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 November 1, 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
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
--- ---
The number of shares of the registrant's common stock outstanding as of December
10, 2003 was 20,473,494.
INDEX
ONE PRICE CLOTHING STORES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets - November 1, 2003,
February 1, 2003 and November 2, 2002
Condensed consolidated statements of operations - Three-month
periods and nine-month periods ended November 1, 2003 and
November 2, 2002
Condensed consolidated statements of cash flows - Nine-month
periods ended November 1, 2003 and November 2, 2002
Notes to unaudited condensed consolidated financial statements
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 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PART I. FINANCIAL INFORMATION
Item I. Financial Statements (Unaudited)
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
One Price Clothing Stores, Inc. and Subsidiaries
November 1, February 1, November 2,
2003 2003 2002
------------------ ------------------ ----------------
(1)
Assets
CURRENT ASSETS
Cash and cash equivalents $ 3,659,000 $ 2,034,000 $ 954,000
Merchandise inventories 59,523,000 49,277,000 51,690,000
Other current assets 9,492,000 7,073,000 10,443,000
------------------ ------------------ ----------------
TOTAL CURRENT ASSETS 72,674,000 58,384,000 63,087,000
------------------ ------------------ ----------------
PROPERTY AND EQUIPMENT, at cost 75,193,000 75,457,000 75,034,000
Less accumulated depreciation 45,054,000 42,476,000 41,382,000
------------------ ------------------ ----------------
30,139,000 32,981,000 33,652,000
------------------ ------------------ ----------------
DEFERRED INCOME TAXES 805,000 1,007,000 3,241,000
------------------ ------------------ ----------------
OTHER ASSETS 5,773,000 4,967,000 5,002,000
------------------ ------------------ ----------------
$ 109,391,000 $ 97,339,000 $ 104,982,000
================== ================== ================
Liabilities and Shareholders' Equity
CURRENT LIABILITIES
Accounts payable $ 53,739,000 $ 38,183,000 $ 37,206,000
Revolving credit agreement 35,325,000 32,863,000 33,640,000
Current portion of long-term debt 7,825,000 1,489,000 4,824,000
Income taxes payable 559,000 433,000 494,000
Sundry liabilities 6,405,000 6,649,000 6,620,000
------------------ ------------------ ----------------
TOTAL CURRENT LIABILITIES 103,853,000 79,617,000 82,784,000
------------------ ------------------ ----------------
LONG-TERM DEBT 11,647,000 10,371,000 7,674,000
------------------ ------------------ ----------------
OTHER NON-CURRENT LIABILITIES 3,194,000 3,231,000 2,623,000
------------------ ------------------ ----------------
SHAREHOLDERS' EQUITY
Preferred stock, par value $0.01 --
authorized 500,000 shares:
Series A, authorized and un-issued100 shares - - -
Series B, authorized and un-issued 3,500 shares
Common stock, par value $0.01 -- Authorized 29,000,000, 10,000,000 and
10,000,000 shares, respectively; issued and outstanding
20,473,494, 3,006,019 and 3,006,019, respectively 204,000 30,000 30,000
Additional paid-in capital 18,366,000 11,581,000 11,546,000
(Accumulated deficit) retained earnings (27,832,000) (7,450,000) 366,000
Less: Treasury stock at cost - 7,150 shares (41,000) (41,000) (41,000)
------------------ ------------------ ----------------
(9,303,000) 4,120,000 11,901,000
------------------ ------------------ ----------------
$ 109,391,000 $ 97,339,000 $ 104,982,000
================== ================== ================
(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 Nine-Month Period Ended
--------------------------------- ---------------------------------
November 1, November 2, November 1, November 2,
2003 2002 2003 2002
---------------- --------------- ---------------- ---------------
NET SALES $ 61,945,000 $ 71,190,000 $ 212,814,000 $ 243,538,000
Cost of goods sold, exclusive of depreciation and
amortization, shown separately below 40,591,000 47,315,000 143,068,000 154,628,000
---------------- --------------- ---------------- ---------------
GROSS MARGIN 21,354,000 23,875,000 69,746,000 88,910,000
---------------- --------------- ---------------- ---------------
Selling, general and administrative expenses 19,930,000 20,966,000 61,696,000 63,884,000
Store rent and related expenses 8,121,000 8,283,000 24,948,000 24,588,000
Depreciation and amortization expense 1,528,000 1,621,000 4,859,000 5,023,000
Interest expense 963,000 798,000 2,630,000 2,551,000
Forgiveness of debt - - (5,414,000) -
---------------- --------------- ---------------- ---------------
30,542,000 31,668,000 88,719,000 96,046,000
---------------- --------------- ---------------- ---------------
LOSS FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES (9,188,000) (7,793,000) (18,973,000) (7,136,000)
Provision for income taxes 12,000 21,000 44,000 257,000
---------------- --------------- ---------------- ---------------
LOSS FROM CONTINUING OPERATIONS (9,200,000) (7,814,000) (19,017,000) (7,393,000)
LOSS FROM DISCONTINUED OPERATIONS, net of income taxes of
$0 in all periods (567,000) (210,000) (1,365,000) (85,000)
---------------- --------------- ---------------- ---------------
NET LOSS $ (9,767,000) $ (8,024,000) $ (20,382,000) $ (7,478,000)
================ =============== ================ ===============
Loss per common share from continuing operations - basic
and diluted $ (0.84) $ (2.60) $ (2.99) $ (2.46)
Loss per common share from discontinued operations - basic
and diluted (0.05) (0.07) (0.21) (0.03)
---------------- --------------- ---------------- ---------------
Net loss per common share - basic and diluted $ (0.89) $ (2.67) $ (3.20) $ (2.49)
================ =============== ================ ===============
Weighted average number of common shares
outstanding - basic and diluted 10,940,574 3,006,019 6,350,491 2,999,544
================ =============== ================ ===============
See notes to unaudited condensed consolidated financial statements
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
One Price Clothing Stores, Inc. and Subsidiaries
Nine-Month Period Ended
---------------------------------------
November 1, November 2,
2003 2002
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (20,382,000) $ (7,478,000)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation and amortization 4,894,000 5,098,000
Forgiveness of debt 5,414,000 -
Provision for awards of common stock and warrants 568,000 75,000
Decrease in other non-current assets 654,000 183,000
Increase in other non-current liabilities 64,000 196,000
Deferred income taxes - 200,000
Loss on disposal of property and equipment and impairment
charges 816,000 420,000
Changes in operating assets and liabilities 1,598,000 4,094,000
------------------ ------------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (6,374,000) 2,788,000
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,211,000) (3,016,000)
Purchases of other non-current assets (380,000) (559,000)
------------------ ------------------
NET CASH USED IN INVESTING ACTIVITIES (2,591,000) (3,575,000)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from revolving credit agreement 2,462,000 1,556,000
Proceeds from term loan 5,000,000 -
Repayment of long-term debt (934,000) (548,000)
Debt and equity financing costs incurred (1,625,000) (409,000)
Payment of capital lease obligations (611,000) (984,000)
Decrease in amount due to related parties (93,000) (151,000)
Issuance of common stock, preferred stock and warrants 6,391,000 -
------------------ ------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 10,590,000 (536,000)
------------------ ------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,625,000 (1,323,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,034,000 2,277,000
------------------ ------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,659,000 $ 954,000
================== ==================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 2,225,000 $ 2,326,000
Income taxes paid 93,000 151,000
Non-cash investing and financing activities:
Capital leases 82,000 -
Issuance of common stock awards - 108,000
Issuance of stock warrants 567,000 -
Issuance of vendor notes payable 4,099,000 -
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
and nine-month periods ended November 1, 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).
Stock-Based Compensation
The Company applies the principles of Accounting Principles Board ("APB")
Opinion 25, "Accounting for Stock Issued to Employees," 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 related to employee stock option
awards has been recognized in the Company's financial statements for the
nine-month periods ended November 1, 2003 and November 2, 2002. Had compensation
cost been determined on the basis of Statement of Financial Accounting
Standards, ("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 $20,000 and $63,000 for the nine-month
periods ended November 1, 2003 and November 2, 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 and net loss
per common share, basic and diluted, would have been affected as indicated in
the pro-forma amounts below:
Nine-Month Period Ended
------------------------------
November 1, November 2,
2003 2002
----------- ----------
Compensation costs recognized using APB Opinion 25 $ - $ -
Compensation costs if recognized under SFAS 123,
net of income taxes of $0 and $0 $ 20,000 $ 63,000
Net loss Actual $ (20,382,000) $ (7,478,000)
Pro-forma $ (20,402,000) $ (7,541,000)
Net loss per share - basic and diluted Actual $ (3.20) $ (2.49)
Pro-forma $ (3.20) $ (2.51)
NOTE B - FINANCIAL RESULTS AND LIQUIDITY
Equity Investment and Enhancements to Credit Facilities
On June 27, 2003, the Company obtained $7,000,000 in additional funding as a
result of closing a transaction with Sun One Price, LLC ("Sun One Price"), an
affiliate of Sun Capital Partners, Inc. (a private investment firm based in Boca
Raton, Florida) and three co-investors ("the Sun transaction"). In exchange for
the $7,000,000, the Company issued to Sun One Price, 5,119,101 shares of its
common stock, 100 shares of its preferred stock (which were converted into
11,964,500 shares of common stock immediately upon amendment of the Company's
certificate of incorporation in early October 2003) and an anti-dilution
warrant, the result of which gave Sun One Price 85% of the voting rights of the
Company's common stock. Following the conversion of the 100 shares of preferred
stock to common stock, Sun One Price owned approximately 85% of the Company's
common shares outstanding and retained approximately 85% of the associated
voting rights. The anti-dilution warrant allows Sun One Price to maintain its
85% ownership position upon the exercise of options or warrants by other
investors. In addition, the Company also amended its existing credit facility
to, among other things, increase the maximum credit from $44,650,000 to
$54,650,000, then to $60,000,000 in October 2003 (See discussion below). The
completion of the equity investment and the amendments to the credit facility
were 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. These
concessions included forgiveness of $5,915,000 and deferral of up to 36 months
of $4,099,000 of amounts the Company owed to such vendors as of June 27, 2003.
The deferred amount bears interest at 5% per year. At November 1, 2003,
$1,923,000 and $1,547,000 were included in Current Liabilities and Long-Term
Debt, respectively, in the Condensed Consolidated Balance Sheets relating to the
deferred amounts. These conditions were satisfied and the stock purchase and
related transactions closed on June 27, 2003.
The Company awarded warrants to third party recipients during the nine-month
period ended November 1, 2003 in partial settlement of certain indebtedness. The
estimated fair value of such warrants of $471,000 was netted against the
forgiveness of debt gain arising from obtaining certain concessions from its
existing vendors (see "Equity Investment and Enhancements to Credit Facilities"
above).
On October 24, 2003, the Company obtained $5,000,000 in additional funding in
the form of a term loan (the "October term loan") provided indirectly by its
primary shareholder, Sun One Price. The additional funding was facilitated by an
amendment to the Company's revolving credit facility with its primary lender
under which Sun One Price purchased the $5,000,000 term loan as a junior
participant. The $5,000,000 term loan plus accrued interest is payable by the
Company on May 20, 2004, provided that the Company meets certain excess
availability requirements as described in the amended revolving credit facility.
Loans made under the new loan agreement bear interest at 15% per annum. Interest
accruing on loans made under the new loan agreement is capitalized each month
into the principal balance and will be due at the maturity date of the new loan
agreement. In addition, Sun One Price will earn a facility fee of $150,000,
which will be due and payable on the maturity date of the new loan agreement,
and receive warrants to purchase the Company's common stock at the exercise
price of $0.01 per share.
On October 24, 2003, the Company issued Sun One Price 150,000 of such warrants
and increased Other Assets in the Condensed Consolidated Balance Sheets by
$96,000 which represents the fair value of the warrants. In addition, until such
time as Sun One Price no longer has any rights in loans made under the amendment
to the Company's revolving credit facility pursuant to the junior participation
agreement between Sun One Price and the Company's primary lender, Congress
Financial (Southern) and until the Company no longer has any outstanding
obligations or liabilities under the amendment to the Company's revolving credit
facility, Sun One Price will be granted the right to purchase, at an exercise
price of $0.01 per share, (a) 150,000 shares of the Company's common stock on
November 24, 2003; (b) 150,000 shares of the Company's common stock on each
monthly anniversary of November 24, 2003 until May 20, 2004; (c) 300,000 shares
of the Company's common stock on May 20, 2004; and (d) 300,000 shares of the
Company's common stock on each monthly anniversary of May 20, 2004 until the
expiration of the warrant.
Operations and Strategies
The Company incurred operating losses during its three most recent fiscal years
and the nine-month period ended November 1, 2003, and as of November 1, 2003,
the Company had a substantial working capital deficit and accumulated deficit.
The Company believes that these recent losses were 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 thirty-nine weeks of fiscal 2003 were 13.7%
below those for the same thirty-nine 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 thirty-nine weeks of fiscal 2003 decreased
9.7% as compared with the same period in fiscal 2002. The primary reasons
identified for the fiscal 2003 year to date decrease in net sales were
imbalances in select merchandise categories, continued weakness in consumer
spending on apparel and continued economic uncertainty. Additionally, the
Company experienced reduced flow of merchandise while negotiating concession
agreements with certain of its vendors in June 2003. The Company responded to
these issues by:
o completing the Sun transaction and the October term loan in 2003;
o negotiating with its existing lenders to further increase the maximum
amount available under its credit facility to $60,000,000 with the
October amendment, 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;
o refocusing its store development strategy by reducing the number of new
store openings while focusing on relocating and expanding existing
stores in proven locations while closing certain smaller,
under-performing stores. The Company has continued this store
development approach during fiscal 2003, including the opening or
reconfiguration of approximately nine large stores (seven of which have
opened) 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),
which the Company plans to continue and improve upon;
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 merchandise sourcing program and its
distribution systems, both designed to increase merchandise margins, in
part, by reducing processing costs through increasing the amount of
floor-ready merchandise;
o changing the composition of its senior management team; and
o reducing selling, general and administrative expenses.
The Company's ability to meet all obligations as they come due for the twelve
months ending October 2004, including planned capital expenditures, is dependent
upon the success in implementing these operating strategies. If such strategies
are not successful, the Company will seek additional debt and/or equity capital.
However, there can be no assurance that the Company will be successful in
implementing these operating strategies and/or raising additional debt and/or
equity capital, should it become necessary to do so.
NOTE C - DISCONTINUED OPERATIONS
The Company uses SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," to account for the results of operations of certain closed
stores. Under SFAS 144, the Company considers closed stores in markets where the
Company has no continuing involvement to be discontinued operations. There were
24 under-performing stores closed during the nine-month period ended November 1,
2003 which have been classified as discontinued operations and their results of
operations are presented below and are included in the accompanying Condensed
Consolidated Statements of Operations:
Three months ended Nine months ended
------------------------------------- ------------------------------------
November 1, 2003 November 2, 2002 November 1, 2003 November 2, 2002
------------------ ------------------ ----------------- ------------------
Net sales $ 325,000 $ 2,117,000 $ 3,502,000 $ 7,167,000
================== ================== ================= ==================
Loss from operations (486,000) (210,000) (1,017,000) (85,000)
Loss on disposal (81,000) - (348,000) -
Provision for income taxes - - - -
------------------ ------------------ ----------------- ------------------
Net loss from discontinued operations $ (567,000) $ (210,000) $(1,365,000) $ (85,000)
================== ================== ================= ==================
NOTE D - 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 presented below reflect the investment of new
equity on June 27, 2003 (see "Equity Investment and Enhancements to Credit
Facilities" above). A reconciliation of basic and diluted weighted average
shares outstanding is presented below:
Three-Month Period Ended Nine-Month Period Ended
---------------------------------- ------------------------------------
November 1, November 2, November 1, November 2,
2003 2002 2003 2002
---------------- ---------------- ---------------- ----------------
Weighted average number of common 10,940,574 3,006,019 6,350,491 2,999,544
shares outstanding - basic
Net effect of dilutive stock options - based
on the treasury stock method using the
average market price - - - -
---------------- --------------- --------------- ----------------
Weighted average number of common
shares outstanding - diluted 10,940,574 3,006,019 6,350,491 2,999,544
================ =============== =============== ================
Common stock equivalents of 2,070,342 and 1,173,987 for the quarter and
nine-month period ended November 1, 2003, respectively, were excluded from the
computation of diluted earnings per share because such common stock equivalents
were anti-dilutive. Common stock equivalents of 432,795 and 408,225 for the
quarter and nine-month period ended November 2, 2002, respectively, were
excluded from the computation of diluted earnings per share because such common
stock equivalents were anti-dilutive.
NOTE E - CREDIT FACILITIES
In June and October 2003, the Company amended its credit facility with its
primary lender. This credit facility, as amended, includes a revolving credit
agreement of up to $50,000,000 (including a letter of credit sub-facility of up
to $25,000,000) through July 2006. 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 $35,325,000 and
$33,640,000 as of November 1, 2003 and November 2, 2002, respectively, are
classified as current liabilities in the accompanying Condensed 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, as amended, also
includes two term loans. At November 1, 2003, a balance of $8,150,000 remained
on these term loans, of which $3,150,000 is classified in long-term debt in the
Condensed Consolidated Balance Sheet. The October term loan plus accrued
interest is payable by the Company on May 20, 2004, provided the Company meets
certain minimum availability covenants as described in the revolving credit
agreement. A final principal payment on the $3,150,000 term loan is due in June
2005.
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 November 1, 2003, the
Company had approximately $3.7 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 portions 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 covenants with which
the Company was in full compliance both as of quarter end and since quarter-end.
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 $500,000.
The Company's amended credit agreement with its primary lender contains
financial covenants which are effective only if the company falls below an
average daily excess availability of $2,500,000, as measured on a rolling 20
business day basis. Should such average daily excess availability fall below
$2,500,000, these financial covenants would require the Company to meet certain
required levels of earnings before interest, taxes, depreciation and
amortization (EBITDA) and minimum levels of inventory purchases. At November 1,
2003, the Company's average daily excess availability, measured on a rolling 20
business day basis was approximately $4 million.
The Company's agreement with a commercial bank to provide a separate letter of
credit facility of up to $8,000,000 expired on June 30, 2003. The Company is
using a portion of the increase in the maximum credit of its revolving credit
agreement for letters of credit previously provided under this separate letter
of credit facility. See "Equity Investment and Enhancements to Credit
Facilities" above.
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 $6,808,000 at November 1, 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.
In June 2003, the Company obtained from certain of its vendors deferral of up to
36 months of $4,099,000 of amounts the Company owed to such vendors as of June
27, 2003. The deferred amount bears interest at 5% per year. At November 1,
2003, $1,923,000 and $1,547,000 were included in Current Liabilities and
Long-Term Debt, respectively, in the Condensed Consolidated Balance Sheets
relating to the deferred amounts.
NOTE F - RELATED PARTY TRANSACTIONS
The Company paid Sun Capital Partners Management III, LLC ("SCPM"), an affiliate
of Sun One Price, a fee of $460,000 in consideration of certain services the
investment firm rendered to the Company in connection with the $7,000,000 equity
investment, the amendment to the Company's revolving credit facility and the
concessions the Company obtained from certain of its vendors. The Company also
entered into a Management Services Agreement, dated as of June 27, 2003, with
SCPM pursuant to which SCPM will provide various financial and management
consulting services to the Company in exchange for an annual fee (which is paid
in quarterly installments) equal to the greater of $500,000 or 6% of the
Company's EBITDA (as defined therein). Pursuant to this Management Services
Agreement, the Company paid $172,000 to SCPM through November 1, 2003, which
represents management service fees for the period from June 27, 2003 through
November 1, 2003.
On June 27, 2003, Sun One Price entered into a junior participation agreement
with a participant in the term loan portion of the Company's revolving credit
facility, pursuant to which Sun One Price paid $1,000,000 in exchange for a
junior participation in the term loan.
On October 24, 2003, the Company obtained $5,000,000 in additional funding in
the form of a term loan (the "October term loan") provided indirectly by its
primary shareholder, Sun One Price. The additional funding was facilitated by an
amendment to the Company's revolving credit facility with its primary lender
under which Sun One Price purchased the $5,000,000 term loan as a junior
participant. The $5,000,000 term loan plus accrued interest is payable by the
Company on May 20, 2004, provided that the Company meets certain excess
availability requirements as described in the amended revolving credit facility.
Loans made under the new loan agreement bear interest at 15% per annum. Interest
accruing on loans made under the new loan agreement is capitalized each month
into the principal balance and will be due at the maturity date of the new loan
agreement. In addition, Sun One Price will earn a facility fee of $150,000,
which will be due and payable on the maturity date of the new loan agreement,
and receive warrants to purchase the Company's common stock at the exercise
price of $0.01 per share.
On October 24, 2003, the Company issued Sun One Price 150,000 of such warrants
and increased Other Assets in the Condensed Consolidated Balance Sheets by
$96,000 which represents the fair value of the warrants. In addition, until such
time as Sun One Price no longer has any rights in loans made under the amendment
to the Company's revolving credit facility pursuant to the junior participation
agreement between Sun One Price and the Company's primary lender, Congress
Financial (Southern) and until the Company no longer has any outstanding
obligations or liabilities under the amendment to the Company's revolving credit
facility, Sun One Price will be granted the right to purchase, at an exercise
price of $0.01 per share, (a) 150,000 shares of the Company's common stock on
November 24, 2003; (b) 150,000 shares of the Company's common stock on each
monthly anniversary of November 24, 2003 until May 20, 2004; (c) 300,000 shares
of the Company's common stock on May 20, 2004; and (d) 300,000 shares of the
Company's common stock on each monthly anniversary of May 20, 2004 until the
expiration of the warrant.
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 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. 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 November 1, 2003 and
November 2, 2002, certain financial statement elements expressed as a percentage
of net sales:
Three-Month Period Ended Nine-Month Period Ended
---------------------------------- ----------------------------------
November 1, November 2, November 1, November 2,
2003 2002 2003 2002
---------------- ---------------- ---------------- ---------------
PERCENTAGE OF NET SALES
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold, exclusive of depreciation and
amortization shown separately below 65.5% 66.5% 67.2% 63.5%
---------------- ---------------- ---------------- ---------------
Gross margin 34.5% 33.5% 32.8% 36.5%
Selling, general and administrative expenses 32.2% 29.4% 29.0% 26.2%
Store rent and related expenses 13.1% 11.6% 11.7% 10.1%
Depreciation and amortization expense 2.5% 2.3% 2.3% 2.1%
Interest expense 1.6% 1.1% 1.2% 1.0%
Forgiveness of debt - - (2.5)% -
---------------- ---------------- ---------------- ---------------
Loss from continuing operations
before income taxes (14.9)% (11.0)% (8.9)% (2.9)%
Provision for income taxes - - - 0.1%
---------------- ---------------- ---------------- ---------------
Loss from continuing operations (14.9)% (11.0)% (8.9)% (3.0)%
Loss from discontinued operations (0.9)% (0.3)% (0.7)% -
---------------- ---------------- ---------------- ---------------
Net loss (15.8)% (11.3)% (9.6)% (3.0)%
================ ================ ================ ===============
Results of Operations
Net sales for the three-month period ended November 1, 2003 decreased 13.0%
compared with the corresponding time period in 2002. Net sales for the
nine-month period ended November 1, 2003 decreased 12.6% compared with the
corresponding time period in 2002. The decrease in year-over-year net sales for
both periods presented was due to operating an average of 60 and 46 fewer stores
in the three-month and nine-month periods, respectively, and to the Company's
comparable store sales decreases of 8.4% in the third quarter of fiscal 2003 and
9.7% for the nine-month period ended November 1, 2003. The Company considers
stores that have been open 18 months or more to be comparable, and there were
547 such stores at November 1, 2003. Management believes that these comparable
store sales decreases were due to imbalances in inventory in select merchandise
categories, continued weakness in consumer spending on apparel and continued
economic uncertainty.
During the first nine months of fiscal 2003, the Company relocated or expanded
ten of its stores. In addition, the Company closed forty-six under-performing
stores, including nine during the quarter ended November 1, 2003 (24 of such
closed stores are classified as discontinued operations - see below). At
November 1, 2003, the Company operated 552 stores, fifty-nine 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 decreased in the third quarter and in
the first nine months of fiscal 2003 compared with both such periods of fiscal
2002. This decrease in gross margin as a percentage of net sales primarily
resulted from lower sales in the first nine months of fiscal 2003. Markdowns,
resulting in part from price competition from discount retail chains and
traditional department stores, distribution and merchandising costs increased as
a percentage of net sales, 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 third quarter and in the first nine months of fiscal 2003
compared with both such periods 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 nine months of fiscal 2003 compared with fiscal 2002. In the
third quarter and the first nine months of fiscal 2003, SG&A expenses decreased
in dollars compared with the same time periods in fiscal 2002 primarily due to
lower store costs as a result of operating fewer stores on average
year-over-year.
Store rent and related expenses decreased slightly in dollars in the third
quarter due to the Company operating on average, forty-six fewer stores.
However, store rent and related expenses increased in dollars in the first nine
months of fiscal 2003 compared with both such periods of fiscal 2002. The
increase for the first nine months of fiscal 2003 in store rent and related
expenses was due to a 9.6 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 recent 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 third quarter and
first nine months of fiscal 2003 compared with the same period last year as a
result of operating fewer stores on average year-over-year. Depreciation and
amortization increased as a percentage of sales in the third quarter and first
nine months of fiscal 2003 compared with the same periods last year as a result
of a lack of sales leverage due to lower sales.
Interest expense increased as a percentage of net sales in both the third
quarter and in the first nine months of fiscal 2003 due to higher average
borrowings year-over-year and a lack of sales leverage as a result of lower
sales year-over-year.
The Company's effective income tax rate for the first nine months of fiscal 2003
reflects the Company's estimate of the expected effective tax rate for the full
fiscal year. At November 1, 2003, the Company's net deferred income tax assets
of $25.6 million were offset by a valuation allowance of $24.8 million against
these deferred income tax assets. Due to the Company's ownership change
involving a 5% or more shareholder in June 2003 (see "Equity Investment and
Enhancements to Credit Facilities" below), the use of the federal net operating
loss carryforwards may be limited under Section 382 of the Internal Revenue
Code. The Company has not yet determined the amount, if any, of any limitation
of use of these carryforwards. 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.
The Company uses SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," to account for the results of operations of certain closed
stores. Under SFAS 144, the Company considers closed stores in markets where the
Company has no continuing involvement to be discontinued operations. There were
24 under-performing stores closed during the nine-month period ended November 1,
2003 which have been classified as discontinued operations and their results of
operations are presented below and are included in the accompanying Condensed
Consolidated Statements of Operations:
Three months ended Nine months ended
------------------------------------- ------------------------------------
November 1, 2003 November 2, 2002 November 1, 2003 November 2, 2002
------------------ ------------------ ----------------- ------------------
Net sales $ 325,000 $ 2,117,000 $ 3,502,000 $ 7,167,000
================== ================== ================= ==================
Loss from operations (486,000) (210,000) (1,017,000) (85,000)
Loss on disposal (81,000) - (348,000) -
Provision for income taxes - - - -
------------------ ------------------ ----------------- ------------------
Net loss from discontinued operations $ (567,000) $ (210,000) $(1,365,000) $ (85,000)
================== ================== ================= ==================
As part of its plan to improve its overall liquidity and capital resources, as
more fully discussed below, the Company amended its credit facility and
completed a transaction with Sun One Price, LLC ("Sun One Price"), an affiliate
of Sun Capital Partners, Inc. (a private investment firm based in Boca Raton,
Florida) and three co-investors ("the Sun transaction") for a $7,000,000
investment of new equity in the Company. The completion of the equity investment
and the amendments to the Company's credit facility was subject to certain
conditions, including the Company obtaining certain concessions from its
existing vendors. These concessions included forgiveness of $5,915,000 and
deferral of up to 36 months of $4,099,000 of amounts the Company owed to such
vendors as of June 27, 2003. The deferred amount bears interest at 5% per year.
The forgiveness, net of consideration provided to such vendors in the form of
warrants to purchase common stock, which were estimated to have a fair value of
$471,000, was recognized as income during the nine-month period ended November
1, 2003. In addition, the Company further amended its credit facility to obtain
$5,000,000 in additional funding in the form of a term loan (the "October term
loan") provided indirectly by its primary shareholder, Sun One Price.
Equity Investment and Enhancements to Credit Facilities
On June 27, 2003, the Company obtained $7,000,000 in additional funding as a
result of closing a transaction with Sun One Price, an affiliate of Sun Capital
Partners, Inc. (a private investment firm based in Boca Raton, Florida) and
three co-investors ("the Sun transaction"). In exchange for the $7,000,000, the
Company issued to Sun One Price, 5,119,101 shares of its common stock, 100
shares of its preferred stock (which were converted into 11,964,500 shares of
common stock immediately upon amendment of the Company's certificate of
incorporation in early October 2003) and an anti-dilution warrant, the result of
which gave Sun One Price 85% of the voting rights of the Company's common stock.
Following the conversion of the 100 shares of preferred stock to common stock,
Sun One Price owned approximately 85% of the Company's common shares outstanding
and retained approximately 85% of the associated voting rights. The
anti-dilution warrant allows Sun One Price to maintain its 85% ownership
position upon the exercise of certain options or warrants by other investors. In
addition, the Company also amended its existing credit facility to, among other
things, increase the maximum credit from $44,650,000 to $54,650,000, then to
$60,000,000 in October 2003 (see discussion below). The completion of the equity
investment and the amendments to the credit facility were 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. These concessions included
forgiveness of $5,915,000 and deferral of up to 36 months of $4,099,000 of
amounts the Company owed to such vendors as of June 27, 2003. The deferred
amount bears interest at 5% per year.
On October 24, 2003, the Company obtained $5,000,000 in additional funding in
the form of a term loan (the "October term loan") provided indirectly by its
primary shareholder, Sun One Price. The additional funding was facilitated by an
amendment to the Company's revolving credit facility with its primary lender
under which Sun One Price purchased the $5,000,000 term loan as a junior
participant. The $5,000,000 term loan plus accrued interest is payable by the
Company on May 20, 2004, provided that the Company meets certain excess
availability requirements as described in the amended revolving credit facility.
Loans made under the new loan agreement bear interest at 15% per annum. Interest
accruing on loans made under the new loan agreement is capitalized each month
into the principal balance and will be due at the maturity date of the new loan
agreement. In addition, Sun One Price will earn a facility fee of $150,000,
which will be due and payable on the maturity date of the new loan agreement,
and receive warrants to purchase the Company's common stock at the exercise
price of $0.01 per share.
On October 24, 2003, the Company issued Sun One Price 150,000 of such warrants
and increased Other Assets in the Condensed Consolidated Balance Sheets by
$96,000 which represents the fair value of the warrants. In addition, until such
time as Sun One Price no longer has any rights in loans made under the amendment
to the Company's revolving credit facility pursuant to the junior participation
agreement between Sun One Price and the Company's primary lender, Congress
Financial (Southern) and until the Company no longer has any outstanding
obligations or liabilities under the amendment to the Company's revolving credit
facility, Sun One Price will be granted the right to purchase, at an exercise
price of $0.01 per share, (a) 150,000 shares of the Company's common stock on
November 24, 2003; (b) 150,000 shares of the Company's common stock on each
monthly anniversary of November 24, 2003 until May 20, 2004; (c) 300,000 shares
of the Company's common stock on May 20, 2004; and (d) 300,000 shares of the
Company's common stock on each monthly anniversary of May 20, 2004 until the
expiration of the warrant.
Outlook and Business Strategy
The Company has incurred operating losses during its three most recent fiscal
years and the nine months ended November 1, 2003, and as of November 1, 2003,
the Company had a substantial working capital deficit and accumulated 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 thirty-nine weeks of fiscal 2003 were 12.6% below those for the
same thirty-nine 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 thirty-nine weeks of fiscal 2003 decreased 9.7% as compared with the
same period in fiscal 2002.
The Company believes that there are several reasons for this recent decrease in
net sales (see "Results of Operations" above), including imbalances in inventory
in select merchandise categories, continued weakness in consumer spending on
apparel and continued economic uncertainty.
The Company developed a plan to respond to these issues which is detailed below.
This plan provided for additional equity being invested in the Company and
restructuring current financing arrangements (see "Equity Investment and
Enhancements to Credit Facilities" above). This plan also provided for
management to continue focusing its merchandising efforts on its higher-margin,
core apparel items, reduce operating expenses, and continue its investment in
its tri-box store concept, at management's discretion, while closing
under-performing stores.
To address the potential cash flow issues that a continued negative net sales
trend would create, the Company completed a stock purchase agreement with Sun
One Price for a $7,000,000 investment of new equity in the Company and obtained
an additional $5,000,000 from Sun One Price indirectly in the form of a term
loan (which was facilitated by an amendment to the Company's revolving credit
facility with its primary lender under which Sun One Price purchased the
$5,000,000 term loan as a junior participant) (See Note E above). In addition,
the Company negotiated with its existing lenders to amend its existing credit
facility to, among other things, increase the maximum credit from $44,650,000 to
$60,000,000. The completion of the equity investment and the amendments to the
credit facility was 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. These concessions included forgiveness of $5,915,000 and deferral of
up to 36 months of $4,099,000 of amounts the Company owed to such vendors as of
June 27, 2003. The deferred amount bears interest at 5% per year.
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.
In addition, the Company plans to continue to focus its efforts on reducing its
expenses. In fact, since the end of fiscal 2002, the Company has reduced its
corporate management workforce by approximately 25%.
The Company may, 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. Sales volumes in each of
these stores have exceeded the Company's standard "BestPrice! Fashions" store.
In fact, based on results to date, the Company's 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 or that the tri-box store concept will retain its recent
level of priority contained within the Company's strategic plans.
As a part of the Company's focus on its store development, 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
plans to continue to close or sell certain smaller square footage
under-performing stores. Management believes that re-prioritizing its store
development strategy and/or 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.
The Company also plans to implement changes in its merchandise sourcing program
and its distribution systems, both designed to increase merchandise margins, in
part, by reducing processing costs through increasing the amount of floor-ready
merchandise.
The Company's ability to meet all obligations as they come due for the twelve
months ending October 2004, including planned capital expenditures, is dependent
upon the success in implementing these strategies. There can be no assurance
that the Company will be successful in implementing these strategies. If such
strategies are not successful, the Company will seek additional debt
and/or equity capital. However, there can be no assurance that the Company will
be successful in implementing these operating strategies and/or raising
additional debt and/or equity capital, should it become necessary to do so.
In light of recent changes to the Company's senior management, the Company's
tri-box development strategy, merchandising strategy, certain capital spending
priorities and other strategic decisions may be re-assigned a higher or lower
priority or may be abandoned altogether. The Company's management is currently
evaluating these and other strategies and is unable to determine how much, if
any, additional debt or equity may be required to implement new strategies under
consideration. 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.
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 investment 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. In addition, during
fiscal 2003, the Company received two capital infusions totaling approximately
$12,000,000 from its majority stockholder, Sun One Price. Because of its
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 Company's ability to meet all obligations as they come due for the twelve
months ending October 2004, including planned capital expenditures, is dependent
upon the success in implementing the strategies outlined above. There can be no
assurance that the Company will be successful in implementing these strategies.
If such strategies are not successful, the Company will seek additional debt
and/or equity capital. However, there can be no assurance that the Company will
be successful in implementing these operating strategies and/or raising
additional equity and/or debt capital, should it become necessary to do so.
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 November 1, 2003. Refer
to Note E to the unaudited condensed consolidated financial statements for a
detailed description of the Company's credit facilities.
In the first nine months of fiscal 2003, the investment of equity and borrowings
on the Company's revolving credit facility were primarily used to offset the net
loss for the corresponding period, fund equity transaction and credit facility
amendment costs, and fund capital expenditures. In the first nine 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:
Nine-Month Period Ended
November 1, 2003 November 2, 2002
------------------------ ----------------
New store openings 1 5
Store relocations or expansions 10 14
Store closings (46) (11)
At November 1, 2003, total merchandise inventories increased 15.2% compared with
November 2, 2002. The increase in total merchandise inventories was primarily
attributable to higher levels of inventory in-transit to the Company's stores as
a result of increased purchases. Total merchandise inventories at the end of the
third quarter of fiscal 2003 were 30.7% 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
For a more detailed description, please refer to "Certain Considerations" as
described more fully in the Company's Form 10-K for the year ended February 1,
2003. In connection with the information contained herein, you should consider
the following:
o Terrorism and the uncertainty of war may adversely affect the Company's
sales and profitability.
o The Company expects to continue to experience price competition and may
be required to mark down its inventory more than expected.
o The Company's merchandising and marketing strategies and other actions
it takes may not improve results of operations or be adequate to
minimize the Company's exposure to any negative impacts due to
competition.
o The Company's tri-box store development efforts may not result in the
improved operating results expected by management, nor may the tri-box
stores be developed as rapidly as management had planned or at all.
o Similarly, the Company's trend of increased sales in tri-box stores, as
compared with the Company's traditional stores, may not continue.
o Planned changes to and disruptions in distribution of merchandise,
caused by natural disasters or otherwise, could impact the Company's
business.
o Increases in the level of purchases of pre-ticketed and pre-packaged
merchandise from vendors, and attendant reduction in the handling costs
associated with distributing merchandise to its stores may not provide
the Company with the efficiencies anticipated.
o Management cannot be certain that the requisite first quality
merchandise at acceptable credit terms will continue to be available in
the future.
o The Company's business is subject to seasonality which may result in
higher than expected markdowns.
o The Company's business is vulnerable to economic factors beyond its
control, including but not limited to increases in inflation, increases
in operating costs, increases in employee health care and workers'
compensation costs, increases in prevailing wage levels, increases in
the minimum wage rate, both at the Federal and state levels, and
decreases in consumer confidence levels.
o The Company faces significant competition from its traditional
competitors and from discount retail chains and traditional department
stores. Although management believes that the Company is
well-positioned to compete in its markets, there can be no assurance
that the Company will be able to compete successfully against its
current and future competitors.
o In light of recent changes to the Company's senior management, all
current business strategies and operations are undergoing a complete
review.
MARKET FOR THE COMPANY'S COMMON STOCK
After reporting the net loss for the three-month period ended May 3, 2003, the
Company's stockholders' equity no longer met the minimum requirement of the
NASDAQ SmallCap Market. Accordingly, on June 24, 2003, the Company requested
that its common stock be de-listed. The Company's common stock is now quoted on
the OTC Bulletin Board using the ticker symbol, ONPR.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates affecting
its credit arrangements, including a variable-rate revolving credit agreement,
two fixed-rate term loans 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 nine months
of fiscal 2003 and fiscal 2002 would have increased pre-tax loss and reduced
pre-tax income by approximately $244,000 and $234,000 respectively.
Item 4. Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluations as of the end of the period covered by
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 4. Submission of Matters to a Vote of Security Holders
The Company received proxies representing 64.5% of the 8,261,747 shares
outstanding and eligible to vote at the annual meeting of the Company's
stockholders held on October 2, 2003. The following summarizes the votes at the
annual meeting:
Matter For Against Abstentions Non-Votes
Election of Directors:
Rodger R. Krouse 5,154,825 0 172,700 0
Marc J. Leder 5,154,825 0 172,700 0
Malcolm L. Sherman 5,154,253 0 173,272 0
R. Lynn Skillen 5,154,253 0 173,272 0
Robert J. Stevenish 5,154,825 0 172,700 0
Clarence E. ("Bud") Terry 5,154,496 0 173,029 0
Allan Tofias 5,154,210 0 173,315 0
C. Deryl Couch 5,154,730 0 172,795 0
T. Scott King 5,154,496 0 173,029 0
M. Steven Liff 5,154,730 0 172,795 0
Matter For Against Abstentions Non-Votes
Authorization to Increase
the Number of Authorized Shares
of the Company's Common Stock 5,150,610 173,303 3,612 0
Item 5. Other Information
On October 8, 2003, the Company announced the promotion of
C. Burt Duren to Senior Vice President, Chief Financial
Officer and Treasurer.
On November 10, 2003, the Company announced the appointment of
John J. Disa as Chief Executive Officer.
On December 16, 2003, the Company announced the appointment of
Darrell Gold as Senior Vice President of Merchandise Planning
and Allocation.
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits
10.1 Amendment Number Seventeen to the Continuing
Commercial Credit Agreement dated October 24, 2003, by
and among Congress Financial Corporation (Southern) as
Lender and the Company and One Price Clothing of Puerto
Rico, Inc. as Borrowers: Incorporated by reference to
Exhibit 10.1 to the October 24, 2003 Form 8-K.
10.2 Form of Vendor Warrant issued by the Company to
Sun: Incorporated by reference to Exhibit 10.2 to the
October 24, 2003 Form 8-K.
31.1+ Certification Required by Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2+ Certification Required by Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1+ Certification Required by Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
On September 10, 2003, the Company filed Form 8-K to announce
the resignation of Leonard M. Snyder, its Chairman of the
Board of Directors and Chief Executive Officer effective as of
September 26, 2003. A copy of the press release was filed with
Form 8-K.
On October 24, 2003 the Company filed Form 8-K to report that
the Company received $5 million in additional funding
indirectly from its largest shareholder, Sun One Price, LLC. A
copy of Amendment Number Seventeen to the Continuing
Commercial Credit Agreement, Form of Warrants issued by the
Company to Sun and the Press Release were filed with Form 8-K.
On November 12, 2003 the Company filed Form 8-K to report that
the Company had dismissed Deloitte & Touche LLP as the
Company's independent auditors effective November 6, 2003. A
copy of the letter from Deloitte & Touche LLP to the
Securities and Exchange Commission agreeing with the
statements made by the Company in the Item 4 of this current
report on Form 8-K was filed with Form 8-K.
On November 13, 2003 the Company filed Form 8-K to report that
the Company had appointed Grant Thornton, LLP as its
independent accountants.
- --------------------------------------------------------------------------------
+ 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: December 16, 2003 /s/ John J. Disa
----------------------------------------------------
John J. Disa
Chief Executive Officer
(principal executive officer)
Date: December 16, 2003 /s/ C. Burt Duren
----------------------------------------------------
C. Burt Duren Chief Financial
Officer (principal financial officer
and principal accounting officer)