existing stores. In addition, the Company closed seven under-performing
stores. At May 3, 2003, the Company operated 590 stores, thirty-three fewer than
at quarter-end last year. The Company's 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 decreased in the first quarter of
fiscal 2003 compared with the first quarter of fiscal 2002 as a result of lower
sales in the first quarter of fiscal 2003. Markdowns, distribution and
merchandising costs increased as a result of a lack of sales leverage due to
these lower sales year-over-year.
Selling, general and administrative ("SG&A") expenses increased as a percentage
of net sales in the first quarter of fiscal 2003 compared with the first quarter
of fiscal 2002. SG&A expenses were higher as a percentage of net sales primarily
due to a lack of sales leverage due to lower sales in the first quarter of
fiscal 2003 compared with fiscal 2002. In the first quarter of fiscal 2003, SG&A
expenses decreased in dollars compared with the same time period in fiscal 2002
primarily due to reducing operating costs in the Company's corporate offices and
to lower store costs as a result of operating thirty fewer stores
year-over-year.
Store rent and related expenses increased in dollars in the first quarter of
fiscal 2003 compared with the first quarter of fiscal 2002 due to an 8.9 percent
increase in the Company's average store rent. The increase in average store rent
and related expenses was 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. Management seeks to minimize
increases in store rent expense through renegotiating lease terms, relocating
stores, and leveraging rent increases through strategies intended to increase
sales by focusing on key categories and reformatting stores where necessary.
Depreciation and amortization decreased in dollars in the first quarter of
fiscal 2003 compared with the same period last year as a result of operating
thirty fewer stores year-over-year. Depreciation and amortization increased as a
percentage of sales in the first quarter of fiscal 2003 compared with the same
period last year as a result of a lack of sales leverage due to lower sales.
Interest expense remained at 1.0% of net sales in both the first quarter of
fiscal 2003 and 2002 due to lower average interest rates in 2003, offset by a
lack of sales leverage as a result of lower sales year-over-year.
The Company's effective income tax rate of 2.0% in the first quarter of fiscal
2002 reflects the Company's estimate of its effective tax rate expected for the
full fiscal year. At May 3, 2003, the Company's gross deferred income tax assets
of $19.6 million were offset by a full valuation allowance of $18.0 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 against the related net deferred income tax assets.
Management will continue to assess the adequacy of or the need for the valuation
allowance based upon future operations.
Pending Equity Investment and Enhancements to Credit Facilities
As part of its plan to improve its overall liquidity and capital resources, as
more fully discussed below, the Company has recently entered into a stock
purchase agreement with an investment firm for a $7,000,000 investment of new
equity in the Company. In addition, the Company has reached an agreement in
principle with its existing lenders to amend its existing credit facility, to
among other things, increase the maximum credit from $44,650,000 to $54,650,000.
Closing of the stock purchase agreement and the enhanced working capital
facility is subject to certain conditions, including the Company obtaining
certain concessions from its existing vendors and finalization of documentation
reflecting the agreed upon enhancements to its existing credit facility. Subject
to satisfying these conditions, the stock purchase and related transactions are
expected to close on or before June 30, 2003. However, there can be no assurance
that the stock purchase or amendment to increase the credit facility will be
completed.
Outlook and Business Strategy
The Company has incurred operating losses during its three most recent fiscal
years and the quarter ended May 3, 2003, and as of May 3, 2003, the Company had
a substantial working capital deficit. These recent losses have been exacerbated
by difficult economic conditions existing in the retail market within which the
Company operates. Since the end of fiscal 2002, the Company has experienced a
negative sales trend as compared with the same period in prior fiscal years,
even after adjusting for the decrease in the number of stores the Company
operates. The Company's net sales for the first seventeen weeks of fiscal 2003
were 12.6% below those for the same seventeen weeks of fiscal 2002 which is well
below the level of sales assumed in the Company's fiscal 2003 business plan.
Comparable store sales for the first seventeen weeks of fiscal 2003 decreased
10.7% as compared with the same period in fiscal 2002 and the Company has
experienced similar sales trends during the first two weeks of fiscal June. This
difficult sales trend has occurred in one of the historically strongest net
sales periods of the Company's fiscal year.
The Company believes that there are several reasons for this recent decrease in
net sales, including unusually cool and rainy weather in many of the geographic
markets in which the Company operates, some imbalances in inventory in select
merchandise categories, economic uncertainty and general decreases in consumer
spending in connection with the recent war in Iraq and its impact on apparel
spending by the Company's target customers.
The current sales trend has negatively affected the Company's liquidity and
capital resources in the first quarter of fiscal 2003. If this sales trend
continues to persist in the second quarter of fiscal 2003, historically the
largest sales volume and most profitable quarter of the Company's fiscal year,
the Company may not continue to be in compliance with certain of its covenants
under its credit facility with its primary lender. This credit facility subjects
the Company to certain covenants requiring a minimum level of quarterly earnings
before interest, taxes, depreciation and amortization ("EBITDA"), a minimum
quarterly gross profit percentage and certain sales and inventory receipt levels
that are measured monthly. There can be no assurance that the Company's primary
lender would waive any instances of non-compliance with certain financial
covenants or amend the credit agreement to adjust such financial covenants (see
"Liquidity and Capital Resources" herein). As a result, if the trend of
declining net sales continues, the Company's results of operations and its
liquidity and capital resources could continue to be negatively affected because
funds may not be available under its revolving credit facility and its cash flow
may not be sufficient to meet the Company's cash needs to operate its business.
The Company has developed a plan to address these issues. This plan is designed
to provide for additional equity being invested in the Company and restructuring
its current financing arrangements (see "Pending Equity Investment and
Enhancements to Credit Facilities" herein) and continuing its merchandising,
expense reduction and tri-box store development strategies as further outlined
below. The Company's ability to meet all obligations as they come due for fiscal
2003, including planned capital expenditures, is dependent upon the success in
achieving the objectives of this plan. However, because there is no assurance as
to the Company's ability to be successful in achieving its objectives as
outlined below, substantial doubt exists as to the Company's ability to continue
as a going concern.
To address the potential cash flow issues that a continued negative net sales
trend would create, the Company has entered into a stock purchase agreement with
an investment firm for a $7,000,000 investment of new equity in the Company. In
addition, the Company has reached an agreement in principle with its existing
lenders to amend its existing credit facility to, among other things, increase
the maximum credit from $44,650,000 to $54,650,000. Closing of both the stock
purchase and the enhanced working capital facility is subject to certain
conditions, including the Company obtaining certain concessions from its
existing vendors and finalization of documentation reflecting the enhancements
to its existing credit facility. There can be no assurance that the Company will
be successful in its efforts to improve its liquidity and capital resources
through such securities sales, refinancing its existing credit facilities or
otherwise.
The Company plans to continue to focus its merchandising efforts to improve the
current trend in net sales by, among other things, continuing to focus on its
higher-margin core apparel merchandise categories of women's and children's
apparel and women's accessories. However, the general decreases in consumer
spending in recent months have impacted the pricing at which merchandise must be
offered and this has had a negative impact on gross margin which could continue.
Given the continuing economic uncertainty and lower demand for apparel,
management intends to maintain conservative inventory levels. In addition, the
Company plans to continue to focus its efforts on maintaining its tight expense
controls. In fact, since the end of fiscal 2002, the Company has reduced its
corporate office and field management workforce by approximately 10%.
The Company plans to continue to focus its store development efforts and
business strategy in the remainder of fiscal 2003 on its self-described tri-box
store concept which consists of stores ranging from approximately 7,000 to
11,000 square feet, offering the Company's "BestPrice! Kids" and "BestPrice!
Plus" concepts along with substantially the same junior/misses apparel and
accessories found in the Company's "BestPrice! Fashions" stores. To date, the
Company has opened eleven new tri-box stores and has converted three existing
stores to the tri-box concept. Sales volumes in each of these stores have
exceeded the Company's standard "BestPrice! Fashions" store. In fact, based on
results to date, management projects that these stores, on average, will
generate substantially more annual sales volume and significantly more net store
contribution than the Company's traditional stores. Management expects to
realize improved leverage of its fixed overhead and operations as the Company
focuses its store development on these tri-box stores. However, there can be no
assurance that the initial success of the tri-box stores will continue. In
addition, the Company's initiatives to improve sales and operating results
through its focus on the tri-box concept are designed to improve the Company's
operating performance in the long term and are unlikely to result in immediate
improvement in operating results. There are other factors, many of which are
beyond the Company's control, that could affect the Company's sales and
operating results. See "Certain Considerations," herein.
As a part of the Company's focus on the tri-box concept, the Company may, over a
period of time, attempt to sell certain smaller square-footage stores that do
not fit strategically with the Company's tri-box focus. In addition, the Company
will continue to close or sell certain smaller square footage under-performing
stores. Management believes that this strategy of opening new tri-box stores,
while at the same time closing or selling under-performing and/or smaller
square-footage stores, will contribute to improved cash flow, results of
operations and financial condition of the Company in the future. However, there
are a number of risks and uncertainties related to this strategy. See "Certain
Considerations," herein.
There can be no assurance that the Company's plans as outlined above will be
successful in increasing its net sales and operating results.
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 facility to meet its liquidity needs.
During the Company's three most recent fiscal years, the Company has primarily
relied upon its credit facilities to offset cash used in operations and to
expand, relocate and open new 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. The Company relies on
net sales and resultant gross margin to provide sufficient cash flow to meet its
financial obligations. When net sales and gross margin levels have not been
sufficient 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.
The operating issues outlined above (see "Outlook and Business Strategy" herein)
have created additional needs for liquidity. The Company has developed a plan to
address these issues. This plan is designed to provide for additional equity
being invested in the Company and the restructuring of its current financing
arrangements (see "Pending Equity Investment and Enhancements to Credit
Facilities" contained herein), continue focusing merchandising efforts on its
higher-margin, core apparel items, reduce operating expenses, and continue its
investment in its tri-box store concept while identifying under-performing
stores for closure. The Company's ability to meet all obligations as they come
due for fiscal 2003, including planned capital expenditures, is dependent upon
the success in achieving the objectives of this plan. Additionally, achieving
the results contained within the fiscal 2003 business plan will require a
reversal of the current negative sales trend. If the current negative sales
trend being experienced is not reversed, or if the Company is not successful in
obtaining new equity investments in amounts and terms acceptable to the Company,
meeting obligations as they come due will require additional cash generated from
operations from increases in outstanding amounts of trade accounts payable.
There can be no assurance that should this be necessary, the Company will be
successful in extending the balance in trade accounts payable and still procure
inventory in the quantities and mix required to achieve its forecasted level of
sales. There can be no assurance that the Company will be successful in
obtaining concessions from certain of its merchandise vendors as part of the
conditions of closing its stock purchase agreement and enhancements to its
credit facilities described in "Pending Equity Investment and Enhancements to
Credit Facilities" herein. There also can be no assurance that the Company will
be successful in achieving the objectives of its plan as outlined above, its
forecasted results of operations and financial condition, and in meeting its
obligations as they come due.
The Company's credit facilities consist of a revolving credit agreement and term
loan with its primary lender, a mortgage loan collateralized by the Company's
corporate offices and distribution center and letter of credit facilities.
Collectively, the credit facilities contain certain financial and non-financial
covenants, with which the Company was in compliance at May 3, 2003. Refer to
Note D to the unaudited condensed consolidated financial statements for a
detailed description of the Company's credit facilities.
In the first three months of fiscal 2003, borrowings on the Company's revolving
credit facility were primarily used to fund capital expenditures. In the first
three months of fiscal 2002, net cash provided by operations and borrowings on
the Company's revolving credit facility were primarily used to fund capital
expenditures.
The following schedule summarizes the changes to the Company's store portfolio:
Three-Month Period Ended
-------------------------------
May 3, 2003 May 4, 2002
----------- -----------
New store openings - 3
Store relocations or expansions 7 11
At May 3, 2003, total merchandise inventories decreased 7.6% compared with total
May 4, 2002. The decrease in total merchandise inventories was primarily
attributable to a lower level of merchandise in-transit to the Company's stores
as a result of decreasing its levels of imported merchandise compared with the
same period in 2002, and decreasing the amount of time required to process and
distribute merchandise to the stores. In preparation for the spring selling
season, total merchandise inventories at the end of the first quarter of fiscal
2003 were 13.7% higher on an average store basis than at February 1, 2003 when
inventories are typically lower. The level and source of inventories are subject
to fluctuations because of the Company's seasonal operations and business
conditions prevailing at the time.
CERTAIN CONSIDERATIONS
Terrorism and the uncertainty of war may affect the Company's business.
The possibility of terrorist attacks, such as the attacks that occurred in New
York and near Washington, D.C. on September 11, 2001, and the impact of the war
with Iraq have negatively affected and may continue to affect the markets in
which the Company operates and the Company's operations. Immediately following
the September 11 attacks, the Company experienced sluggish demand for apparel in
its stores located along the border with Mexico and in areas whose local
economies are heavily dependent upon tourism. The potential near-term and
long-term effects that any future terrorist attacks may have for the Company's
customers, the markets for its products and the United States economy are
uncertain.
The Company faces significant competition.
The Company operates in the highly competitive discount retail merchandise
business. The Company competes with large discount retail chains such as
Wal-Mart, Kmart and Target and with off-price chains such as TJ Maxx, AJ Wright,
Ross Stores, Factory-2-U Stores and Marshall's, most of which have substantially
greater capital and other resources than the Company's. The Company also
competes with independent and small chain retailers which serve the same low-
and middle-income market. In the future, new companies may also enter the
deep-discount retail industry. As a result of depressed retail sales resulting
from the currently lackluster demand for apparel, the Company now faces
significant competition from discount retail chains and traditional department
stores which are heavily discounting prices of apparel and, as a result, more
directly competing with the Company's price points. Although management believes
that the Company is well-positioned to compete in its markets, there is no
guarantee that the Company will be able to compete successfully against its
current and future competitors.
As a result of competition, the Company is subject to the risk of reduced
profitability resulting from lower net sales and reduced margins. Management
expects that competition will continue and increase in the future. To counteract
such competitive pressures, the Company has implemented certain merchandise
strategies including concentrating on its core apparel and accessories
categories, better execution of its core businesses, and broader methods of
marketing its business; all designed to improve gross margin, customer frequency
and attract new customers. However, management can not guarantee that these
merchandising and marketing strategies and other actions taken will improve
results of operations or be adequate to minimize the Company's exposure to any
negative impacts due to competition.
The Company's improvement in operating results depends on improvement in net
sales and gross margin.
The Company's improvement in operating results depends largely on its ability to
improve net sales and gross margin. To that end, in the future, the Company will
seek to focus its resources on its core merchandise categories of women's and
children's apparel and women's accessories. Within these core merchandise
categories, management believes that plus-size women's apparel, children's
apparel and women's accessories offer the most potential to increase net sales
and gross margin. To achieve this, the Company has increased the square footage
devoted to these categories in many of its stores. The Company will seek to
improve its gross margin in existing stores by continuing to focus its resources
on higher margin, faster-turning apparel categories and by increasing, as
proportions of its total merchandise offerings, accessories and its own brands
of merchandise.
The Company's tri-box store development efforts may not result in the improved
operating results expected by management.
The Company's improvement in operating results also depends on its ability to
improve net sales and gross margin through its tri-box store strategy. This
tri-box strategy involves expanding, converting or relocating existing stores
and/or opening new stores of 7,000 to 11,000 square feet which offer the
Company's "BestPrice! Kids" and "BestPrice! Plus" concepts as separate "stores
within a store." The Company's tri-box store development strategy depends on
many factors, including its ability to identify suitable markets and sites for
tri-box stores, negotiate leases with acceptable terms, appropriately upgrade
its financial and management information systems and controls to support the
tri-box strategy, and manage its operating expenses. In addition, the Company
must be able to continue to hire, train, motivate and retain competent managers
and store personnel. Many of these factors are beyond the Company's control. As
a result, the Company may not be able to achieve its future store development
goals. Any failure by the Company to achieve its tri-box store development goals
on a timely basis, continue to enjoy acceptance in its current markets, attract
and retain management and other qualified personnel, appropriately upgrade its
financial and management information systems, or control or manage operating
expenses could adversely affect its future operating results and its ability to
execute its tri-box store development strategy.
There is no guarantee that the Company's tri-box store development strategy will
improve the Company's results of operations as expected by management or that
the trend of increased sales in tri-box stores, as compared with the Company's
traditional stores, will continue. A variety of factors are critical to the
success of the Company's tri-box stores and such factors include, but are not
limited to, store sales, store location, store size, lease terms, initial
advertising effectiveness and brand recognition. Management cannot assure that
such large stores will achieve the sales per selling square foot and store
contributions achieved in the Company's current tri-box stores.
Planned changes to and disruptions in distribution of merchandise could impact
the Company's business.
The Company's success depends in part upon whether its receiving and shipping
schedules for merchandise are well organized and managed. The Company
anticipates a continued increase in the level of purchases of pre-ticketed and
pre-packaged merchandise from vendors, which it believes will continue to reduce
the handling costs associated with distributing merchandise to its stores.
However, there is no guarantee that these plans will provide the Company with
the efficiencies anticipated.
In addition, the Company may face unexpected demands on its distribution
operations that could cause delays in delivery of merchandise from its
distribution center to its stores. A fire, earthquake or other disaster at the
Company's distribution center could harm its business, financial condition and
results of operations. The Company maintains commercial property, business
interruption, earthquake and flood insurance to minimize the potential financial
impact of these risks.
Relationships with the Company's vendors and the availability of in-season
merchandise affect its business.
The Company's success depends in large part on its ability to locate and
purchase first-quality merchandise at attractive prices and acceptable credit
terms. Management cannot be certain that such merchandise will continue to be
available in the future, or that its credit terms will remain acceptable.
Further, the Company may not be able to find and purchase such first-quality
merchandise in quantities necessary to accommodate its operations. Although
management believes that the Company's relationships with its vendors are good,
the Company does not have long-term agreements with any vendor. As a result, the
Company must continuously seek out buying opportunities from its existing
suppliers and from new sources. The Company competes for these opportunities
with other retailers, discount and deep-discount chains and mass merchandisers.
Although the Company does not depend on any single vendor or group of vendors,
and believes it can successfully compete in seeking out new vendors, a
disruption in the availability of merchandise at attractive prices and
acceptable terms could impair its business. In addition, the Company has
recently entered into an exclusive stock purchase agreement with an investment
firm for an investment of new equity in the Company and has reached an agreement
in principle with its existing lenders for an increase in its working capital
facility from $44,650,000 to $54,650,000. The closing of its stock purchase
agreement and enhancements to its credit facilities is dependent upon the
Company obtaining concessions from certain of its merchandise vendors as
previously described in "Pending Equity Investment and Enhancements to Credit
Facilities" herein.
The Company's business is subject to seasonality.
The Company has historically realized its highest levels of sales and operating
results during the first and second quarters of its fiscal year (the quarters
ending in April and July) because of heavy sales associated with the Easter and
Mother's Day holidays. Historically, the Company has realized a significant
portion of its net sales and net income during these two quarters. The Company's
net sales for the first seventeen weeks of fiscal 2003 were 12.6% below those
for the same seventeen weeks of fiscal 2002 which is well below the level of
sales assumed in the Company's fiscal 2003 business plan. Any adverse events
during the second quarter could therefore negatively affect the Company's
financial performance. If for any reason, the Company's net sales during these
seasons were below seasonal norms or its expectations, a seasonal merchandise
inventory imbalance could result. If such an imbalance occurred, markdowns might
be required to clear excess inventory. The Company's profitability and operating
results could be adversely affected by higher than expected markdowns.
The Company's capital requirements may impact its operating results.
Historically, the Company's capital needs have been to maintain and expand its
stores and inventories. In the future, the Company may require additional
capital in order to successfully implement its tri-box store strategy. If the
current negative sales trend continues and the Company is unable to generate
sufficient cash flow from its operations, enter into acceptable debt financing
arrangements, sell additional equity and/or generate sufficient cash flow from
the potential sale of non-strategic assets, it may be forced to limit the number
of tri-box stores that it can open, which could adversely affect the Company's
financial condition and the financial success of this strategy.
The Company may need additional financing to meet its future capital
requirements.
The Company has incurred operating losses for the past three fiscal years and
had a deficiency in working capital as of May 3, 2003. These factors, as well as
the uncertain retail environment in which the Company operates, have raised
substantial doubt about the Company's ability to continue as a going concern.
The Company has developed a plan to address these issues, which is detailed in
the "Outlook and Business Strategy" section above. The Company's financial
resources are limited and the amount of funding that the Company will require in
the future is uncertain (see "Outlook and Business Strategy" and "Liquidity and
Capital Resources" herein). If the Company's results of operations and/or
proceeds from its pending sale of equity securities, sales of non-strategic
assets and/or refinancing of certain indebtedness fall short of management's
expectations, the Company's ability to fund its tri-box store development
strategy, take advantage of opportunities, and/or respond to competitive
pressures may be affected.
The Company's business is vulnerable to economic factors beyond its control.
The Company's ability to provide quality merchandise at everyday low prices
could be hindered by certain economic factors beyond its control, including but
not limited to:
o increases in inflation;
o increases in operating costs;
o increases in employee health care and workers' compensation costs;
o increases in prevailing wage levels;
o increases in the minimum wage rate, both at the Federal and state levels; and
o decreases in consumer confidence levels.
The market price of the Company's common stock has experienced substantial
fluctuation.
The market price of the Company's common stock has fluctuated substantially over
the last several years. In the future, trading prices for its common stock could
fluctuate significantly due to many factors, including:
o the depth of the market for the Company's common stock;
o changes in expectations of the Company's future financial performance,
including financial estimates by securities analysts and investors;
o variations in the Company's operating results;
o conditions or trends in the Company's industry;
o additions or departures of key personnel;
o continued listing criteria;
o future sales of the Company's common stock.
The Company's common stock will not continue to be listed on The NASDAQ
SmallCap Market.
On January 22, 2003, the Company received notification from NASDAQ that its
common stock did not meet the $1.00 minimum bid price required by the NASDAQ
SmallCap Market. As a result, the Company has a 180-day grace period through
July 21, 2003 in which to come into compliance with the minimum bid price
requirement for at least ten consecutive trading days or its common stock will
be de-listed. On June 6, 2003, the Company received notification from NASDAQ
that its common stock regained compliance with the minimum bid price requirement
based on meeting the minimum requirement for ten consecutive trading days.
On April 14, 2003, the Company received notification from NASDAQ that its common
stock did not meet the $1,000,000 minimum market value of publicly-held shares
required by the NASDAQ SmallCap Market. As a result, the Company had a
three-month grace period through July 14, 2003 in which to come into compliance
with the minimum market value of publicly-held shares requirement for at least
ten consecutive trading days or its common stock will be de-listed.
After reporting the net loss for the three-month period ended May 3, 2003, the
Company's stockholders' equity no longer meets the minimum requirement of the
NASDAQ SmallCap Market. Accordingly, the Company has requested that its common
stock be de-listed and will apply to have its common stock quoted on the OTC
Bulletin Board.
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, a
fixed-rate term loan and a fixed-rate mortgage loan agreement, which may
adversely affect its 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 for the first three months
of fiscal 2003 and fiscal 2002 would have increased pre-tax (loss) income by
approximately $82,000 in both of the respective time periods.
Effect of New Accounting Pronouncements
In April 2003, Statement of Financial Accounting Standards ("SFAS") No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities,"
was issued which amends and clarifies the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities under SFAS No. 133. It requires, among other things, that
contracts with comparable characteristics be accounted for similarly and
clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative and when a derivative contains a
financing component that warrants special reporting in the statement of cash
flows. SFAS No. 149 is effective generally for contracts entered into and
modified after June 30, 2003. Because the Company presently has no derivative
instruments, adoption is expected to have no effect on its financial statements
or disclosures.
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity." This Statement establishes new standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). This Statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company has not completed its evaluation of what, if any, the impact
this Statement will have on the Company's financial statements or disclosures.
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 Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluations within 90 days prior to the filing date of
this report, that the Company's disclosure controls and procedures are effective
for gathering, analyzing and disclosing the information which it is required to
disclose in its reports filed under the Securities Exchange Act of 1934. There
have been no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the previously mentioned evaluation.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
10(a)+ Amendment Number Fifteen to the Continuing
Commercial Credit Agreement by and between Congress
Financial Corporation (Southern) as Lender and the
Registrant and One Price Clothing of Puerto Rico, Inc. as
Borrowers dated as of May 30, 2003.
10(b) Stock Purchase Agreement dated by and between Sun
One Price, LLC and the Registrant dated June 18, 2003:
Incorporated by reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K dated June 19,
2003 (File No. 0-15385) (the "June 19, 2003 Form 8-K").
10(c) First Amendment to the Amended and Restated
Shareholders' Rights Agreement by and between the
Registrant and Continental Stock Transfer and Trust
Company dated as of June 16, 2003: Incorporated by
reference to Exhibit 10.2 to the June 19, 2003 Form 8-K.
99.1+ Certification Required by Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2+ Certification Required by Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On April 8, 2003 the Company filed Form 8-K to report that the
Company issued a press release announcing its earnings for the
three-month and twelve-month periods ended February 1, 2003.
Financial statements were attached. In addition, the Company
announced the amendment of its revolving credit facility with
Congress Financial (Southern), an affiliate of Wachovia
Corporation.
On June 19, 2003, the Company filed Form 8-K to report that
the Company issued a press release announcing the execution of
a stock purchase agreement with Sun One Price, LLC. In
addition, the Company announced the execution of the First
Amendment to the Amended and Restated Shareholders' Rights
Agreement by and between the Registrant and Continental Stock
Transfer and Trust Company dated as of June 16, 2003. A copy
of the stock purchase agreement, the First Amendment to the
Amended and Restated Shareholders' Rights Agreement and the
press release were filed with Form 8-K.
-------------------------------------------------------------
+ Filed herewith.
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: June 23, 2003 /s/Leonard M. Snyder
------------------------------------------------------
Leonard M. Snyder
Chairman of the Board of Directors and Chief Executive
Officer
(principal executive officer)
Date: June 23, 2003 /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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 23, 2003
/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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 23, 2003
/s/H. Dane Reynolds
- -------------------------
H. Dane Reynolds
Chief Financial Officer