-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PRtWWBW6kJ4Q3lVqN/U3pZG2F6rnpXzaifwBevvOzSyzkrjFoK2ledYW5jpsGp0b bbdpvXXO2+IVynrTe8qcQg== 0000912057-96-008097.txt : 19960507 0000912057-96-008097.hdr.sgml : 19960507 ACCESSION NUMBER: 0000912057-96-008097 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960203 FILED AS OF DATE: 19960503 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LAMONTS APPAREL INC CENTRAL INDEX KEY: 0000785962 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-FAMILY CLOTHING STORES [5651] IRS NUMBER: 752076160 STATE OF INCORPORATION: DE FISCAL YEAR END: 1028 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15542 FILM NUMBER: 96556401 BUSINESS ADDRESS: STREET 1: 3650 131ST AVE SE CITY: BELLEVUE STATE: WA ZIP: 98006 BUSINESS PHONE: 2065628386 MAIL ADDRESS: STREET 2: 3650 131ST SE CITY: BELLEVUE STATE: WA ZIP: 98006 FORMER COMPANY: FORMER CONFORMED NAME: ARIS CORP DATE OF NAME CHANGE: 19920318 FORMER COMPANY: FORMER CONFORMED NAME: ARIS CORPORATION DATE OF NAME CHANGE: 19910903 FORMER COMPANY: FORMER CONFORMED NAME: TEXSTYRENE CORP DATE OF NAME CHANGE: 19881103 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED FEBRUARY 3, 1996 COMMISSION FILE NUMBER 0-15542 ---------------------------------- LAMONTS APPAREL, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE #75-2076160 (State of Incorporation) (I.R.S.Employer Identification Number) 3650 131ST AVENUE S.E., BELLEVUE, WASHINGTON 98006 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (206) 562-8386 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE (Title of Class) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $0.01 PER SHARE (Title of Class) 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) The aggregate market value of the Registrant's voting stock held by nonaffiliates of the Registrant as of April 10, 1996, was approximately $1,000,000 (based on the closing quote of such stock on such date). As of April 10, 1996, there were 17,899,549 shares of the Registrant's Common Stock, par value $0.01 per share, outstanding. Exhibit Index on Page 49 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1 LAMONTS APPAREL, INC. (DEBTOR-IN-POSSESSION) ANNUAL REPORT ON FORM 10-K FOR THE 53 WEEKS ENDED FEBRUARY 3, 1996 PART I ITEM 1 - BUSINESS GENERAL BACKGROUND AND CHAPTER 11 REORGANIZATION Lamonts Apparel, Inc. (the "Company" or "Lamonts") is a Northwest based regional retailer of moderately priced casual apparel. The Company, which has been operating in the Northwest for almost thirty years, is well recognized in the region as a retailer of nationally recognized brand name apparel such as Levi, Liz Claiborne, Lee, Union Bay, Bugle Boy, Jockey, Alfred Dunner, Koret, OshKosh and Health-Tex. Lamonts operates forty-two stores in six states and employs approximately 1,600 employees. The Company's stores are approximately 40,000 square feet and are generally located in top quality shopping centers and high traffic malls. Since 1986, thirty-nine of the Company's stores have completed either major or minor remodels. The Company was incorporated in Delaware as Texstyrene Corporation in 1985, changed its name to Aris Corporation in October 1988 and to Lamonts Corporation in April 1991. In September 1989, the Company acquired Lamonts Apparel, Inc. ("Apparel") from LH Group, Inc., a subsidiary of Northern Pacific Corporation. Prior to the completion of the divestiture of its original core business in August 1989, the Company manufactured expandable polystyrene beads and converted them into foam cups and containers, insulation products, packing materials and custom-molded packaging products. Apparel's predecessor was incorporated in Washington in May 1923. On October 30, 1992, Apparel was merged with and into the Company and the name of the Company was changed to Lamonts Apparel, Inc. On January 6, 1995 (the "Petition Date") the Company filed a voluntary petition for relief under Chapter 11 ("Chapter 11") of title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court (the "Court") for the Western District of Washington at Seattle. In Chapter 11, the Company has continued to manage its affairs and operate its business as a debtor-in-possession. The Company and representatives of the committees that represent Lamonts' unsecured trade creditors, bondholders and equityholders (the "Committees") have reached a confidential agreement in principle regarding the economic terms of a consensual Plan of Reorganization designed to enable the Company to emerge from Chapter 11 (the "Plan"). The Company and the Committees are discussing the timing for the filing with the Court of the Plan and the Disclosure Statement related thereto. In addition, the Company has received certain non-binding proposals regarding potential new equity and/or debt investments in the Company, which proposals are subject to customary conditions, including, in certain cases, consummation of a plan of reorganization. The Company and the representatives of the Committees are evaluating such proposals. The Company's principal office is located at 3650 131st Avenue, S.E., Bellevue, Washington 98006, and its telephone number is (206) 562-8386. In May 1996, the Company will be relocating its principal office to 12413 Willows Road N.E., Kirkland, WA 98034. OPERATIONS Lamonts offers an assortment of moderately priced fashion apparel and accessories at competitive prices for the entire family. Management believes that Lamonts has made substantial progress in the period since the filing of its Chapter 11 petition. The Company has closed unprofitable stores, eliminated unprofitable merchandise lines, added a home decor line, replaced its shoe licensee and reduced operating expenses. The Company has also refocused its merchandising strategy on casual apparel and expects to continue to build its merchandise categories in the Men's, Children's, Misses and Special Sizes areas and to promote nationally recognized brands. In addition, new management, which began operating the Company in November 1994, has implemented new merchandising strategies designed to: (i) improve the quality of merchandise offered while maintaining price points geared to the Company's customer base; (ii) reduce cash operating expenses; and (iii) reduce inventory levels and increase inventory turns to improve the Company's performance. As a result, the age and quality of inventory have improved significantly, and the Company has also initiated a policy to mark-down and clear out any unsold merchandise within its respective season. 2 Sales promotion and inventory allocation decisions are made centrally by Lamonts' corporate staff. The Company maintains uniformity with respect to inventory, pricing decisions, selection of promotional goods and markdown policies throughout all of its locations. In May 1995, the Company replaced its licensee for its family shoe department with a new license with Shoe Corporation of America. Sales of the licensee approximated 6% of the Company's Fiscal 1995 (defined below) revenues, but are not reflected in such revenues for financial reporting purposes because income derived by the Company from the rental fees charged to the licensee is reported as an offset to operating expenses. Lamonts advertises primarily through radio, television, newspaper inserts, direct mail, and charge statement inserts. The Company's promotional strategy is to target specific merchandise products and consumer groups, including holders of its proprietary credit card, for sale events. PURCHASING. The Company's centralized buying organization includes general merchandise managers, divisional merchandise managers and buyers responsible for maintaining vendor relationships. New management teams within the merchandising departments have been assembled over the last 12 months. In addition, the Company's membership in Frederick Atkins, Inc. ("Atkins") provides it with group buying opportunities on domestic merchandise, industry research and the ability to use Atkins' private label import program. Additionally, the Company backs certain of its direct import purchases with letters of credit issued through Atkins. Costs associated with the letters of credit are based on a fixed percentage of each draw plus a non-interest bearing deposit of 17% of annual usage. The Company purchases its merchandise from approximately 1,700 vendors and is not dependent on any single source of supply. The Company maintains no long term commitments with any supplier and believes that there will continue to be an adequate supply of merchandise to satisfy its current and anticipated requirements. However, like other apparel retailers, the Company is dependent upon its ability to obtain trade credit. See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations." DISTRIBUTION. The Company utilizes a 100,000 square foot, contractor-operated distribution center dedicated to the Company for centralized receiving and marking (ticketing). Through its distribution center, the Company is able to receive and ship merchandise to its stores within a two-to-three day period. The Company believes that this distribution center enables it to monitor vendor shipments effectively, reduce receiving and marking expenses, reduce related transportation costs, improve inventory control, and reduce inventory shrinkage. The lease of this distribution center, which expires in February 1998, is quaranteed by the Company. See "Item 2 - Properties". STORE OPERATIONS. The Company's store management team consists of a senior vice president, four regional directors and 38 store managers. The four regional directors also serve as store managers. Store managers are primarily responsible for hiring and supervising store personnel and for day-to-day store operations. A typical Lamonts store employs a staff of 23 to 40 people, including the store manager, two to four area sales managers and 20 to 35 sales clerks, approximately one-half of whom are part-time. EMPLOYEES. The Company employs approximately 1,600 employees, approximately one-half of whom are part-time. Approximately 385 employees working in Seattle, Washington stores are represented by the United Food and Commercial Workers Union pursuant to a contract that expires the earlier of June 11, 1997 or seven months following emergence from Chapter 11. Approximately 39 employees work in the Wenatchee, Washington store and are represented by the United Food and Commercial Workers Union; they have no negotiated bargaining agreement and the employees work under the same working conditions as the Company's non-union employees. There are approximately 20 employees working in the Seattle Corporate office who are represented by the United Food and Commercial Workers Union pursuant to an employee ratified agreement that expires the earlier of March 31, 1998 or seven months following emergence from Chapter 11. Management believes its employee relations are good. COMPETITION. Lamonts competes with other specialty retail apparel stores, department stores and discount/mass merchandisers on the basis of product range, quality, fashion, price and service. The Company differentiates itself from its competitors by positioning itself as a focused specialty retailer with emphasis on casual wear and high quality branded products, including denim. Lamonts has also been promoting its recently introduced private label "Northwest Outfitters". Principal competitors in one or more of the Company's market areas include The Bon Marche (a division of Federated Stores, Inc.), Nordstrom, J.C. Penney Co., Inc., Sears Roebuck and Company and Mervyn's (a division of Dayton-Hudson Corporation). 3 TRADEMARKS. The Company currently owns various registered trademarks which are part of its proprietary brand imports program. Management believes that, although such trademarks are significant, the Company's business is not dependent on any of such rights. CREDIT POLICY. The Company offers its customers various methods of payment including cash, check, Lamonts charge card, certain major credit cards and a lay-away plan. Since its inception in July 1988, the Company's charge card program has been expanded to approximately 500,000 accounts. Growth in credit sales represents an important element in the Company's marketing strategy because statistics show that Lamonts charge card holders shop more regularly and purchase more merchandise than the customer who pays by cash, check or bank credit card. The Company believes that its proprietary charge card program provides additional benefits in two areas: (i) the creation of customer loyalty and (ii) enhancement of target marketing by providing demographic and purchasing behavior information on customers. The Company's proprietary charge card, administered and owned by National City Corporation, provides for the option of paying in full within 30 days of the billed date with no finance charge or with revolving credit terms. Terms of the short-term revolving charge accounts require customers to make minimum monthly payments in accordance with prescribed schedules. Through a contractual arrangement, as amended, National City owns the receivables generated from purchases made by customers using the Lamonts charge card. The agreement provides for a minimum fee of 1% of purchases. As the prime rate exceeds 6%, the minimum fee increases at the same rate. However, the Company has elected to pass such increase in the minimum fee on to its charge card customers. Additionally, the agreement provides for a contingent supplemental fee equal to 0.1% of purchases for each $1 million by which such purchases are less than $48.0 million in any calendar year, up to a maximum fee of 3%. In the event of store closures, the agreement provides for adjustments to the dollar value of purchases required. Additionally, the Company is responsible for 50% of the net bad debt expense. The agreement with National City may be terminated by either party after June 22, 1999, with 180 days prior written notice. The Company paid National City $0.9 million for bad debt expense and $0.5 million in fees during Fiscal 1995. The Company is currently negotiating certain changes to the contract with National City which it believes to be advantageous to the Company. However, there can be no assurances that a new agreement will be reached or approved by the Court. RETURN POLICY. It is the Company's policy to exchange or issue a credit if a customer is not completely satisfied with any Lamonts purchase. Management believes that the Company's customer return policy and experience is consistent with industry practices. SEASONALITY. The Company's sales are seasonal, with the Christmas Season being its strongest quarter. See "Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - Seasonality". REGULATIONS. The Company is subject to Federal, state and local laws and regulations affecting retail apparel stores generally. The Company believes that it is in substantial compliance with these laws and regulations. REORGANIZATION BACKGROUND As a result of financial difficulties, during the second half of Fiscal 1992, the Company and its financial advisors commenced negotiations with certain of the Company's creditors and stockholders regarding a restructuring of the Company's indebtedness. On October 30, 1992, the Company completed a comprehensive recapitalization (the "Recapitalization") pursuant to which, among other things, the Company issued an aggregate of $75.0 million in principal amount of its 10-1/4% Senior Subordinated Notes due 1999 (the "10-1/4% Notes"). As a result of the Recapitalization, the Company's funded debt was reduced by $63.6 million. On December 1, 1993, the Company completed a capital infusion and debt reduction plan (the "Infusion") that further reduced the Company's debt. The transaction included, among other things, the repurchase of $13.0 million aggregate principal amount of 10-1/4% Notes, at par, together with accrued interest through the repurchase date, and the concurrent amendment of the terms of the 10-1/4% Notes that remained outstanding to, among other things, prospectively reduce the interest rate of such 10-1/4% Notes from 11-1/2% (the original rate at issuance) to 10-1/4%. On June 10, 1994, the Company further amended the terms of the 10-1/4% Notes to provide, among other things, that interest payments due on the 10-1/4% Notes through November 1, 1995 could be paid, at the Company's option, either 4 in cash, at a rate of 12% per annum, or in additional 10-1/4% Notes ("PIK Interest"), at a rate of 13% per annum. In accordance with the amendment, the Company elected to issue additional 10-1/4% Notes at the PIK Interest rate of 13% for the November 1, 1994 interest payment. Interest continued to accrue on the 10-1/4% Notes until the date of filing of the Company's Chapter 11 case. In addition, on June 10, 1994, the Company issued Warrants ("the 1994 Warrants") initially to purchase up to an aggregate of approximately 2 million shares of common stock, par value $.01 per share (the "Common Stock") (or approximately 10% of the Common Stock outstanding after giving effect to the exercise of such 1994 Warrants) to the holders of the 10-1/4% Notes. The 1994 Warrants may be exercised on or prior to June 10, 1999, at an initial exercise price of $1.00 per share of Common Stock. As of February 3, 1996, none of the 1994 Warrants have been exercised. On October 18, 1994, the holders of all outstanding 10-1/4% Notes (i) granted the Company the option to exchange the 10-1/4% Notes for shares of Common Stock, representing approximately 70% of the Common Stock outstanding immediately following the exchange and $50.0 million aggregate liquidation preference of a new series of preferred stock of the Company and (ii) released the collateral securing the 10-1/4% Notes and generally subordinated the Company's obligations under the 10-1/4% Notes so that they are junior to trade payables and certain other liabilities, subject to certain exceptions. The Company could exercise its option to exchange the 10-1/4% Notes on or prior to March 31, 1995. However, on March 27, 1995, the Company received an extension from the holders of the 10-1/4% Notes to extend indefinitely, the time in which the Company may exercise its option to require the holders to exchange their 10-1/4% Notes; provided, however, that a majority of the holders of the 10-1/4% Notes may terminate such extension upon 60 days notice to the Company. Notwithstanding the foregoing, the Company's financial position continued to deteriorate through Fiscal 1994. The Company's ability to service its debt and to obtain trade credit was dependent on its performance, which continued to fall short of projected results. In response to its deteriorating financial condition, the Company determined that a more significant financial and operational restructuring was necessary. FILING In January 1995, the Company filed for protection pursuant to Chapter 11, and as a result of the filing, the Company is currently in default under all of its funded debt agreements, except for the borrowings under the working capital facility with Foothill (as defined below), in effect prior to the Petition Date. As a result, all unpaid principal of, and accrued prepetition interest on, such debt became immediately due and payable. The payment of such debt and accrued but unpaid prepetition interest is prohibited during the pendency of the Company's Chapter 11 case. Further, the Company has not accrued interest on its funded debt agreements, excluding the DIP Facility, since the date of filing. For additional information related to the Company's Chapter 11 case, see "Item 3 - Legal Proceedings." In accordance with the Bankruptcy Code, the Company can seek Court approval for the rejection of executory contracts, including real property leases. Any such rejection may give rise to a prepetition unsecured claim for breach of contract. In connection with the Company's Chapter 11 case, a review is being undertaken of all the Company's obligations under its executory contracts. As of March 31, 1996, the Company has rejected nine real property leases and certain executory contracts and assumed six leases (with certain conditions and limitations).. DEBTOR-IN-POSSESSION FINANCING The Company is currently receiving debtor-in-possession financing from Foothill Capital Group ("Foothill"). Pursuant to this loan and security agreement dated February 17, 1995 (the "DIP Facility"), the Company is able to borrow up to $32 million in revolving loans, including up to $15 million of letters of credit. Borrowings under the DIP Facility, together with cash flow from operations, may be used by the Company to finance general working capital requirements, including purchases of inventory and other expenditures permitted under the DIP Facility. The DIP Facility is secured by inventory and certain other assets and is an allowed administrative expense claim with priority over certain other administrative expenses in the Chapter 11 case. The DIP Facility imposes limitations on the Company with respect to, among other things, (i) consolidations, mergers, and sales of assets, (ii) capital expenditures in excess of specified levels and (iii) the prepayment of certain indebtedness. Additionally the Company must maintain a minimum net worth (as defined therein). The DIP Facility has been extended from its initial maturity date of May 17, 1996 and will now expire on the earlier of (i) August 17, 1996, with provisions for two additional quarterly renewals, or (ii) the effective date of a plan of reorganization. The Company is currently negotiating with the First National Bank of Boston ("FNBB") with respect to (i) a debtor-in-possession credit facility (the "New DIP Facility"), which would replace the DIP Facility and (ii) an exit facility (the "Exit Facility" and, together with the New DIP Facility, the "New Facilities"), which would replace the New DIP Facility upon the Company's emergence from Chapter 11. On April 5, 1996, the Court approved the payment by the Company of $50,000 to FNBB as a deposit in connection with the New Facilities pursuant to a Term Sheet dated April 3, 1996 (the "FNBB Term Sheet") provided to the Company by FNBB. The consummation of each of the New Facilities is subject to final documentation satisfactory to FNBB, approval of the Court and other customary conditions, including, in the case of the Exit Facility, effectiveness of a plan of reorganization. There can be no assurances that any of such conditions will be satisfied. See "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" for a more detailed description of the New Facilities. CHANGE IN FISCAL YEAR On March 9, 1995, the Company elected to change its fiscal year end from the Saturday closest to October 31 to the Saturday closest to January 31 in order to enhance comparability of the Company's results of operations with other 5 apparel retailers. Accordingly, the accompanying information includes the 53 weeks ended February 3, 1996 ("Fiscal 1995"), the 52 weeks ended January 28, 1995, the Quarter ended January 28, 1995 (the "January Quarter"), the 52 weeks ended October 29, 1994 ("Fiscal 1994"), and the 52 weeks ended October 28, 1993 ("Fiscal 1993"). ITEM 2 - PROPERTIES The Company considers its ability to maintain attractive, high traffic store locations to be a critical element of its business and a key determinant of Lamonts' future growth and profitability. Lamonts' stores are designed to maximize selling space while providing a fashionable, pleasant shopping environment. The Company currently operates 42 stores in the following locations: Alaska 7 Washington 24 Utah 1 - --------------------- ----------------------------- ---------------- - - Anchorage: 3 stores - Seattle: 6 stores - Logan - - Fairbanks - Bellevue/Eastside: 4 stores - - Juneau - Spokane: 3 stores - - Soldotna - Tacoma: 2 stores Montana 1 - - Wasilla - Aberdeen ---------------- - Marysville Idaho 6 - Moses Lake - Missoula - --------------------- - Olympia - Port Angeles Oregon 3 - - Coeur d'Alene - Silverdale ---------------- - - Idaho Falls - Tri-Cities - - Lewiston - Wenatchee - Astoria - - Moscow - Yakima - Corvallis - - Pocatello - Hillsboro - - Twin Falls Of the 42 stores, 17 are located in regional malls, 15 are located in community malls, 4 are located in strip centers and 6 are located in free-standing locations. All of the Company's operating stores (except one which is subject to a ground lease) are currently located in leased facilities. The lease terms for these facilities cover periods up to 30 years, with an average remaining term of 8 years, not including additional option periods. The Company has executed a new lease for its principal office in Kirkland, Washington. The new lease, which commences May 1996, is for approximately 30,000 square feet and expires May, 2006. The Company's stores range in size from 20,000 to 85,000 square feet, with a typical store averaging approximately 40,000 square feet. The interiors of Lamonts' stores are attractively decorated and are organized to maximize traffic flow and merchandise exposure. Signage and service facilities, such as fitting rooms and customer service areas, are designed to create a pleasant and convenient shopping environment. During 1994, the Company determined that three of its Portland, Oregon stores and all five Lamonts For Kids children's stores should be closed because of poor performance. In October 1994, the Company closed an additional store in the greater Seattle area as the lease was not renewed. Also, in connection with its operational restructuring, the Company received permission from the Court to close six additional underperforming stores in early 1995. The six stores closed were located in Vancouver, Everett and Lakewood, Washington; Medford, Oregon; Ogden, Utah; and the downtown outlet center in Spokane, Washington. The Company opened a new 36,000 square foot store in March 1995 in a 465,000 square foot shopping center in Issaquah, Washington. This is the Company's fourth store in the eastside area of the Seattle market. In January 1996, the Company received permission from the Court to close an underperforming store located in Eugene, Oregon, and the Company conducted going out of business sales at this store through March 1996. The Company continues to own the building subject to a ground lease and is currently attempting to market the building for sale. If a purchaser is not located, ownership of the building will revert to the owner of the underlying land. 6 Accordingly, the book value of the building has been fully reserved in the Financial Statements as of February 3, 1996. (See Note 9 to the Consolidated Financial Statements included herein.) In February 1996, the Company entered into a sale-leaseback transaction involving the land and building at the Company's Alderwood store in Washington. The Company sold the property for $5 million and leased the property back for a 20 year period, plus option terms. (See Note 16 to the Consolidated Financial Statements included herein.) The Company has an arrangement with Distribution Center Systems, Inc. which provides distribution and merchandise processing services for Lamonts on a cost plus fee reimbursement basis. As part of the arrangement, the Company is a guarantor of the lease of the distribution center located in Kent, Washington. The lease has remaining future minimum rents of approximately $0.3 million per year and expires February 1998. ITEM 3 - LEGAL PROCEEDINGS COMMENCEMENT OF CHAPTER 11 PROCEEDINGS On January 6, 1995, the Company filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the Western District of Washington at Seattle, Case No. 95-00100. The ability of the Company to effect a successful reorganization under Chapter 11 depends, in significant part, upon the Company's ability to formulate a confirmable reorganization plan that is approved by the Court and meets the standards for plan confirmation under the Bankruptcy Code. In a Chapter 11 reorganization plan, the rights of the Company's creditors and stockholders may be substantially altered. Creditors may realize substantially less than the full face amount of their claim. Equity interests of the Company's stockholders may be diluted or even canceled. Investment in any security of the Company, therefore, should be regarded as highly speculative. The following summary sets forth certain aspects of the Company's Chapter 11 case. This summary is not intended to be an exhaustive summary. For additional information regarding the effect of the Chapter 11 case on the Company, reference should be made to the Bankruptcy Code. Pursuant to section 362 of the Bankruptcy Code, the commencement of the Company's Chapter 11 case operates as a stay, applicable to all entities, with certain exceptions, of the following: (i) commencement or continuation of a judicial, administrative, or other proceeding against the Company that was or could have been commenced prior to commencement of the Company's Chapter 11 case, or to recover for a claim that arose before the commencement of the Company's Chapter 11 case; (ii) enforcement of any judgments against the Company that arose before the commencement of the Company's Chapter 11 case; (iii) the taking of any action to obtain possession of property of the Company or to exercise control over property of the Company; (iv) the creation, perfection or enforcement of any lien against the property of the Company; (v) the taking of any action to collect, assess or recover a claim against the Company that arose before the commencement of the Company's Chapter 11 case; or (vi) the setoff of any debt owing to the Company that arose prior to the commencement of the Company's Chapter 11 case against a claim held by such creditor or party-in-interest against the Company that arose before the commencement of the Company's Chapter 11 case. Any entity may apply to the Court for relief from the automatic stay so that it may enforce any of the aforesaid remedies that are automatically stayed by operation of law at the commencement of the Company's Chapter 11 case. In connection with the Company's Chapter 11 case, the United States Trustee has appointed the Committees for the Company's (i) bondholders, (ii) other general unsecured creditors, and (iii) equity holders. Although the Company is authorized to operate its business as debtor-in-possession, it may not engage in transactions outside the ordinary course of business without first complying with the notice and hearing provisions of the Bankruptcy Code and obtaining Court approval. As debtor-in-possession, the Company has the right, subject to the approval of the Court, under the relevant provisions of the Bankruptcy Code, to assume or reject executory contracts, including real property leases. Certain parties to such executory contracts with the Company, including parties to such real property leases, may file motions with the Court seeking to require the Company to assume or reject those contracts or leases. In this context, "assumption" requires that the Company cures, or provides adequate assurance that it will cure, all existing defaults under the contract or lease and provides adequate assurance of future performance under the contract or lease. "Rejection," which is a remedy available under the relevant provisions of the Bankruptcy Code, means that the Company is relieved from its obligations to perform further under the contract or lease. Rejection of an executory contract or lease may constitute a breach of that contract and may afford the non-debtor party the right to assert a claim against the bankruptcy estate for damages arising out of the breach which shall be allowed or disallowed as if such claim had arisen before the date of the filing of the petition. 7 Prepetition claims that were contingent, unliquidated, or disputed as of the commencement of the Chapter 11 case, including, without limitation, those that arise in connection with rejection of executory contracts, may be allowed or disallowed depending on the nature of the claim. Such claims may be fixed by the Court or otherwise settled or agreed upon by the parties. Under the Bankruptcy Code, an allowed claim of a creditor that is secured by a lien on property of the Company's estate, or that is subject to a valid right of setoff, is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property, or to the extent of the amount subject to setoff, as the case may be, and is an unsecured claim to the extent that the value of such creditor's interest or the amount so subject to setoff is less than the amount of such allowed claim. Generally, claims for unmatured interest are not allowable. To the extent that an allowed secured claim is secured by property whose value, after recovery of the reasonable, necessary costs and expenses of preserving or disposing of such property, is greater than the amount of such claim, the holder of such claim generally is allowed interest on such claim and any reasonable fees, costs or charges provided for under the agreement under which such claim arose. For 120 days after the Petition Date, the Company had the exclusive right to propose and file a plan of reorganization with the Court. Such time period has been extended to August 27, 1996. Section 501 of the Bankruptcy Code allows any creditor or indenture trustee to file a proof of claim with the Court and any equity security holder to file a proof of interest with the Court. A claim or interest, proof of which is timely filed under Bankruptcy Code section 501, is deemed allowed, unless a party-in-interest (including the Company) objects thereto. If an objection is made to the allowance of a claim, the Court, after notice and hearing, will determine the amount, validity, and priority of such claim. The last date for filing proofs of claim or proofs of interest was April 28, 1995. A $27 million claim was filed by a former landlord of one of the Company's stores located in Ogden, Utah allegedly based upon closing of the store and rejection of the store lease pursuant to the Bankruptcy Code. The Company has settled such claim with the former landlord in the amount of $0.85 million, which amount may be reduced in the event the landlord is able to mitigate its damages. A claim was filed by the Pension Benefit Guaranty Corporation ("PBGC") in the amount of $2.8 million based upon PBGC's assumption that one of the Company's qualified employee retirement plans would be terminated. The Company believes that even if the plan was terminated, unfunded plan benefit liabilities would not be material. The Company disputed the claim. PBGC has withdrawn its claim without prejudice to its right to refile at a future date if the PBGC determines it is appropriate to do so. A $2.3 million claim was filed by a former landlord of the Company's store located in Lloyd Center in Portland, Oregon allegedly based upon rejection of the store lease pursuant to the Bankruptcy Code. The Company disputed the claim and pursued a lawsuit against this landlord for damages for wrongfully refusing to consent to the Company's attempted assignment of this store to other users. In November 1995, the Company prevailed in a lawsuit following a jury trial in the State Court in Oregon. On motion for judgment notwithstanding the verdict, the jury verdict was overturned and judgment entered in favor of the landlord. On February 16, 1996, the matter was appealed by the Company to the Oregon Court of Appeals, and that appeal is currently pending. A $1.7 million claim was filed by a former landlord of one of the Company's stores located in Tacoma, Washington allegedly based upon closing of the store and rejection of the store lease pursuant to the Bankruptcy Code. The Company disputes the claim and believes that reletting of the store will substantially reduce the claim. The Company is in the process of preparing a suitable objection to the claim and will otherwise defend against the claim to the extent necessary and appropriate. Claims have been filed by two former officers of the Company in the total amount of $1.5 million. These claims are allegedly based upon claims that employment contracts between the Company and these former officers were breached by the Company. The Company disputes the claims and will otherwise defend against the claims to the extent necessary. After a consensual plan of reorganization is completed, it will be sent, with a Disclosure Statement approved by the Court, after notice and hearing, to members of all classes of impaired creditors and equity security holders for acceptance or rejection. Following acceptance or rejection of a plan of reorganization by creditors and equity security holders, the Court, at a noticed hearing, will consider whether to confirm a plan of reorganization. 8 If at least one class of claims that is impaired under a plan of reorganization has accepted a plan of reorganization, and certain other requirements of the Bankruptcy Code relating to a plan of reorganization confirmation are satisfied, the proponent of a plan of reorganization may invoke the so-called "cramdown" provisions of section 1129(b) of the Bankruptcy Code. Under these provisions, the Court, on request of the proponent of a plan of reorganization, shall confirm a plan of reorganization if it does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, a plan of reorganization. As used in the Bankruptcy Code, the phrases "discriminate unfairly" and "fair and equitable" have narrow and specific meanings. A "cramdown" might result in holders of Common Stock receiving no property or other value for their equity security interest in the Company. Because of this and other possibilities, the value of the Company's securities, including the Common Stock, is highly speculative. OTHER LEGAL PROCEEDINGS As previously reported, the Company was a defendant in a lawsuit originally brought as a class action in state court in Anchorage, Alaska on September 18, 1992. Plaintiffs alleged that certain employees in the State of Alaska were not exempt from overtime pay requirements under the Alaska Wage and Hour Act and thus have worked hours for which they had not been compensated. The complaint sought back wages, liquidated damages, attorneys fees and costs. Subsequent to the Petition Date, the plaintiffs filed a proof of claim in the Court asserting the same claims. On October 27, 1995, following a hearing before the Court, an order was entered granting the Company's objection to and precluding the class action claim. The balance of the claim by two individuals has been settled in an amount not material to the Company. The Company is also involved in various other matters of litigation arising in the ordinary course of business. In the opinion of management, the ultimate outcome of all such matters should not have a material adverse effect on the financial position of the Company, but, if decided adversely to the Company, could have a material effect upon the Company's plan of reorganization or operating results during the period in which such litigation is resolved. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 9 PART II ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK The Common Stock is traded in the over-the-counter market and, until January 20, 1995, was listed on the Nasdaq Stock Market's Smallcap Market ("Nasdaq"). As a result of the filing, the Common Stock is no longer listed. The following table sets forth, for the periods indicated, the high and low closing bid prices as reported on Nasdaq and over the counter quotes. The bid prices, as stated, represent inter-dealer prices without adjustments for retail mark-ups, mark- downs or commissions and may not necessarily represent actual transactions.
Fiscal 1994: High Low - ------------------------------- ----------- ----------- Quarter ended January 29 2-3/4 2 Quarter ended April 30 2 1-1/4 Quarter ended July 30 1-3/4 3/4 Quarter ended October 29 13/16 5/8 January Quarter High Low - ------------------------------- ----------- ----------- Quarter ended January 28, 1995 2 1/8 Fiscal 1995: High Low - ------------------------------- ----------- ----------- Quarter ended April 29 1/2 1/8 Quarter ended July 29 7/16 1/8 Quarter ended Oct 28 1/4 1/16 Quarter ended February 3 1/4 1/16
At April 10, 1996, there were 152 holders of record of the Common Stock. DIVIDENDS The Company has never declared or paid cash dividends on its Common Stock, or any other equity security, and does not anticipate paying cash dividends on the Common Stock or any other equity security in the foreseeable future. The ability of the Company to pay dividends is restricted under the terms of the DIP Facility. In addition, the Bankruptcy Code prohibits the Company's payment of cash dividends during the pendency of the Company's Chapter 11 case and, based on the terms FNBB Term Sheet will be restricted under the New Facilities. ITEM 6 - SELECTED FINANCIAL DATA The following table sets forth certain selected financial data for the Company and should be read in conjunction with the Consolidated Financial Statements of the Company and the Notes thereto included in Item 8. The following financial data is not necessarily comparable for the periods presented because of the effects of, among other things, the consummation of the Recapitalization in October 1992 and the Company's change in fiscal year end. However, for purposes of comparing the data for Fiscal 1995, the Company has provided data for the comparable prior year period which are derived from unaudited financial records of the Company. 10 LAMONTS APPAREL, INC. (DEBTOR-IN-POSSESSION) (Dollars in thousands, except per share data)
53 weeks ended 52 weeks ended Quarter ended 52 weeks ended Feb 3, 1996 January 28, 1995 Jan 28, 1995 Oct 29, 1994 ---------------- ------------------ --------------- ---------------- STATEMENT OF OPERATIONS DATA - --------------------------------------------- Revenues (1) $199,548 $231,199 $71,014 $237,922 Cost of merchandise sold 131,677 175,330 60,587 163,697 ---------------- ------------------ --------------- ---------------- Gross profit 67,871 55,869 10,427 74,225 ---------------- ------------------ --------------- ---------------- Operating and administrative expenses 71,372 87,807 22,400 88,520 Depreciation and amortization 9,232 11,355 2,666 11,441 Store closure costs 7,200 7,200 ---------------- ------------------ --------------- ---------------- Operating costs 80,604 106,362 25,066 107,161 ---------------- ------------------ --------------- ---------------- Earnings (loss) from continuing operations before other income/(expense), reorganization expenses and income tax provision/(benefit) (12,733) (50,493) (14,639) (32,936) Other income (expense): Interest expense - Cash (5,098) (6,698) (1,356) (8,130) - Non-cash (2) (5,160) (1,670) (3,490) Other income (expense) 196 27 29 (369) ---------------- ------------------ --------------- ---------------- Loss from continuing operations before reorganization expenses and income tax provision/(benefit) (17,635) (62,324) (17,636) (44,925) Reorganization expenses 7,240 7,499 7,499 ---------------- ------------------ --------------- ---------------- Loss from continuing operations before income tax provision/(benefit) (24,875) (69,823) (25,135) (44,925) Income tax provision/(benefit) (400) (400) ---------------- ------------------ --------------- ---------------- Net earnings (loss) ($24,875) ($69,423) ($25,135) ($44,525) ---------------- ------------------ --------------- ---------------- ---------------- ------------------ --------------- ---------------- NET EARNINGS (LOSS) PER COMMON SHARE (4) - ---------------------------------------- Net earnings (loss) per common share ($1.39) ($4.13) ($1.41) ($3.05) ---------------- ------------------ --------------- ---------------- ---------------- ------------------ --------------- ---------------- Weighted average number of shares 17,893,675 16,820,257 17,883,135 14,583,038 BALANCE SHEET DATA (at end of period) - ------------------------------------ Working capital ($2,248) $16,025 $16,025 $9,938 Total assets 102,361 120,269 120,269 152,589 Liabilities subject to settlement under reorganization proceedings 104,845 108,333 108,333 Long term debt and obligations under capital leases, net of current maturities 80,642 Stockholders' equity (deficit) (42,556) (17,509) (17,509) 7,560
11 LAMONTS APPAREL, INC. (DEBTOR-IN-POSSESSION) (Dollars in thousands, except per share data)
52 weeks 52 weeks 52 weeks ended ended ended Oct 30, 1993 Oct 31, 1992 Nov 2, 1991 --------------- -------------- ------------- STATEMENT OF OPERATIONS DATA - --------------------------------------------- Revenues (1) $251,015 $258,096 $252,627 Cost of merchandise sold 157,098 156,940 153,771 --------------- -------------- ------------- Gross profit 93,917 101,156 98,856 --------------- -------------- ------------- Operating and administrative expenses 84,176 83,798 78,921 Depreciation and amortization 11,164 13,290 11,070 --------------- -------------- ------------- Operating costs 95,340 97,088 89,991 --------------- -------------- ------------- Earnings (loss) from continuing operations before other income/(expense), income tax provision/(benefit), and extraordinary item (1,423) 4,068 8,865 Other income (expense): Interest expense - Cash (12,477) (9,936) (16,439) - Non-cash (2) (13,417) (5,494) Other income (expense) 29 417 917 --------------- -------------- ------------- Loss from continuing operations before income tax provision/(benefit) and extraordinary item (13,871) (18,868) (12,151) Income tax provision/(benefit) (3,000) 710 (552) --------------- -------------- ------------- Loss from continuing operations before extraordinary item (10,871) (19,578) (11,599) Gain (loss) from discontinued operations, net of income taxes 283 (113) Extraordinary item - gain on extinguishment of debt (3) 23,572 --------------- -------------- ------------- Net earnings (loss) ($10,871) $4,277 ($11,712) --------------- -------------- ------------- --------------- -------------- ------------- NET EARNINGS (LOSS) PER COMMON SHARE (4) - --------------------------------------- Loss from continuing operations before extraordinary item ($1.22) ($82.84) ($67.99) Gain (loss) from discontinued operations, net of income taxes 1.20 (0.61) Extraordinary item - gain on extinguishment of debt 99.74 --------------- -------------- ------------- Net earnings (loss) per common share ($1.22) $18.10 ($68.60) --------------- -------------- ------------- --------------- -------------- ------------- Dividends on preferred stock (5) None None ($1,045) Weighted average number of shares 8,917,624 236,339 185,970 BALANCE SHEET DATA (at end of period) - ------------------------------------- Working capital $43,060 $52,327 $52,319 Total assets 183,709 195,339 194,954 Long term debt and obligations under capital leases, net of current maturities 93,130 94,615 154,694 Stockholders' equity (deficit) 36,208 46,773 (1,500)
12 LAMONTS APPAREL, INC. (DEBTOR-IN-POSSESSION) FOOTNOTES TO SELECTED FINANCIAL DATA (1) The additional week in Fiscal 1995 accounted for $2.2 million of revenues. (2) Non-cash interest expense is comprised of amortization of discounts on the Company's long term debt and interest paid through issuance of additional debt. (3) Extraordinary item reflects gain on cancellation of debt associated with the Recapitalization. (4) Represents per common share earnings (loss) after accrual of dividends on the Old Preferred Stock (hereinafter defined) for the 52 weeks ended November 2, 1991. Concurrent with the Recapitalization, the Company (i) converted all of the Old Preferred Stock into Common Stock, (ii) eliminated all accrued and unpaid dividends associated with the Old Preferred Stock and (iii) effected a one-for-30 reverse stock split of the Common Stock outstanding prior to the Recapitalization. All share and per share amounts for the 52 weeks ended November 2, 1991 have been restated to reflect the reverse stock split on a retroactive basis. (5) Represents dividends on the Old Preferred Stock which were accrued but never declared or paid. All of the accrued and unpaid dividends were eliminated pursuant to the Recapitalization. 13 ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following information should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this document. On March 9, 1995, the Company elected to change its fiscal year end from the Saturday closest to October 31 to the Saturday closest to January 31 in order to enhance comparability of the Company's results of operations with other apparel retailers. Accordingly, for purposes of comparing the results of operations of the Company for Fiscal 1995, the Company believes it is meaningful to use the comparable prior year period as the basis for comparison. FINANCIAL CONDITION BACKGROUND On October 30, 1992, the Company completed the Recapitalization pursuant to which the Company issued an aggregate of $75.0 million in principal amount of its 10-1/4% Notes and issued 8,080,734 shares of its Common Stock, in exchange for $138.6 million, after original issue discount, of outstanding debt and the transfer of a $2.0 million promissory note held by the Company to one of its debtholders. In addition, the Company's 9-1/2% Convertible Exchangeable Preferred Stock, par value $15 per share (the "Old Preferred Stock"), was converted into 622,600 shares of Common Stock. After the transaction, approximately $796,000 in principal amount of the Company's 13-1/2% Senior Subordinated Notes due February 15, 1995 (the "13-1/2 Notes") remained outstanding. As a result of the Recapitalization (i) the holders of Common Stock outstanding prior to the Recapitalization held 2.09% of the Common Stock outstanding immediately following the Recapitalization and (ii) the Company's funded debt was reduced by $63.6 million. In December 1993, the Company completed the Infusion pursuant to which it received approximately $13.4 million from the issuance of 4,466,206 shares of its Series A Convertible Preferred Stock, par value $.01 per share ("Series A Preferred Stock"), which, together with cash flow from operations was used to repurchase $13.0 million aggregate principal amount of the 10-1/4% Notes, at par, together with accrued interest through the repurchase date. Each share of the Series A Preferred Stock automatically converted into two shares of Common Stock on March 14, 1994. In connection with this transaction, the terms of the 10-1/4% Notes that remained outstanding were amended to, among other things, prospectively reduce the interest rate thereof from 11-1/2% to 10-1/4%. On June 10, 1994, the Company further amended the terms of the 10-1/4% Notes to provide, among other things, that interest payments due on the 10-1/4% Notes through November 1, 1995 could be paid, at the Company's option, either in cash, at a rate of 12% per annum, or in additional 10-1/4% Notes, at a rate of 13% per annum. In accordance with the amendment, the Company elected to issue additional 10-1/4% Notes at the PIK Interest rate of 13% for the November 1, 1994 interest payment. Interest continued to accrue on the 10-1/4% Notes until the date of filing of the Company's Chapter 11 case. In addition, on June 10, 1994, the Company issued the 1994 Warrants initially to purchase up to an aggregate of approximately 2 million shares of Common Stock, (or approximately 10% of the Common Stock outstanding after giving effect to the exercise of such 1994 Warrants) to the holders of the 10-1/4% Notes. The 1994 Warrants may be exercised on or prior to June 10, 1999, at an initial exercise price of $1.00 per share of Common Stock. As of February 3, 1996, none of the 1994 Warrants have been exercised. On October 18, 1994, the holders of all outstanding 10-1/4% Notes (i) granted the Company the option to exchange the 10-1/4% Notes for shares of Common Stock representing approximately 70% of the Common Stock outstanding immediately following the exchange and $50.0 million aggregate liquidation preference of a new series of preferred stock of the Company and (ii) released the collateral securing the 10-1/4% Notes and generally subordinated the Company's obligations under the 10-1/4% Notes so that they are junior to trade payables and certain other liabilities, subject to certain exceptions. The Company could exercise its option to exchange the 10-1/4% Notes on or prior to March 31, 1995. However, on March 27, 1995, the Company received an extension from the holders of the 10- 1/4% Notes to extend indefinitely, the time in which the Company may exercise its option to require the holders to exchange their 10-1/4% Notes; provided, however, that a majority of the holders of the 10-1/4% Notes may terminate such extension upon 60 days notice to the Company. Notwithstanding the foregoing, the Company's financial position continued to deteriorate through Fiscal 1994. The Company's ability to service its debt and to obtain trade credit was dependent on its performance, which continued to fall short of anticipated results. In response to its deteriorating financial condition, the Company determined that a more significant financial and operational restructuring was necessary. 14 FILING On January 6, 1995, the Company filed for protection pursuant to Chapter 11. In Chapter 11, the Company has continued to manage its affairs and operate its business as a debtor-in-possession The Company and representatives of the Committees have reached a confidential agreement in principle regarding the economic terms of a Plan designed to enable the Company to emerge from Chapter 11. The Company and the Committees are discussing the timing for the filing with the Court of the Plan and the Disclosure Statement related thereto. In addition, the Company has received certain non-binding proposals regarding potential new equity and/or debt investments in the Company, which proposals are subject to customary conditions, including, in certain cases, consummation of a plan of reorganization. The Company and the representatives of the Committees are evaluating such proposals. For additional information related to the Company's Chapter 11 case, see "Item 3 - - Legal Proceedings." As of the Petition Date, payment of pre-petition liabilities to unsecured creditors, including trade creditors and noteholders, and pending litigation against the Company are generally stayed while the Company continues its business operations as a debtor-in-possession. In a Chapter 11 reorganization plan, the rights of the creditors may be significantly altered. Creditors may receive substantially less than the full face amount of claims. No estimate of the amount of adjustments, if any, from recorded amounts, to amounts to be realized by creditors, is available at this time. As a result of the Company's Chapter 11 case, the Company is currently in default under the indentures governing the 10-1/4% Notes and the 13-1/2% Notes. As a result, all unpaid principal of, and accrued prepetition interest on, such debt became immediately due and payable. The payment of such debt and accrued but unpaid interest thereon is prohibited during the pendency of the Company's Chapter 11 case. STORE LOCATIONS Since October 29, 1994, the Company has closed 15 stores, six of which, with the approval of the Court, were closed in January 1995. The last store was closed in March 1996. Of the 15 stores closed, all were closed due to poor performance. Management is continually evaluating store locations and operations to determine whether to close, downsize or relocate stores that do not meet performance objectives. In March 1995, the Company opened a new store in Issaquah, Washington. Management is also evaluating possibilities of opening new stores in desirable geographic locations to facilitate revenue growth. RESULTS OF OPERATIONS FISCAL 1995 COMPARED TO THE 12 MONTHS ENDED JANUARY 28, 1995 REVENUES. Revenues of $199 million for Fiscal 1995 decreased 13.7% on a total store basis from $231 million for the comparable prior year period, primarily because the comparable prior year period results include revenues from six stores that were closed in January 1995. In addition, the majority of the revenue decrease in Fiscal 1995 occurred during the first three months after the Company's Chapter 11 filing. Comparable store revenues decreased 4.5% in Fiscal 1995 (after deducting the 53rd week of sales in Fiscal 1995). Comparable store revenues are defined as revenues generated at stores opened for at least twelve months in each of the periods. GROSS PROFIT. Gross profit, as a percentage of revenues, increased 3.2% for Fiscal 1995, to 34.5% from 31.3% of revenues in the comparable prior year period (excluding the effect of non-cash charges of $16.5 million in the comparable prior year period and $0.9 million in Fiscal 1995). The non-cash charges consist primarily of "LIFO" inventory valuation and net realizable value adjustments. The improvement in gross profit margins can be attributed to the Company's implementation of new merchandising strategies designed to improve the quality of merchandise offered while maintaining price points geared to the Company's customer base, reduced inventory levels and increased inventory turns. Merchandise turnover increased from 2.3 times in the comparable prior year period to 2.8 times in Fiscal 1995, a 22% improvement. The Company has also initiated policies to mark-down and clear out any unsold merchandise within its respective season. OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative expenses of $71.3 million, or 35.8% of revenues for Fiscal 1995, decreased compared to $87.8 million, or 38.0% of revenues for the comparable prior year period. On a comparable store basis, operating and administrative expenses have decreased $5.5 million or 7.3%. Reduction in payroll, corporate administration and professional expenses are primarily attributable to this improvement. 15 DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense of $9.2 million for Fiscal 1995 decreased from $11.4 million in the comparable prior year period. The decrease is primarily attributable to the six stores closed during January 1995. The increase in depreciation and amortization associated with newly acquired assets was offset by reductions due to assets becoming fully depreciated or amortized. REORGANIZATION EXPENSES. Reorganization expenses relate to costs associated with the Company's Chapter 11 filing and the general restructuring of the Company's business operations. Since the Chapter 11 filing, the Company has recognized $14.7 million in reorganization expense (approximately $9.0 million of non-cash charges), of which $7.2 million was incurred during Fiscal 1995 and $7.5 million during the comparable prior year period. These expenses relate primarily to legal costs associated with the Company's Chapter 11 case, the accrued or estimated costs associated with the rejection of real property leases, and costs related to closing underperforming and nonprofitable stores subsequent to the Company's Chapter 11 case. The charges for store closures are primarily non-cash write-offs of abandoned assets but also include inventory losses realized in the inventory liquidation process. INTEREST EXPENSE. Interest expense of $5.1 million for Fiscal 1995 decreased from $11.8 million ($6.7 million cash and $5.1 million non-cash) in the comparable prior year period. The decrease in interest expense is primarily a result of the Company's Chapter 11 case. See "Item 3, Legal Proceedings". As of February 3, 1996, the DIP Facility accrued interest at an annual rate of 11.25% as compared to 12% on borrowings on the Company's working capital facility in the comparable prior year period. NET LOSS. The Fiscal 1995 net loss of $24.8 million decreased $44.6 million compared to the net loss of $69.4 million for the comparable prior year period. The reduction in operating losses is primarily a result of (i) a $12 million improvement in gross margin which includes non-cash charges in the comparable prior year period as discussed above, (ii) a $6.4 million decrease in costs related to the closing of stores in Fiscal 1995 compared to the comparable prior year period, (iii) lower operating and administrative expenses of $16.4 million in Fiscal 1995 as discussed above, (iv) a $6.8 million reduction in interest expense in Fiscal 1995 due to the Company's Chapter 11 filing and (v) a $2.1 million decline in depreciation and amortization expense during Fiscal 1995. Although the Company has realized a significant reduction in operating and other expenses due to downsizing, these savings have been partially offset by a decline in sales also attributable to a reduced number of operating stores. QUARTER ENDED JANUARY 28, 1995 COMPARED TO QUARTER ENDED JANUARY 29, 1994 REVENUES Revenues of $71.0 million for the January Quarter include the Christmas holiday season and are not indicative of an annualized trend. Revenues decreased 8.6% on a total store basis from $77.7 million for the quarter ended January 29, 1994. Store closures contributed $2.4 million to the total revenue decline. Comparable store revenues decreased 6.4% for the January Quarter as compared to the same period in the prior year. Management believes that revenues have been adversely affected, in part, by (i) a weak retail environment for apparel, (ii) the adverse publicity associated with the Company's Chapter 11 filing and (iii) the interruption in the receipt of merchandise due to a reduction in available credit immediately following the filing. GROSS PROFIT. Gross profit, as a percentage of revenues, decreased approximately 17.3% for the January Quarter, to 20.2% as compared to 37.5% for the comparable prior year period (excluding the effects of non-cash charges of $3.9 million during the January Quarter and $0.3 million during the comparable prior year period). The decrease in gross profit, excluding non-cash items, is primarily attributable to the significant markdowns taken during the January Quarter in order to sell aged and slow-moving merchandise from the Company's inventory. Non-cash charges, primarily resulting from the Company's use of the LIFO method for valuing inventories, increased during the January Quarter due to the $2.9 million liquidation of a step-up layer included in inventory. OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative expenses of $22.4 million for the January Quarter were $0.7 million lower than the $23.1 million incurred for the comparable prior year period. The closure of nine stores subsequent to January 29, 1994 resulted in a decrease of $1.8 million in operating and administrative expenses offset, in part, by a slight increase in comparable store operating and administrative expenses. As a percentage of revenues, operating and administrative expenses increased to 31.5% for the January Quarter compared to the 29.7% for the same period of the prior year due to lower revenues. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense of $2.7 million for the January Quarter remained relatively unchanged from $2.8 million recorded for the comparable prior year period. Increased depreciation and amortization associated with newly acquired assets offset reductions associated with assets retired as a result of store closures and assets becoming fully depreciated or amortized. 16 INTEREST EXPENSE. Interest expense of $3.0 million ($1.3 million cash and $1.7 million non-cash) for the January Quarter increased $0.2 million from $2.8 million (all cash) in the comparable prior year period primarily due to (i) the accrual of payment-in-kind interest on the 10-1/4% Notes at the rate of 13% through the date of the filing as compared to a cash interest rate of 10-1/4% in effect for the majority of the prior year period and (ii) higher borrowing levels and higher interest rates under the Company's working capital facilities, offset by (i) the termination of interest accruals on the 10-1/4% Notes and on the 13-1/2% Notes as of the date of the Company's Chapter 11 filing, and (ii) the December 1993 repurchase of $13.0 million aggregate principal amount of the 10-1/4% Notes. OTHER. Other expense of $0.4 million for the January Quarter reflects the write-off of certain deferred financing costs attributable to $13.0 million aggregate principal amount of 10-1/4% Notes repurchased by the Company in December 1993. REORGANIZATION EXPENSES. Reorganization expenses represent costs directly related to the Company's Chapter 11 filing, and include (i) estimated costs associated with the rejection of real property leases, (ii) estimated cost of closing underperforming stores and (iii) professional fees and other expenditures. NET LOSS. The Company reported a net loss of $25.1 million for the January Quarter as compared to a net loss of $0.2 million for the comparable prior year period. The decrease in net earnings of $24.9 million is primarily attributable to decreased gross profit dollars and the recognition of reorganization expenses attributable to the Company's Chapter 11 proceedings offset, in part, by lower operating and administrative expenses. FISCAL 1994 COMPARED TO FISCAL 1993 REVENUES. Revenues of $237.9 million for Fiscal 1994 decreased 5.2% on a total store basis from $251.0 million for Fiscal 1993. Comparable store revenues decreased 6.4% for Fiscal 1994 as compared to Fiscal 1993. Management believes that revenues have been affected by (i) slow reaction to a changing consumer, (ii) an unprecedented increase of approximately 1.7 million square feet of mass merchant/discount retail space since the Fall of 1993 in the Alaska market, (iii) the sluggish economy in the Seattle/Tacoma market and (iv) the general lower demand for apparel experienced by the Company and many other apparel retailers. GROSS PROFIT. Gross profit, as a percentage of revenues decreased 1.4% in Fiscal 1994, to 36.5% from 37.9% of revenues in Fiscal 1993 (excluding the effect of non-cash charges of $12.6 million in Fiscal 1994 and $1.2 million in Fiscal 1993). The non-cash charges increased $11.4 million in Fiscal 1994 primarily due to a $10.0 million reduction in the step-up in inventory to net realizable value. The step-up was recorded in connection with the Recapitalization in October 1992 pursuant to the provisions of purchase accounting and the use of the LIFO method of valuing inventory. Management believes that the decrease in gross profit is attributable to (i) planned inventory levels that supported turns at less than the industry norm, (ii) higher markdowns resulting from lower sales volume which necessitated extensive clearance pricing to maintain planned inventory levels and (iii) lower markups on merchandise due to changes in mix of business. OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative expenses of $88.5 million (or 37.2% of revenues) for Fiscal 1994 increased compared to $84.2 million (or 33.5% of revenues) for Fiscal 1993. While cost containment measures were successful in stabilizing or reducing most operating expenses, these measures were more than offset by (i) increased advertising expenditures which management believed were necessary to maintain a competitive stance in the Company's markets, (ii) legal expenditures required to defend against certain lawsuits (see "Item 3 - Legal Proceedings"), (iii) less favorable experience in the Company's self-insured medical program and (iv) costs associated with the change in management in November 1994. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense of $11.4 million for Fiscal 1994 remained relatively flat as compared to the comparable period in the prior year. The increase in depreciation and amortization associated with newly acquired assets was offset by reductions due to assets becoming fully depreciated or amortized. STORE CLOSURE COSTS. Store closure costs of $7.2 million for Fiscal 1994 reflect the Company's estimate of write-offs to be made and costs to be incurred in connection with certain store closures. As the store closure costs consist primarily of non-cash write-offs, the Company anticipates a net cash outlay of approximately $1.0 million. INTEREST EXPENSE. Interest expense of $11.6 million ($8.1 million cash and $3.5 million non-cash) for Fiscal 1994 decreased from $12.5 million (all cash) for Fiscal 1993. The decrease in interest expense is primarily a result of (i) the repurchase of $13.0 million of the Company's 10-1/4% Notes in connection with the Infusion and (ii) the reversal of $0.6 million of accrued interest previously established as a liability for settlement of an examination of the Company's Federal income tax returns (see Note 10 of the Notes to the Consolidated Financial Statements contained elsewhere in 17 this document), partially offset by (i) the Company's election to accrue interest at the PIK Interest rate of 13% for the November 1, 1994 interest payment and (ii) increased interest expense associated with higher borrowing levels and higher interest rates under the Company's existing working capital facility. OTHER. Other expense of $0.4 million for Fiscal 1994 reflects the write-off of certain deferred financing costs attributable to the $13.0 million of 10-1/4% Notes repurchased pursuant to the Infusion. NET LOSS. The Fiscal 1994 net loss of $44.5 million increased $33.6 million compared to the net loss of $10.9 million for Fiscal 1993 primarily as a result of (i) the $19.7 million decrease in gross profit dollars, $10.0 million of which is attributable to the net realizable value adjustment to inventory, (ii) the $7.2 million charge for store closure costs, (iii) higher operating and administrative expenses and (iv) the $3.0 million reversal of a deferred tax credit recognized during Fiscal 1993 offset, in part, by (i) the reversal of $0.4 million of accrued taxes and the $0.6 million of accrued interest previously established as a liability for settlement of an examination of the Company's Federal income tax returns (see Note 10 of the Notes to the Consolidated Financial Statements contained elsewhere in this document) and (ii) lower interest expense. LIQUIDITY AND CAPITAL RESOURCES The Company used $5.4 million of cash for operating activities for Fiscal 1995. The Company's primary cash requirement is the procurement of inventory which is currently funded through borrowings under the DIP Facility and trade credit. Like other apparel retailers, the Company is dependent upon its ability to obtain trade credit. If the Company is able to continue to obtain the trade credit terms it is currently receiving, and enters into the New Facility on substantially the terms set forth in the FNBB Term Sheet, the Company believes that its available sources of cash will provide the cash necessary to fund the Company's cash requirements. The Company utilized $1.8 million of cash for investing activities in Fiscal 1995. The $1.8 million relates primarily to capital expenditures. DIP FINANCING On February 17, 1995, the Company received approval from the Court for the DIP Facility with Foothill. The DIP Facility provides for a borrowing capacity of up to $32.0 million in revolving loans, including up to $15 million of letters of credit, subject to borrowing base limitations based upon, among other things, the value of inventory. Effective October 17, 1995, the DIP Facility was amended to increase the percentage of inventory value allowed in determining the borrowing capacity. This increase in borrowing capacity was in effect for the period October 17, 1995 through December 2, 1995. Effective November 28, 1995, Foothill increased the Company's borrowing capacity from $32 million to $34 million to accommodate seasonal requirements. The additional $2 million in borrowing capacity expired December 15, 1995. As of April 10, 1996, the Company had $17.6 million of borrowings and $0.1 million letters of credit outstanding under the DIP Facility, with additional borrowing capacity of $2.5 million. The DIP Facility provides that interest will accrue at the rate of 3% per annum in excess of the reference rate, payable monthly in arrears. The DIP Facility also provides that in the event of a default in the payment of any amount due thereunder, the interest rate on such defaulted amount shall be 4.5% per annum in excess of the reference rate, payable on demand. At April 10, 1996, the reference rate was 8.25%. Additionally, the Company must maintain a minimum net worth of $10.0 million (as defined in the DIP Facility to exclude, among other items, reorganization expenses, certain liabilities incurred prior to the filing, reductions in goodwill, charges for store closure and non-cash interest). The DIP Facility has been extended from its initial maturity date of May 17, 1996 and will now expire on the earlier of August 17, 1996, with provisions for two additional quarterly renewals, or the effective date of the Company's plan of reorganization. The Company believes it may be in violation of certain covenants on or after May 3, 1996. Consequently, if the Company does not enter into the New DIP Facility on or prior to such date, it will be in default under the DIP Facility. Although, the Company believes that it would be able to obtain a waiver of any such default, there can be no assurance that the Company could obtain such waiver. The Company and representatives of the Committees have reached a confidential agreement in principle regarding the economic terms of a Plan designed to enable the Company to emerge from Chapter 11. The Company and the Committees are discussing the timing for the filing with the Court of the Plan and the Disclosure Statement related thereto. In addition, the Company has received certain non-binding proposals regarding potential new equity and/or debt investments in the Company, which proposals are subject to customary conditions, including, in certain cases, consummation of a plan of reorganization. The Company and the representatives of the Committees are evaluating such proposals. The Company is currently negotiating with FNBB with respect to (i) the New DIP Facility, which would replace the DIP Facility and (ii) the Exit Facility, which would replace the New DIP Facility upon the Company's emergence from Chapter 11. On April 5, 1996, the Court approved the payment by the Company of $50,000 to FNBB as a deposit in connection with the New Facilities pursuant to the FNBB Term Sheet. The consummation of each of the New Facilities is subject to final documentation satisfactory to FNBB, approval of the Court and other customary conditions, including, in the case of the Exit Facility, effectiveness of a plan of reorganization. There can be no assurances that any of such conditions will be satisfied. In addition, the following description of the New Facilities is based on currently proposed terms and there can be no assurances that such terms will not be changed in a manner adverse to the Company. Under the currently proposed terms of the New Facilities, the Company will be able to borrow up to $32 million in revolving loans, including up to $3 million of documentary and standby letters of credit. Borrowings under the New Facilities will be subject to borrowing base limitations based upon, among other things, the value of eligible inventory. The New Facilities will provide that interest will accrue at the rate of 1.5% per annum in excess of FNBB's alternate base rate, payable monthly in arrears, or 2.75% per annum in excess of the fully reserve adjusted eurodollar rate for interest periods of one, two and three months, payable at the end of the applicable interest period; provided, that with respect to the Exit Facility, after January 31, 1997, such rates will be subject to prospective adjustment based upon achievement of certain financial tests. The New Facilities also provide that in the event of a default in the payment of any amount due thereunder, the interest rate on such defaulted amount shall be 3% per annum in excess of FNBB's alternate base rate. The New DIP Facility will be secured by all real and personal property of the Company and will be an allowed administrative expense claim with priority over certain other administrative expenses in the Company's Chapter 11 case. The Exit Facility will be secured by all existing and after acquired assets, properties and rights of the Company (including, without limitation, inventory, accounts receivables, general intangibles, equipment, real property and intellectual property). The New Facilities will impose limitations on the Company with respect to, among other things, (i) consolidations, mergers and sales of assets, (ii) the incurrence of liens and encumbrances, (iii) the incurrence of debt or guaranties, (iv) capital expenditures in excess of specified levels, (v) investments and dividends and (vi) the prepayment of certain indebtedness. Additionally, under the New Facilities, the Company will be required to satisfy certain financial tests. The New DIP Facility will expire on the earlier of June 30, 1997, or the effective date of a plan of reorganization and the Exit Facility will expire two years from the closing of such facility. 18 OTHER The Company has never declared or paid cash dividends on its Common Stock, or any other equity security, and does not anticipate paying cash dividends on the Common Stock or any other equity security in the foreseeable future. Any future determination as to the payment of dividends will depend upon certain debt instrument limitations, future earnings, results of operations, capital requirements and the financial condition of the Company. The ability of the Company to pay dividends is restricted under the terms of the DIP Facility. In addition, the Bankruptcy Code prohibits the Company's payment of cash dividends during the pendency of the Company's Chapter 11 case and, based on the terms set forth in the FNBB Term Sheet will be restricted under the New Facilities. SEASONALITY The Company's sales are seasonal, with the Christmas Season being its strongest quarter. The table below sets forth the effect of seasonality on the Company's business for Fiscal 1995 and the comparable prior year period. Revenues by quarter in the comparable prior year period have been restated to conform with the current year presentation, after the Company's change in fiscal year to the Saturday closest to January 31.
1ST QTR 2ND QTR 3RD QTR 4TH QTR TOTAL --------- --------- --------- --------- --------- (dollars in thousands) FISCAL 1995 Revenues $36,682 $47,711 $49,802 $65,353 $199,548 % Contribution 18.4% 23.9% 24.9% 32.8% TWELVE MONTHS ENDED JANUARY 28, 1995 Revenues $48,503 $54,994 $56,688 $71,014 $231,199 % Contribution 21.0% 23.8% 24.5% 30.7%
INFLATION The primary items affected by inflation include the cost of merchandise, utilities, and labor. Retail sales prices are generally set to reflect such inflationary increases, the effects of which cannot be readily determined. Management of the Company believes that inflationary factors have had a minimal effect on the Company's operations during the past three years. 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA LAMONTS APPAREL, INC. (DEBTOR-IN-POSSESSION) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PAGE # -------- 21 Report of Independent Accountants 22 Consolidated Balance Sheets - February 3, 1996, January 28, 1995 and October 29, 1994. 23 Consolidated Statements of Operations for the 53 weeks ended February 3, 1996, Quarter ended January 28, 1995, and the 52 weeks ended October 29, 1994 and October 30, 1993. 24 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the 53 weeks ended February 3, 1996, Quarter ended January 28, 1995, and the 52 weeks ended October 29, 1994 and October 30, 1993. 25 Consolidated Statements of Cash Flows for the 53 weeks ended February 3, 1996, Quarter ended January 28, 1995, and the 52 weeks ended October 29, 1994 and October 30, 1993. 27 Notes to Consolidated Financial Statements. All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto. 20 REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors Lamonts Apparel, Inc. We have audited the accompanying consolidated balance sheets of Lamonts Apparel, Inc. (Debtor-in-Possession) as of February 3, 1996, January 28, 1995 and October 29, 1994 and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for the 53 weeks ended February 3, 1996, Quarter ended January 28, 1995 and the 52 weeks ended October 29, 1994, and October 30, 1993. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lamonts Apparel, Inc. (Debtor-in-Possession) as of February 3, 1996, January 28, 1995 and October 29, 1994 and the results of its operations and its cash flows for the 53 weeks ended February 3, 1996, Quarter ended January 28, 1995 and the 52 weeks ended October 29, 1994 and October 30, 1993, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has suffered recurring losses from operations. As discussed in Note 1 of the notes to the consolidated financial statements, on January 6, 1995, the Company filed a voluntary petition for relief under Chapter 11 of title 11 of the United States Code. Further, as more fully described in Note 1, claims substantially in excess of amounts reflected as liabilities in the consolidated financial statements have been asserted against the Company as a result of the reorganization proceedings. The validity of these claims, as well as the amount and manner of payment of all valid claims, will ultimately be determined by the Bankruptcy Court. As a result of the reorganization proceedings, the Company may sell or otherwise realize assets and liquidate or settle liabilities for amounts other than those reflected in the consolidated financial statements. Further, the confirmation of a Plan of Reorganization could materially change the amounts currently recorded in the consolidated financial statements. These matters raise substantial doubt about its ability to continue as a going concern and recover the carrying amounts of its assets, including the excess of cost over net assets acquired. Management's plans in regard to these matters are also discussed in Note 1. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. COOPERS & LYBRAND L.L.P. Seattle, Washington April 16, 1996 21 LAMONTS APPAREL, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FEBRUARY 3, JANUARY 28, OCTOBER 29, 1996 1995 1994 -------------- -------------- -------------- Current Assets: Cash $1,581 $7,972 $2,694 Receivables, net 2,458 3,050 1,994 Inventories 30,401 28,399 61,713 Prepaid expenses and other 2,076 5,517 5,924 Restricted cash 1,058 532 -------------- -------------- -------------- Total current assets 37,574 45,470 72,325 Property and equipment 42,083 51,924 54,661 Leasehold interests 4,570 5,058 5,241 Excess of cost over net assets acquired 13,278 13,639 13,730 Deferred financing costs 2,713 3,436 3,617 Restricted cash 1,278 256 1,884 Other assets 865 486 1,131 -------------- -------------- -------------- Total assets $102,361 $120,269 $152,589 -------------- -------------- -------------- -------------- -------------- -------------- Liabilities not subject to settlement under reorganization proceedings: Current liabilities: Borrowings under DIP Facility $20,334 $ $ Borrowings under working capital facility 15,838 24,593 Accounts payable 8,417 1,754 16,151 Accrued payroll and related costs 2,396 2,913 4,979 Accrued taxes 821 455 1,699 Accrued interest 207 336 1,249 Accrued store closure costs 3,254 2,951 3,557 Other accrued expenses 4,393 5,198 8,047 Current maturities of long term debt 796 Current maturities of obligations under capital leases 1,316 -------------- -------------- -------------- Total current liabilities 39,822 29,445 62,387 Long term debt - related party 66,026 Obligations under capital leases 14,616 Other 250 2,000 -------------- -------------- -------------- Total liabilities not subject to settlement under reorganization proceedings 40,072 29,445 145,029 -------------- -------------- -------------- Liabilities subject to settlement under reorganization proceedings: Related party 68,414 68,414 Other 36,431 39,919 -------------- -------------- -------------- 104,845 108,333 Commitments and contingencies -------------- -------------- -------------- Stockholders' equity (deficit): Common stock, $.01 par value; 40,000,000 shares Authorized; 17,899,549, 17,887,775 and 17,875,230 shares issued and outstanding, respectively 179 179 179 Additional paid-in-capital 62,921 62,843 62,777 Minimum pension liability adjustment (250) Accumulated deficit (105,406) (80,531) (55,396) -------------- -------------- -------------- Total stockholders' equity (deficit) (42,556) (17,509) 7,560 -------------- -------------- -------------- Total liabilities and stockholders' equity (deficit) $102,361 $120,269 $152,589 -------------- -------------- -------------- -------------- -------------- --------------
The accompanying notes are an integral part of these financial statements. 22 LAMONTS APPAREL, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
53 WEEKS QUARTER 52 WEEKS ENDED ENDED ENDED ------------------------------- FEBRUARY 3, JANUARY 28, OCTOBER 29, OCTOBER 30, 1996 1995 1994 1993 -------------- -------------- -------------- -------------- Revenues $199,548 $71,014 $237,922 $251,015 Cost of merchandise sold 131,677 60,587 163,697 157,098 -------------- -------------- -------------- -------------- Gross profit 67,871 10,427 74,225 93,917 -------------- -------------- -------------- -------------- Operating and administrative expenses 71,372 22,400 88,520 84,176 Depreciation and amortization 9,232 2,666 11,441 11,164 Store closure costs 7,200 -------------- -------------- -------------- -------------- Operating costs 80,604 25,066 107,161 95,340 -------------- -------------- -------------- -------------- Loss from operations before other income (expense), reorganization expenses and income tax benefit (12,733) (14,639) (32,936) (1,423) Other income (expense): Interest expense: Cash (contractual interest of $13.8 million and $3.6 million during 1995 and the January Quarter, respectively) (5,098) (1,356) (8,130) (12,477) Non-cash (1,670) (3,490) Other income (expense) 196 29 (369) 29 -------------- -------------- -------------- -------------- Loss from operations before reorganization expenses and income tax benefit (17,635) (17,636) (44,925) (13,871) Reorganization expenses 7,240 7,499 -------------- -------------- -------------- -------------- Loss before income tax benefit (24,875) (25,135) (44,925) (13,871) Income tax benefit (400) (3,000) -------------- -------------- -------------- -------------- Net loss ($24,875) ($25,135) ($44,525) ($10,871) -------------- -------------- -------------- -------------- -------------- -------------- -------------- -------------- Net loss per common share ($1.39) ($1.41) ($3.05) ($1.22) -------------- -------------- -------------- -------------- -------------- -------------- -------------- --------------
The accompanying notes are an integral part of these financial statements. 23 LAMONTS APPAREL, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (DOLLARS IN THOUSANDS)
Minimum Additional pension Preferred Common paid-in liability Accumulated stock stock capital adjustment deficit ------------ ------------ ------------ ------------ ------------ Balance, October 31, 1992 $0 $89 $46,684 $0 $0 Net loss for the 52 weeks ended October 30, 1993 (10,871) Compensation expense related to stock option plan 306 ------------ ------------ ------------ ------------ ------------ Balance, October 30, 1993 89 46,990 (10,871) Net loss for the 52 weeks ended October 29, 1994 (44,525) Issuance of Series A Preferred stock pursuant to the Infusion, net of issuance cost 45 12,990 Conversion of Series A Preferred Stock into Common Stock (45) 89 (44) Options exercised 1 Issuance of warrants 2,205 Compensation expense related to stock option plan 636 ------------ ------------ ------------ ------------ ------------ Balance, October 29, 1994 179 62,777 (55,396) Net loss for the quarter ended January 28, 1995 (25,135) Compensation expense related to stock option plan 66 ------------ ------------ ------------ ------------ ------------ Balance, January 28, 1995 179 62,843 (80,531) Net loss for the 53 weeks ended February 3, 1996 (24,875) Compensation expense related to stock option plan 78 Minimum pension liability adjustment (250) ------------ ------------ ------------ ------------ ------------ Balance, February 3, 1996 $0 $179 $62,921 ($250) ($105,406) ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
The accompanying notes are an integral part of these financial statements. 24 LAMONTS APPAREL, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
53 WEEKS QUARTER 52 WEEKS ENDED ENDED ENDED ------------------------------------ FEBRUARY 3, JANUARY 28, OCTOBER 29, OCTOBER 30, 1996 1995 1994 1993 ----------- ---------- ------------------------------------ Cash flows from operating activities: Net loss ($24,875) ($25,135) ($44,525) ($10,871) Adjustments to reconcile net loss to net cash provided (used) by operating activities before reorganization items: Depreciation and amortization 9,232 2,666 11,441 11,164 Store closure costs charged to operations 6,129 Non-cash interest, including interest paid-in-kind and amortization of debt discount 1,670 3,490 Income taxes (400) (3,000) Stock option expense 78 66 636 306 Net realizable value adjustment to inventory 500 10,000 Increase in long term restricted cash (1,022) Other (1,425) (950) 473 (388) Net change in current assets and liabilities 4,895 31,186 7,342 3,706 Reorganization expenses 7,240 7,499 --------- --------- --------- --------- Net cash provided (used) by operating activities before reorganization expenses (5,377) 17,002 (5,414) 917 Operating cash flows used by reorganization items: Payment for professional fees or other expenses related to the Chapter 11 proceedings (2,475) (1,872) --------- --------- --------- --------- Net cash provided (used) by operating activities (7,852) 15,130 (5,414) 917 --------- --------- --------- ---------- Cash flows from investing activities: Capital expenditures (1,343) (694) (3,889) (6,522) Proceeds from escrow 500 Other (448) (3) 228 8 --------- --------- --------- ---------- Net cash used by investing activities (1,791) (697) (3,661) (6,014) --------- --------- --------- --------- Cash flows from financing activities: Pre-petition borrowings under working capital facility 26,667 194,768 72,850 Pre-petition payments under working capital facility (35,422) (183,875) (64,950) Post-petition borrowings under working capital facility 244,178 Post-petition payments under working capital facility (239,682) Principal payments on obligations under capital leases (1,183) (373) (1,484) (1,331) Payments of financing costs (805) (1,495) Proceeds from sale of preferred stock 13,399 Payment of long term debt (13,000) Other (61) (27) (159) (140) --------- ---------- ---------- --------- Net cash provided (used) by financing activities 3,252 (9,155) 8,844 4,934 --------- --------- ---------- --------- Net increase (decrease) in cash (6,391) 5,278 (231) (163) Cash, beginning of period 7,972 2,694 2,925 3,088 --------- --------- --------- --------- Cash, end of period $1,581 $7,972 $2,694 $2,925 --------- --------- --------- --------- --------- --------- --------- ---------
The accompanying notes are an integral part of these financial statements 25 LAMONTS APPAREL, INC. (DEBTOR-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
53 WEEKS 52 WEEKS ENDED ENDED QUARTER ENDED ------------------------- FEBRUARY 3, JANUARY 28, OCTOBER 29, OCTOBER 30, 1996 1995 1994 1993 ----------- ------------- ------------------------- Reconciliation of net change in current assets and liabilities (Increase) decrease in accounts receivable $692 ($1,056) $1,144 ($423) (Increase) decrease in inventory (excluding adjustment for net realizable value) (2,692) 32,400 9,895 2,912 (Increase) decrease in prepaid expenses 2,018 992 (907) 2,318 Increase (decrease) in accounts payable 6,663 (3,245) (1,012) (4,718) Increase (decrease) in accrued interest (103) (666) (3,982) 4,349 Increase (decrease) in other accrued expenses (1,683) 2,761 2,149 (466) (Increase) decrease in other working capital 55 (266) ------- -------- ------- ------- $4,895 $31,186 $7,342 $3,706 ------- ------- ------- ------- ------- ------- ------- ------- SUPPLEMENTAL CASH FLOW INFORMATION: Cash interest payments made $5,201 $1,401 $12,178 $8,129 Non-cash transactions: Issuance of debt in payment of interest 4,026 Issuance of warrants 2,205 Conversion of Series A Preferred Stock into Common Stock 89
The accompanying notes are an integral part of these financial statements. 26 LAMONTS APPAREL, INC. (DEBTOR-IN-POSSESSION) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 3, 1996 NOTE 1 - CHAPTER 11 PROCEEDINGS AND BASIS OF PRESENTATION On January 6, 1995 (the "Petition Date"), Lamonts Apparel, Inc. (the "Company" or "Lamonts") filed a voluntary petition for relief under Chapter 11 ("Chapter 11") of title 11 of the United States Code (the "Bankruptcy Code") in the United States Bankruptcy Court (the "Court") for the Western District of Washington at Seattle. In Chapter 11, the Company has continued to manage its affairs and operate its business as a debtor-in-possession. The Company and representatives of the committees that represent Lamonts' unsecured trade creditors, bondholders and equityholders ("the Committees") have reached a confidential agreement in principle regarding the economic terms of a consensual Plan of Reorganization designed to enable the Company to emerge from Chapter 11 (the "Plan"). The Company and the Committees are discussing the timing for the filing with the Court of the Plan and the Disclosure Statement related thereto. In addition, the Company has received certain non-binding proposals regarding potential new equity and/or debt investments in the Company, which proposals are subject to customary conditions, including, in certain cases, consummation of a plan of reorganization. The Company and the representatives of the Committees are evaluating such proposals. After a consensual plan of reorganization is completed, it will be sent, with a Disclosure Statement approved by the Court, after notice and hearing, to members of all classes of impaired creditors and equity security holders for acceptance or rejection. Following acceptance or rejection of a plan of reorganization by creditors and equity security holders, the Court, at a noticed hearing, will consider whether to confirm a plan of reorganization. As a debtor-in-possession in Chapter 11, the Company may not engage in transactions outside of the ordinary course of business without approval, after notice and hearing, of the Court. The accompanying consolidated financial statements of the Company have been prepared on a going concern basis of accounting and, for the periods subsequent to the bankruptcy filing, in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE BANKRUPTCY CODE. Recurring losses from operations and the matters discussed herein related to the bankruptcy filing raise substantial doubt about the Company's ability to continue on a going concern. The ability of the Company to continue as a going concern is dependent upon, among other things, (i) the ability to comply with its debtor-in-possession financing agreement, (ii) confirmation of a Plan under the Bankruptcy Code, (iii) the ability to achieve profitable operations after such confirmation and (iv) the ability to generate sufficient cash from operations to meet its obligations. As of the Petition Date, payment of pre-petition liabilities to unsecured creditors, including trade creditors and noteholders, and pending litigation against the Company are generally stayed while the Company continues its business operations as a debtor-in-possession. In a Chapter 11 reorganization plan, the rights of the creditors may be significantly altered. Creditors may receive substantially less than the full face amount of claims. Certain creditors have filed claims with the Court substantially in excess of amounts reflected in the Company's financial statements. The Company continues to analyze and reconcile the claims filed by creditors with the Company's financial records, but believes it has made appropriate provision for all claims filed. However, no estimate of the amount of adjustments, if any, from recorded amounts, to amounts to be realized by creditors, is available at this time. These liabilities are included in the balance sheet as "liabilities subject to settlement under reorganization proceedings." As a result of the Company's Chapter 11 filing, the Company is currently in default under the indentures governing the Company's 10-1/4% Subordinated Notes due November 1999 (the "10-1/4% Notes") and the 13-1/2% Senior Subordinated Notes which were due February 1995 (the "13-1/2% Notes"). As a result, all unpaid principal of, and accrued pre-petition interest on, such debt became immediately due and payable. The payment of such debt and accrued but unpaid interest thereon is prohibited during the pendency of the Company's Chapter 11 case, and these liabilities have been included in the balance sheet as "liabilities subject to settlement under reorganization proceedings." (Also see Note 3) Pre-petition liabilities subject to settlement under reorganization proceedings include the following (dollars in thousands):
FEBRUARY 3, JANUARY 28, 1996 1995 ------------------ ------------------ Accounts payable and accrued liabilities $23,511 $23,714 Capital lease obligations 12,321 15,560 10-1/4% Notes (including pre-petition accrued interest) 67,576 67,576 13-1/2% Notes (including pre-petition accrued interest) 838 838 Notes payable 599 645 ------------------ ------------------ $104,845 $108,333 ------------------ ------------------ ------------------ ------------------
In accordance with the Bankruptcy Code, the Company can seek Court approval for the rejection of pre-petition executory contracts, including real property leases. Any such rejection may give rise to a pre-petition claim for breach of contract. In connection with the Company's Chapter 11 proceedings, a review is being undertaken of all of the Company's obligations under its executory contracts. As of March 31, 1996, the Company has rejected nine real property leases and certain executory contracts and assumed six leases (with certain conditions and limitations). As a result of the reorganization proceedings, the Company may sell or otherwise realize assets and liquidate or settle liabilities for amounts other than those reflected in the financial statements. Further, a plan of reorganization could 27 materially change the amounts currently recorded in the financial statements, including amounts recorded for the excess of cost over net assets acquired. The accompanying financial statements do not include any adjustments that might result from the outcome of these matters or adjustments that might result should the Company be unable to continue as a going concern. Generally if a debtor-in-possession is unable to emerge from Chapter 11, such debtor-in-possession could be required to liquidate its assets.
Costs associated with the reorganization of the Company are charged to expense as incurred. Under the requirements of the Chapter 11 filing, the Company is required to pay certain expenses of the unsecured trade creditors, bondholders, and equityholders Committees. The amounts charged to reorganization expense by the Company are as follows (dollars in thousands): Fiscal January 1995 Quarter ------------------ ------------------ Write-off of property & equipment, net of obligations under capital leases $2,362 $1,330 Professional Fees 2,479 699 Lease Related Costs 925 3,400 Payroll Related Costs 411 728 Other 1,063 1,342 ------------------ ------------------ $7,240 $7,499 ------------------ ------------------ ------------------ ------------------
NOTE 2 - CONSOLIDATION The consolidated financial statements present the consolidated financial position and results of operations of the Company and its subsidiaries. All subsidiaries of the Company are inactive. All significant intercompany transactions and account balances have been eliminated in consolidation. The Company is a Northwest based regional retailer of moderately priced casual apparel. The Company has positioned itself as a focused specialty retailer with emphasis on casual wear and high quality branded products, including denim. NOTE 3 - BACKGROUND On October 30, 1992, the Company completed a comprehensive recapitalization (the "Recapitalization"). Prior to the Recapitalization, the Company was named Lamonts Corporation and was the holding company for Lamonts Apparel, Inc., its sole operating subsidiary ("Apparel"). Concurrent with the Recapitalization, Apparel was merged with and into Lamonts Corporation whose name was changed to Lamonts Apparel, Inc. Pursuant to the Recapitalization, the Company issued an aggregate of $75.0 million in principal amount of its 10-1/4% Notes and issued 8,080,734 shares of its common stock, par value $.01 per share (the "Common Stock"), in exchange for $138.6 million, after original issue discount, of outstanding debt and the transfer of a $2.0 million promissory note held by the Company to one of its debtholders. In addition, the Company's 9-1/2% Convertible Exchangeable Preferred Stock, par value $15 per share (the "Old Preferred Stock"), was converted into 622,600 shares of Common Stock. After the Recapitalization, approximately $796,000 in principal amount of the Company's 13-1/2% Notes also remained outstanding. As a result of the Recapitalization, the holders of Common Stock prior to the Recapitalization held 2.09% of the Common Stock outstanding immediately following the Recapitalization. The Recapitalization was reported as a complete reorganization at October 30, 1992. Purchase accounting was applied in accordance with the provisions of Accounting Principles Board Opinion No. 16. Accordingly, at October 30, 1992, all assets and liabilities were re-valued at their estimated current fair market value and the excess of purchase price over the fair market value of the net assets acquired was allocated to excess of cost over net assets acquired. 28 In December 1993, the Company completed a capital infusion and debt reduction plan (the "Infusion") pursuant to which it received approximately $13.4 million from the issuance of 4,466,206 shares of its Series A Convertible Preferred Stock, par value $.01 per share ("Series A Preferred Stock"), which, together with cash flow from operations was used to repurchase $13.0 million aggregate principal amount of the 10-1/4% Notes, at par, together with accrued interest through the repurchase date. Each share of the Series A Preferred Stock automatically converted into two shares of Common Stock on March 14, 1994, concurrent with the effective date of an amendment to the Company's Restated Certificate of Incorporation to increase the number of authorized shares of Common Stock from 15 million to 40 million shares. In connection with this transaction, the terms of the 10-1/4% Notes that remained outstanding were amended to, among other things, prospectively reduce the interest rate thereof from 11-1/2% (the original rate at issuance) to 10-1/4%. On June 10, 1994, the Company further amended the terms of the 10-1/4% Notes to (i) modify the minimum net worth covenant to exclude store closure costs and (ii) provide that interest payments due on the 10-1/4% Notes through November 1, 1995 could be paid, at the Company's option, either in cash, at a rate of 12% per annum, or in additional 10-1/4% Notes, at a rate of 13% per annum ("PIK Interest"). In accordance with the amendment, the Company elected to issue additional 10-1/4% Notes at the PIK Interest rate of 13% for the November 1, 1994 interest payment. Interest continued to accrue on the 10-1/4% Notes until the date of filing of the Company's Chapter 11 case. On October 18, 1994, the holders of all outstanding 10-1/4% Notes (i) granted the Company the option to exchange the 10-1/4% Notes for shares of Common Stock representing approximately 70% of the Common Stock outstanding immediately following the exchange and $50.0 million aggregate liquidation preference of a new series of preferred stock of the Company and (ii) released the collateral securing the 10-1/4% Notes and generally subordinated the Company's obligations under the 10-1/4% Notes so that they are junior to trade payables and certain other liabilities, subject to certain exceptions. The Company could have exercised its option to exchange the 10-1/4% Notes on or prior to March 31 1995. However, on March 27, 1995, the Company received an extension from the holders of the 10-1/4% Notes to extend indefinitely, the time in which the Company may exercise its option to require the holders to exchange their 10-1/4% Notes; provided, however, that a majority of the holders of the 10-1/4% Notes may terminate such extension upon 60 days notice to the Company. The $75.0 million principal amount of 10-1/4% Notes were issued in connection with the Recapitalization pursuant to the Note Indenture dated October 30, 1992 between the Company and First Trust National Association, as trustee (the "Indenture"). The Indenture initially provided for semi-annual interest payments on May 1 and November 1 of each year at 11-1/2% per annum. Subject to certain exceptions, no principal payments would be due with respect to the 10- 1/4% Notes until the maturity thereof on November 1, 1999. The 10-1/4% Notes Indenture contains, among other things, covenants that (i) limit the Company's ability to make payments on its stock, to make certain investments or to make payments in respect of subordinated indebtedness, (ii) limit the Company's ability to enter into transactions with affiliates, (iii) limit the Company's ability to incur additional indebtedness, (iv) require the Company to repurchase a portion of the 10-1/4% Notes if it fails to maintain a minimum net worth, (v) limit the Company's ability to create or permit payment restrictions affecting its subsidiaries, (vi) prohibit the Company from creating, incurring, assuming or suffering to exist any liens upon its assets other than usual and customary permitted liens and liens in favor of a working capital lender, (vii) require the Company to apply 100% of all net asset sale proceeds to investment in assets directly related to the business of the Company and its subsidiaries, to repay letter of credit or working capital indebtedness or to repurchase the 10-1/4% Notes, (viii) require the Company to offer to purchase all of the 10-1/4% Notes in the event of a post-Recapitalization change of control and (ix) limit the Company's ability to invest in unrestricted subsidiaries. As a result of the Company's Chapter 11 filing, the Company is currently in default on all its funded debt, except for the borrowings under the working capital facility with Foothill in effect prior to the Petition Date. The Company has not accrued interest on this indebtedness since the date of filing. The 13-1/2% Notes were due February 15, 1995. NOTE 4 - SUMMARY OF ACCOUNTING POLICIES CHANGE IN YEAR END On March 9, 1995, the Company elected to change its fiscal year end from the Saturday closest to October 31 to the Saturday closest to January 31 in order to enhance comparability of the Company's results of operations with other apparel retailers. Accordingly, the accompanying financial statements include the results of operations of the Company for the 53 week period ended February 3, 1996 ("Fiscal 1995"), and the quarter ended January 28, 1995, the "January Quarter"). The preceding fiscal years are comprised of the 52 weeks ended October 29, 1994 ("Fiscal 1994") and October 30, 1993 ("Fiscal 1993"). INVENTORIES Inventories are valued at the lower of cost (using the retail last-in, first-out ("LIFO") method) or net realizable value. At October 30, 1992, as a result of the Recapitalization, the purchase price allocated to merchandise inventories was computed based on the estimated selling prices of such merchandise less the costs of disposal and a profit for the selling effort. As a result of purchase accounting and the use of the LIFO method (the "Step-up"), the carrying value of the Company's inventories at February 3, 1996, January 28, 1995 and October 29, 1994 exceeded the weighted average cost of inventories by $2.1 million (net of a reserve of $0.5 million), $2.6 million and $5.5 million (net of a reserve of $10.0 million), respectively. The reserves were provided to reduce the Step-up to net realizable value. During Fiscal 1995 and the January Quarter reductions in inventory quanities resulted in the elimination of LIFO inventory layers which were carried at higher costs (including the Step-up) as compared with the cost of merchandise purchased in Fiscal 1995 and the January Quarter. The effect of these reductions increased cost of merchandise sold by $0.04 million and $3.2 million ($0.18 per share) in Fiscal 1995 and the January Quarter, respectively. 29 PRE-OPENING EXPENSES Certain costs incurred in connection with the opening of new stores are capitalized and amortized on a straight-line basis over twelve months commencing the month following the store opening. RESTRICTED CASH Current restricted cash includes amounts deposited in restricted operating accounts for the purpose of ensuring payment of employee payroll, utilities, and certain taxes, including retail sales tax. The Company chose this option while operating as a debtor-in-possession and will close the accounts at the time of emergence from Chapter 11. Noncurrent restricted cash represents amounts held as a deposit by the Company's buying service for the annual usage of international letters of credit, as well as deposits for workers' compensation. PROPERTY AND EQUIPMENT Property and equipment is recorded at cost less accumulated depreciation based on the following useful lives: buildings, 10-40 years; furniture, fixtures and equipment, 3-10 years; and leasehold improvements and property under capital leases, life of lease or useful life if shorter. Depreciation is computed using primarily the straight-line method for financial reporting purposes and accelerated depreciation methods for income tax purposes. Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts of the Company and any gain or loss is reflected in the consolidated financial statements in the period the sale or retirement occurred. Maintenance and repair costs are expensed as incurred. Expenditures for renewals and betterments are generally capitalized. Software development costs incurred in connection with significant upgrades of management information systems are capitalized. Amortization of capitalized software development costs begins when the related software is placed in service using the straight-line method over estimated useful lives of three to five years. LEASEHOLD INTERESTS In connection with the Recapitalization and the application of purchase accounting, the excess of the fair rental value of leased facilities under operating leases over the respective contractual rents has been recorded as an asset at its discounted net present value and is amortized on a straight-line basis over the respective remaining lease terms. The accumulated amortization of leasehold interests was $1.4 million, $1.3 million, and $1.1 million, at February 3, 1996, January 28, 1995, and October 29, 1994, respectively. EXCESS OF COST OVER NET ASSETS ACQUIRED The Company evaluates the recoverability of the carrying amount of the excess of cost over net assets acquired by estimating future cash flows from operations. Management believes that after giving effect to its reorganization efforts and the filing of the Company's Chapter 11 case, the Company should generate cash flows from operations in the future sufficient to support this asset. However, because of the uncertainty surrounding the results of the Company's Chapter 11 filing, there can be no assurance that such results will occur. The excess of cost over the fair market value of net assets acquired pursuant to the Recapitalization is being amortized on a straight-line basis over 40 years. Accumulated amortization approximated $1.2 million, $0.8 million and $0.7 million at February 3, 1996, January 28, 1995 and October 29, 1994, respectively. DEFERRED FINANCING COSTS Costs incurred in connection with the issuance of the Company's debt are amortized using the effective interest method over the term of the related indebtedness. In connection with an amendment to the 10-1/4% Notes in June 1994, the Company issued Warrants (the "1994 Warrants") initially to purchase up to an aggregate of approximately 2.0 million shares of Common Stock to the holders of the 10-1/4% Notes. The 1994 Warrants may be exercised on or prior to June 10, 1999, at an initial exercise price of $1.00 per share of Common Stock. The issuance of the 1994 Warrants resulted in an increase of $2.2 million in deferred financing costs and additional paid-in capital. The accumulated amortization of deferred financing costs approximated $2.1 million, $1.4 million and $1.2 million at February 3, 1996, January 28, 1995 and October 29, 1994, respectively. 30 ADVERTISING COSTS The Company expenses the production costs of advertising as incurred. Advertising expense was $12.6 million, $3.8 million, $15.0 million and $13.9 million during Fiscal 1995, the January Quarter, Fiscal 1994 and Fiscal 1993, respectively. CASH EQUIVALENTS The Company considers all short term investments with maturities of three months or less when purchased to be cash equivalents. Under the terms of the DIP Facility (see Note 8), all cash from the sale of inventory collected by the Company is paid to the lender and applied to the outstanding balance. OTHER In March 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("Statement No. 121"). Statement No. 121 requires that long-lived assets and certain intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If impairment has occurred, an impairment loss must be recognized. Implementation of Statement No. 121 is required in the Company's Fiscal Year ending February 1, 1997. Based on estimates by management as of February 3, 1996, subject to the outcome of issues discussed in Note 1 , the impact of the adoption of this standard is not expected to be material to the financial position, results of operations, or liquidity of the Company. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior period amounts in the financial statements have been reclassified to conform with the current year presentation. NOTE 5 - NET LOSS PER COMMON SHARE Net loss per common share has been computed by dividing net loss by the weighted average number of common shares outstanding. The common stock equivalents, represented by stock options, warrants and Series A Preferred Stock (outstanding from December 1, 1993 to March 13, 1994) were not considered in the calculation as they either have an exercise price greater than the applicable market price, or the effect of assuming their exercise or conversion would be anti-dilutive. The weighted average number of shares outstanding was 17,893,675, 17,883,135, 14,583,038 and 8,917,624 for 1995, the January Quarter, 1994, and 1993, respectively. Fully diluted earnings per share are not presented as the effect of assuming common stock equivalents exercise or conversion would be anti-dilutive. 31 NOTE 6 - PROPERTY AND EQUIPMENT Property and equipment comprise the following (dollars in thousands):
FEBRUARY 3, JANUARY 28, OCTOBER 29, 1996 1995 1994 ----------- ----------- ----------- Land $1,412 $1,412 $1,412 Buildings under capital leases 15,073 18,018 18,033 Buildings and improvements 7,594 7,594 7,594 Leasehold improvements 17,953 19,498 20,789 Furniture, fixtures, and equipment 16,608 17,781 17,701 Deferred software costs 6,484 5,897 5,706 ----------- ----------- ----------- 65,124 70,200 71,235 Less accumulated depreciation and amortization (23,041) (18,276) (16,574) ----------- ----------- ----------- $42,083 $51,924 $54,661 ----------- ----------- ----------- ----------- ----------- -----------
Accumulated amortization for buildings under capital leases was $4.6 million, $4.1 million and $3.6 million at February 3, 1996, January 28, 1995, and October 29, 1994, respectively. In March 1996 the Company closed a store in Eugene, Oregon. The Company owns the building subject to a ground lease and is currently attempting to market the building for sale. The net book value of the building and improvements totaled $2.2 million at February 3, 1996. (See Note 9.) The Company entered into a sale-leaseback transaction involving the sale of land and building in February 1996 (see Note 16, Subsequent Events). NOTE 7 - LEASES The Company leases all of its stores (except one which is subject to a ground lease), some of its equipment and its office facility. Generally, store leases provide for minimum rentals (which, in some cases, include payment of taxes and insurance) and contingent rentals (based upon a percentage of sales in excess of a stipulated minimum). The majority of lease agreements cover periods from 20 to 30 years, including three to six renewal options of five years each. Operating lease rental expense is summarized as follows (dollars in thousands):
FISCAL JANUARY FISCAL FISCAL 1995 QUARTER 1994 1993 -------- --------- -------- -------- Minimum rentals $7,300 $2,265 $9,258 $9,313 Contingent rentals 496 217 670 567 Sublease rentals (803) (214) (710) (684) -------- --------- -------- ------- $6,993 $2,268 $9,218 $9,196 -------- --------- -------- ------- -------- --------- -------- -------
The Company had capital lease contingent rental expense of approximately $0.1 million and received sublease rentals of approximately $0.4 million during each of Fiscal 1995, Fiscal 1994, and Fiscal 1993. During the January Quarter, the Company had contingent capital lease rental expense of $0.1 million and received $0.2 million in sublease rentals. Capital lease interest expense was $2.0 million, $0.6 million, $2.7 million and $2.9 million during Fiscal 1995, the January Quarter, Fiscal 1994 and Fiscal 1993, respectively. In September 1995, in connection with the Company's Chapter 11 case, the Company negotiated a rental concession with one of its landlords in the Alaska market. The lease agreement was amended to reduce monthly payments from September 1995 through August 2001. The concession has been reflected in the tables below. 32 Future minimum rental payments as of February 3, 1996 under capital and operating leases, excluding amounts related to contracts which have been rejected by the Company in connection with the Company's Chapter 11 filing, are summarized as follows (dollars in thousands):
CAPITAL OPERATING LEASES LEASES --------- ----------- For the fiscal years ending: 1996 $2,612 $7,271 1997 2,612 6,830 1998 2,612 6,767 1999 2,613 6,538 2000 2,481 5,759 Thereafter 11,448 34,880 -------- ---------- Total minimum rental payments 24,378 $68,045 ---------- ---------- Less estimated executory costs (primarily taxes and insurance) (115) Less amounts representing interest (11,942) -------- Present value of obligations $12,321 -------- --------
In addition, the Company guarantees an operating lease, expiring February 1998 with one option to renew the lease for a term of three years, of a third party which operates a distribution center for the Company. At February 3, 1996, annual future minimum rentals of the operating lease relating to the distribution center are approximately $0.3 million per year. In May 1996, the Company will be relocating its corporate office to Kirkland, WA. The new operating lease, which expires in May 2006, requires annual payments of approximately $0.4 million. NOTE 8 - DEBT WORKING CAPITAL FACILITY In January 1994, the Company replaced its existing working capital facility with a new loan and security agreement with an asset-based lender, Foothill Capital Group ("Foothill"). The new facility was amended on June 27, 1994 to, among other things, (i) modify the minimum net worth covenant to exclude from the calculation of net worth write-offs made and costs incurred in connection with the closing of stores and (ii) change the Company's borrowing capacity in each calendar year to $25.0 million from January through September and $28.0 million from October through December. An additional amendment, which was effective October 18, 1994, increased the borrowing capacity to $31 million from October 1994 to December 1994. Amounts borrowed bore interest payable monthly at 1.75%, increased to 2.25% on June 21, 1994, above the reference rate (the base rate charged by major money center banks) with a minimum of 7.50% per annum. At October 29, 1994, the Company had $24.6 million of borrowings and $2.4 million of letters of credit outstanding under the facility, with additional borrowing capacity of $4.0 million. On February 17, 1995, the Company received approval from the Court for a loan and security agreement (the "DIP Facility") with Foothill. The DIP Facility provides for a borrowing capacity of up to $32.0 million in revolving loans, including up to $15 million of letters of credit, subject to borrowing base limitations based upon, among other things, the value of inventory. Effective October 17, 1995, the DIP Facility was amended to increase the percentage of inventory value allowed in the borrowing capacity from 60% to 70%. This increase in borrowing base was in effect for the period October 17, 1995 through December 2, 1995. Effective November 28, 1995, Foothill increased the Company's borrowing capacity from $32 million to $34 million to accommodate seasonal requirements. The additional $2 million in borrowing capacity expired December 15, 1995. At February 3, 1996, the Company had $20.3 million of borrowings and $0.1 million letters of credit outstanding under the DIP Facility, with additional borrowing capacity of $1.8 million. The DIP Facility provides that interest will accrue at the rate of 3% per annum in excess of the reference rate, payable monthly in arrears. The DIP Facility also provides that in the event of a default in the payment of any amount due thereunder, the interest rate on such defaulted amount shall be 4.5% per annum in excess of the reference rate, payable on demand. At February 3, 1996, the reference rate was 8.25%. 33 The Company paid Foothill $80,000 upon the closing of the DIP Facility in February 1995 and the additional closing fees totalling $240,000, all of which has been paid as of March 31, 1996. Fees payable under the DIP Facility consist primarily of monthly payments equal to 1/2% of the average unused borrowing capacity and quarterly payments equal to 1/4% of the borrowing capacity for each quarterly renewal period. The obligations of the Company under the DIP Facility are collateralized by, among other things, inventory and certain real property. The DIP Facility imposes limitations on the Company with respect to, among other things, (i) the creation of incurrence of liens, (ii) consolidations, mergers and sales of assets, (iii) the incurrence of guarantees or other contingent obligations, (iv) capital expenditures in excess of specified levels, (v) the creation or incurrence of any indebtedness for borrowed money or the payment of principal of or interest on any prepetition indebtedness, (vi) the prepayment of certain indebtedness and (vii) transactions with affiliates. Additionally, the Company must maintain a minimum net worth of $10.0 million (as defined in the DIP Facility to exclude, among other items, reorganization expenses, certain liabilities incurred prior to the Company's filing, reductions in goodwill, charges for store closure and non-cash interest). The DIP Facility has been extended from its initial maturity date of May 17, 1996 and will now expire on the earlier of August 17, 1996, with provisions for two additional quarterly renewals, or the effective date of the Company's plan of reorganization. The Company believes it may be in violation of certain convenants on or after May 3, 1996. Consequently, if the Company does not enter into the New DIP Facility on or prior to such date, it will be in default under the DIP Facility. Although, the Company believes that it would be able to obtain a waiver of any such default, there can be no assurances that the Company could obtain such waiver. The Company is currently negotiating with the First National Bank of Boston ("FNBB") with respect to (i) a debtor-in-possession credit facility (the "NEW DIP Facility"), which would replace the DIP Facility and (ii) an exit facility (the "Exit Facility" and, together with the New DIP Facility, the "New Facilities"), which would replace the New DIP Facility upon the Company's emergence from Chapter 11. On April, 5, 1996, the Court approved the payment by the Company of $50,000 to FNBB as a deposit in connection with the New Facilities pursuant to a Term Sheet dated April 3, 1996 (the "FNBB Term Sheet") provided to the Company by FNBB. The consummation of each of the New Facilities is subject to final documentation satisfactory to FNBB, approval of the Court and other customary conditions, including, in the case of the Exit Facility, effectiveness of a plan of reorganization. There can be no assurances that any of such conditions will be satisfied. Under the currently proposed terms of the New Facilities, fees payable under the New Facilities consist primarily of monthly payments equal to 1/2% of the average unused borrowing capacity under the New Facilities; provided, that with respect to the Exit Facility, after January 31, 1997, such rates will be subject to prospective adjustments based upon achievement of certain financial tests. In addition, the Company shall pay a New DIP Facility Fee each month equal to 1/8 of 1.0% of the total New DIP Facility and an Exit Facility Fee equal to 1.75% of the total Exit Facility payable in two installments. Fees payable with respect to letters of credit shall be 1.75% per annum of the maximum amount available to be drawn thereunder. NOTE 9 - STORE CLOSURE COSTS In July 1994, the Company determined that three of its Portland, Oregon stores and five Lamonts For Kids children's stores should be closed because of poor performance. These stores represented approximately 8.1% of the Company's 1994 revenues. All store closures occurred by January 31, 1995, and a $7.2 million charge against operations for these costs was recorded at October 29, 1994. In connection with its operational restructuring, the Company received permission from the Court to close six additional underperforming stores in early 1995. A charge to reorganization expense of $2.2 million was recorded in the January Quarter. In January 1996, the Company received permission from the Court to close an underperforming store located in Eugene, Oregon, and the Company conducted going out of business sales at this store through March 1996. The Company owns the building in Eugene subject to a ground lease and is currently attempting to market the building. If a purchaser is not located, ownership of the building will revert to the owner of the underlying land. The write off of the net book value of the building and leasehold improvements is included in the $3.0 million charge to reorganization expense recorded in Fiscal 1995 in connection with the closure of the Eugene store. Store closure costs for Fiscal 1995, the January Quarter and Fiscal 1994 are as follows (dollars in thousands):
STORE CLOSURE COSTS ------------------------------------------- FISCAL JANUARY FISCAL 1995 QUARTER 1994 ------------ ------------ ---------- Write-off of property and equipment, net of obligations under capital leases $2,362 $1,330 $2,972 Adjustments to inventory carrying values 450 400 1,748 Estimated operating losses through the dates of closure 1,357 Employee severance 75 190 288 Other 163 280 835 ------------ ----------- ---------- $3,050 $2,200 $7,200 ------------ ----------- ---------- ------------ ----------- ---------- Amounts charged to reserve $3,247 $2,806 $3,843 ------------ ----------- ---------- ------------ ----------- ----------
Revenues associated with the closed stores totaled $3.9 million, $8.8 million and $34.8 million in Fiscal 1995, the January Quarter and Fiscal 1994, respectively. Operating losses, excluding allocation of corporate expenses, interest and reorganization expenses, incurred from these stores were $0.8 million, $2.1 million and $5.4 million in Fiscal 1995, the January Quarter and Fiscal 1994, respectively. NOTE 10 - INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). Under FAS 109, deferred tax assets and liabilities are recognized on temporary differences between the financial statement and tax bases of assets and liabilities using applicable enacted tax rates. 34 The income tax benefit from operations is comprised of the following (dollars in thousands):
FISCAL 1994 FISCAL 1993 ------------- --------------- Current ($400) Deferred ($3,000) ------------- --------------- ($400) ($3,000) ------------- --------------- ------------- ---------------
The Company has recorded a valuation Allowance against net deferred tax assets as the Company could not conclude that it was more likely than not that the tax benefits from temporary differences and net operating loss carryforwards would be realized. The differences between the Company's effective income tax rate and the Federal statutory rate for 1994 and 1993 are summarized as follows:
FISCAL 1994 FISCAL 1993 ------------- --------------- Expected benefit (34.0%) (34.0%) Effect of current year net operating loss 34.0% 13.1% Adjustment to tax provision (0.9%) Other (0.7%) ------------- --------------- (0.9%) (21.6%) ------------- --------------- ------------- ---------------
Significant components of the Company's deferred income tax assets and liabilities are as follows (dollars in thousands):
FEBRUARY 3, JANUARY 28, OCTOBER 29, 1996 1995 1994 ----------- ----------- ----------- Deferred income tax assets: Net operating loss carryovers $30,835 $24,192 $17,650 Accrued payroll and related costs 948 1,074 1,094 Leasehold interests 2,652 2,630 2,620 Store closure expenses 3,821 2,856 2,363 Other 1,883 1,623 549 Valuation allowance (38,707) (30,395) (22,198) ----------- ----------- ----------- Total deferred income tax assets 1,432 1,980 2,078 ----------- ----------- ----------- Deferred income tax liabilities: Inventory (454) (644) (1,282) Property and equipment (978) (1,336) (796) ----------- ----------- ----------- Total deferred income tax liabilities (1,432) (1,980) (2,078) ----------- ----------- ----------- Net deferred income taxes $0 $0 $0 ----------- ----------- ----------- ----------- ----------- -----------
Pursuant to the Recapitalization, the Company recorded a $3.0 million deferred tax liability as a result of the difference between the net book basis and the net tax basis of the Company's assets and liabilities as of the Recapitalization date. These "temporary differences" will result in the recognition of revenue and expense in different periods for tax and financial statement purposes. The temporary differences at the recapitalization date had no effect on the tax benefit for Fiscal 1994. The temporary differences for Fiscal 1993 resulted in a tax benefit as follows (dollars in thousands): 35
FISCAL 1993 ------------- Difference due to inventory methods ($347) Proceeds from escrow (170) Capital leases (225) Vacation accrual (35) Difference due to depreciation methods (148) Net operating loss (2,115) Other 40 ------------- ($3,000) ------------- -------------
In connection with the Recapitalization, the Company issued Common Stock with an approximate fair market value of $44.0 million and $75.0 million principal amount of debt in exchange for $138.6 million of debt. In general, when the fair market value of stock and the issue price of new debt is less than the adjusted issue price of debt retired, taxable income must be recognized. However, since the tax basis of the Company's liabilities exceeded the fair market value of its assets immediately prior to the Recapitalization, the company did not recognize taxable income in connection with the Recapitalization to the extent that it was insolvent for tax purposes immediately prior to the Recapitalization. As a result of the Recapitalization, the Company's ability to utilize its Federal tax net operating loss carryforward of $14.7 million and its alternative minimum tax net operating loss carryforward of $2.8 million at October 31, 1992, which expire beginning in 2005, may be significantly limited under Internal Revenue Code section 382 in future years. The Federal tax net operating loss carryforward and the alternative minimum tax net operating loss carryforward at October 31, 1992 are shown net of a $9.5 million and $6.4 million, respectively, reduction associated with the Company's agreement with the Internal Revenue Service ("IRS") discussed below. As of February 3, 1996, the Company had $90.7 million and $78.9 million of regular tax and alternative minimum tax net operating losses, respectively, which are available to offset future income, expiring in years beginning in 2005. Possible restructuring of the Company and cancellation of indebtedness resulting from the reorganization of the Company under Chapter 11 could further impact the Company's ability to utilize its net operating loss carryforwards. The Company's Federal income tax returns for Fiscal years 1988, 1989 and 1990 were examined by the IRS. An agreement, which was reviewed and accepted by the Joint Committee of Taxation was reached with the IRS, whereby the Company was given notice to pay the IRS approximately $504,000 for additional taxes and interest. This amount is included in the balance sheet as liabilities subject to settlement under reorganization proceedings. As a result of reaching this agreement, the Company reduced its previously established accrued liability for taxes and interest for this examination by approximately $1.0 million during 1994. The IRS also completed its examinations of the Company's Federal income tax returns for fiscal years 1991 and 1992, which resulted in no additional tax due. NOTE 11 - FAIR VALUE OF FINANCIAL INSTRUMENTS In accordance with Statement of Financial Accounting Standards No. 107 "Disclosures about Fair Value of Financial Instruments", the following assumptions were used by management of the Company in estimating its fair value disclosures for the Company's financial instruments: CASH The carrying amount for cash approximates fair value because of the short maturity of amounts therein. WORKING CAPITAL FACILITY The carrying value of borrowings under the DIP Facility approximates market value as the interest rate is variable. LETTERS OF CREDIT At February 3, 1996, the Company had $0.1 million outstanding under trade and stand-by letters of credit as discussed in Note 8. The contract amount of the letters of credit is a reasonable estimate of their fair market value as the value of each is fixed over the life of the commitment. LONG TERM DEBT INCLUDED IN LIABILITIES SUBJECT TO COMPROMISE Management believes the carrying amount the Company's 10-1/4% Notes and the 13-1/2% Notes is in excess of fair value based on the Company's Chapter 11 filing. Until a plan of reorganization is approved by the Court, a fair value can not be readily determined. 36 NOTE 12 - COMMITMENTS, CONTINGENCIES AND OTHER The Company was a defendant in a lawsuit originally brought as a class action in state court in Anchorage, Alaska on September 18, 1992. Plaintiffs alleged that certain employees in the State of Alaska were not exempt from overtime pay requirements under the Alaska Wage and Hour Act and thus have worked hours for which they had not been compensated. The complaint sought back wages, liquidated damages, attorneys fees and costs. Subsequent to the Petition Date, the plaintiffs filed a proof of claim in the Court asserting the same claims. On October 27, 1995, following a hearing before the Court, an order was entered granting the Company's objection to and precluding the Class Action claim. The balance of the claim by two individuals has been settled in an amount not material to the Company. The Company is also involved in various other matters of litigation arising in the ordinary course of business. In the opinion of management, the ultimate outcome of all such matters should not have a material adverse effect on the financial position of the Company, but, if decided adversely to the Company, could have a material effect upon the Company's anticipated plan of reorganization and operating results during the period in which the litigation is resolved. CREDIT CARD PLAN AGREEMENT The Company is party to an agreement with a commercial bank which administers and owns the receivables generated from purchases made by customers using the Lamonts credit card. The Company pays a fee, currently 1%, up to a maximum of 3% based on the volume of purchases and is generally responsible for 50% of net bad debt expenses relating to such purchases. At February 3, 1996, January 28, 1995 and October 29, 1994 the Company had $0.3 million, $0.3 million and $0.2 million reserved for bad debts arising from this program. Bad debt expense for Fiscal 1995, the January Quarter, Fiscal 1994 and Fiscal 1993 was approximately $0.9 million, $0.2 million, $0.8 million and $0.8 million, respectively. NOTE 13 - STOCKHOLDERS' EQUITY COMMON STOCK Each share of Common Stock entitles the holder thereof to one vote on all matters on which holders are permitted to vote. No stockholder has any preemptive right or other similar right to purchase or subscribe for any additional securities issued by the Company, and no stockholder has any right to convert Common Stock into other securities. No shares of Common Stock are subject to redemption or to any sinking fund provisions. All of the outstanding shares of Common Stock are fully paid and nonassessable. Subject to rights of holders of Preferred Stock, if any, the holders of shares of Common Stock are entitled to dividends when, and if declared by the Board of Directors from funds legally available and, upon liquidation, to a pro rata share in any distribution to stockholders. PREFERRED STOCK On December 1, 1993, 4,466,206 shares of the Company's Series A Preferred Stock was issued pursuant to the Infusion. Each share of the Series A Preferred Stock automatically converted into two shares of Common Stock on March 14, 1994, concurrent with the stockholders approval of an increase in the number of authorized shares of Common Stock of the Company from 15 million to 40 million shares. Pursuant to the Restated Certificate of Incorporation of the Company, the Board of Directors has the authority, without further shareholder approval, to provide for the issuance of up to 10 million shares of Preferred Stock in one or more series and to determine the dividend rights, conversion rights, sinking fund rights, voting rights, rights and terms of redemption, liquidation preferences, the number of shares constituting any such series and the designation of such series. Because the Board of Directors has the power to establish the preferences and rights of each series, it may afford the holders of any Preferred Stock preferences, powers and rights (including voting rights) senior to the rights of the holders of Common Stock. No shares of Preferred Stock are currently outstanding. 37 WARRANTS On September 21, 1992, the Company distributed as a dividend to the holders of Common Stock of record as of September 1, 1992, 1992 Warrants to purchase an aggregate of 1,017,478 shares of Common Stock. The exercise price of the 1992 Warrants is currently $5.01 per share which shall increase on each September 28 by an amount equal to 10% of the exercise price immediately prior to such increase. At February 3, 1996 none of the 1992 Warrants have been exercised. On June 10, 1994, the Company issued 1994 Warrants to purchase up to an aggregate of approximately 2.0 million shares of Common Stock (or approximately 10% of the Common Stock outstanding after giving effect to the exercise of such 1994 Warrants) to the holders of the 10-1/4% Notes. The 1994 Warrants may be exercised on or prior to June 10, 1999, at an initial exercise price of $1.00 per share of Common Stock. As of February 3, 1996, none of the 1994 Warrants have been exercised. The exercise price per share of Common Stock subject to the 1992 and 1994 Warrants would be decreased upon the occurrence of certain events, including future distributions or issuances by the Company of: (i) Common Stock, (ii) rights, options or warrants to purchase Common Stock or (iii) securities convertible into or exchangeable for Common Stock, at a price per share less than the then current market price per share of Common stock. Upon each such adjustment to the exercise price, the number of shares of Common Stock subject to the 1992 and 1994 Warrants will be proportionately adjusted. STOCK OPTIONS The Lamonts Apparel, Inc. 1992 Incentive and Nonstatutory Stock Option Plan (the "1992 Stock Option Plan"), which was approved by the Board of Directors and by the stockholders in 1992 and amended by the Board of Directors and by the stockholders in 1994, provides for the issuance of options to purchase up to 1,972,845 shares of Common Stock, subject to certain anti-dilution adjustments. Awards may be granted under the 1992 Stock Option Plan to individuals, identified by the plan committee, who have or will have a direct and significant effect on the performance or financial development of the Company. The following table summarizes the 1992 Stock Option Plan activity:
NUMBER OF OPTIONS ----------- Balance, October 30, 1993 420,650 Granted 200,000 Exercised (11,334) Canceled (16,644) ----------- Balance, October 29, 1994 592,672 Granted 0 Exercised (12,545) Canceled (205,387) ----------- Balance, January 28, 1995 374,740 Granted 0 Exercised (11,774) Canceled (43,902) ----------- ----------- Balance, February 3, 1996 319,064 ----------- -----------
At February 3, 1996 options to purchase 319,064 shares at an exercise price of $.01 per share were issued and outstanding of which, 296,685 are currently exercisable and the balance thereof, subject to certain conditions, will vest ratably through the fifth anniversary of the date of grant. All options are exercisable for a period of ten years from the date of grant. The exercise price was below the fair market value of the underlying shares on the date of grant and, accordingly, $0.1 million, $0.1 million, $0.6 million and $0.3 million was charged to compensation expense during Fiscal 1995, the January Quarter, Fiscal 1994 and Fiscal 1993, respectively. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". This statement encourages, but does not require, a fair value based 38 method of accounting for stock compensation plans. Companies may elect to continue to apply current accounting requirements for employee stock compensation awards. All companies are required to comply with the disclosure requirements of the statement, and the Company will adopt the policy beginning in the fiscal year ending February 1, 1997. The Company expects to continue accounting for employee stock compensation awards using current accounting requirements. NOTE 14 - RELATED PARTY TRANSACTIONS In connection with the Recapitalization, certain of the Company's stockholders, representing an aggregate of approximately 8,717,000 shares or 98% of the Common Stock outstanding immediately following the Recapitalization (currently 48.7%), entered into a voting agreement (the "Voting Agreement"). The Voting Agreement provides, among other things, that (i) Apollo Retail Partners, L.P. (together with its permitted assignees, "ARP") may designate six persons to the Board of Directors, (ii) management may designate two persons to the Board of Directors, and (iii) a majority of certain former holders of the 13-1/2% Notes, which notes were exchanged for Common Stock pursuant to the Recapitalization, may designate two persons to the Board of Directors. The Voting Agreement will terminate upon the earlier of (i) October 30, 2002, or (ii) the date upon which at least 25% of the then outstanding shares of Common Stock are publicly held pursuant to one or more underwritten registered offerings of primary shares. Since the Company's Chapter 11 filing, none of the parties to the Voting Agreement has exercised its right thereunder. A former director of the Company is an affiliate of Morgens Waterfall Vintiadis & Co. Inc. ("Morgens Waterfall"). Pursuant to the Recapitalization, certain affiliates of Morgens Waterfall received an aggregate of approximately 16.7% (1,482,906 shares) of Common Stock outstanding immediately following the Recapitalization in exchange for approximately $12.5 million in principal amount of 13-1/2% Notes. A former director of the Company was an officer of one of the banks which extended a line of credit to the Company prior to its replacement with the existing working capital facility in January 1994 (see Note 8). Pursuant to the Recapitalization, Executive Life Insurance Company of New York ("ELICNY") received 898,406 shares of the Company's Common Stock and $7.8 million ($6.4 million after adjustment for the Infusion) in principal amount of the 10-1/4% Notes. During Fiscal 1994 and Fiscal 1993, the Company paid ELICNY $0.8 million and $0.4 million of cash interest on the 10-1/4% Notes, respectively. In addition, at October 29, 1994 the Company had accrued $0.4 million of interest on the 10-1/4% Notes, which was subsequently issued to ELICNY in additional securities of the Company as interest paid in kind. In connection with the Infusion, certain funds and accounts managed by Fidelity Management and Research Company or Fidelity Management Trust Company (the "Fidelity Funds"), the holders of the remaining 10-1/4% Notes, became the holders of more than 5% of the Company's Common Stock. Accordingly, the Company has reflected the entire amount of the 10-1/4% Notes as related party debt. During Fiscal 1994, the Company paid the Fidelity Funds $6.9 million of cash interest on the 10-1/4% Notes. In addition, at October 29, 1994 the Company had accrued $3.6 million of interest on the 10-1/4% Notes, which was subsequently issued to the Fidelity Funds in additional securities of the Company as interest paid in kind. NOTE 15 - BENEFIT PLANS PENSION PLAN On January 1, 1986, the Company established the Lamonts Apparel, Inc. Employees Retirement Trust and the Lamonts Apparel, Inc. Supplemental Executive Retirement Plan (collectively the "Retirement Plan"). The Retirement Plan is a noncontributory defined benefit pension plan for employees of the Company who are not eligible for pension benefits from another pension plan pursuant to collective bargaining agreements. Participant benefits are based on years of service and compensation during later years of employment. It is the Company's policy to make contributions to the Retirement Plan in amounts which comply with the minimum regulatory funding requirements. 39 The following table sets forth the Company's funded plan status and amounts recognized in the Company's consolidated balance sheets (dollars in thousands):
FEBRUARY 3, JANUARY 28, OCTOBER 29, 1996 1995 1994 ------------- ------------- ------------ Actuarial present value of accumulated benefit obligations, including vested benefits of $5,462, $4,286 and $4,176 in Fiscal 1995, the January Quarter and Fiscal 1994, respectively $5,651 $4,583 $4,465 ------------- ------------- ------------ ------------- ------------- ------------ Projected benefit obligation $6,639 $5,499 $5,384 Retirement Plan assets at value, primarily money market funds and guaranteed investment contracts 5,143 4,652 4,685 ------------- ------------- ------------ Projected benefit obligation in excess of Retirement Plan assets 1,496 847 699 Unrecognized net loss from past experience different from that assumed (1,238) (1,162) (1,083) ------------- ------------- ------------ Accrued (prepaid) pension cost 258 (315) (384) Additional liability charge to equity to recognize minimum liability 250 ------------- ------------- ------------ Total accrued (prepaid) pension cost $508 ($315) ($384) ------------- ------------- ------------ ------------- ------------- ------------ Discount Rate 7.25% 8.5% 8.5% Rate of increase in future compensation levels 3.5% 4.5% 4.5% - ------------- Amounts charged to expense under the Retirement Plan were as follows (dollars in thousands):
FISCAL JANUARY FISCAL FISCAL 1995 QUARTER 1994 1993 -------- --------- -------- -------- Service cost, benefits earned during the period $414 $108 $536 $365 Interest cost on projected benefit obligation 483 113 407 340 Actual return on assets (883) 39 11 (565) Other, including deferred recognition of asset gain/(loss) 559 (129) (444) 151 ------- -------- -------- ------- Net pension cost $573 $131 $510 $291 ------- -------- -------- ------- ------- -------- -------- -------
During Fiscal 1995, a claim was filed against the Company by the Pension Benefit Guaranty Corporation ("PBGC") in the amount of $2.8 million based upon PBGC's assumption that one of the Company's qualified employee retirement plans would be terminated. The Company believes that even if the plan was terminated, unfunded plan benefit liabilities would not be material. The Company disputed the claim. PBGC has withdrawn its claim without prejudice to its right to refile at a future date if the PBGC determines it is appropriate to do so. LAMONTS 401(K) PLAN The Lamonts Apparel, Inc. Tax Relief Investments Protection Plan, as amended and restated effective July 1, 1991 (the "401(k) Plan") provides participants the opportunity to elect to defer an amount from one percent to 10% of their compensation, in increments of one percent. Under the 401(k) Plan, the Company matches contributions equal to 50% of each participant's deferred pay contributions (such contribution not to exceed one percent of the participant's compensation). The Company contributed $0.15 million, $0.04 million, $0.2 million and $0.2 million during Fiscal 1995, the January Quarter, Fiscal 1994 and Fiscal 1993, respectively. NOTE 16 - SUBSEQUENT EVENT On February 8, 1996, the Company entered into a sale-leaseback transaction for the land and building at the Company's Alderwood store in Washington. The proceeds of $5 million were applied against the Company's DIP Facility borrowings. The Company concurrently entered into a 20 year lease agreement with the purchaser. 40 ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Name Age Position ---- --- -------- Alan R. Schlesinger 53 Director, Chairman of the Board, President and Chief Executive Officer Loren R. Rothschild 57 Director and Vice Chairman of the Board Peter Aaron 46 Executive Vice President Debbie A. Brownfield 41 Senior Vice President, Chief Financial Officer and Secretary Carolyn Morris 41 Senior Vice President, General Merchandise Manager Mr. Schlesinger joined Lamonts as President and Chief Executive Officer in November 1994. In December 1994, Mr. Schlesinger was appointed Director and Chairman of the Board. From 1991 to 1994, Mr. Schlesinger was a Senior Vice President with The May Company Department Stores. Mr. Rothschild, a Director of the Company since October 1992, became Vice Chairman of the Board in December 1994. In addition, Mr. Rothschild has served as President and director of Sycamore Hill Capital Group since September 1993. Prior to that time, he served as Vice Chairman and President of American Protection Industries Inc. ("API"), a privately held company engaged in direct marketing of collectibles, home decor products, flowers by wire clearing house, and real estate and agribusiness, and Vice Chairman of The Franklin Mint from 1985 to June 1992. From 1988 to June 1992, Mr. Rothschild also served as Chairman and Chief Executive Officer of API's Agribusiness division. Mr. Aaron joined the Company as Executive Vice President in November 1983 and was Acting Secretary of the Company from January 1993 through August 1993. Ms. Brownfield joined the Company as Vice President of Finance, Secretary and Treasurer in September 1985 and served as Acting Chief Financial Officer of the Company from January 1993 through August 1993. Ms. Brownfield was named Senior Vice President and Chief Financial Officer in December 1995. Ms. Morris joined the Company in March 1995 as Senior Vice President and General Merchandise Manager. Prior to joining the Company, Ms. Morris was Vice President, Divisional Merchandise Manager for May Merchandising Corporation from 1993 to 1995. She also served as Vice President, Divisional Merchandise Manager with Robinsons-May in California from 1983 to 1993. In February 1995, Earle J. Spokane ceased to be employed by the Company. Effective May 2, Wallace D. Holznagel resigned from the Company as Executive Vice President. See discussion regarding the severance arrangements applicable to Messrs. Holznagel and Spokane in "Item 11 - Executive Compensation - Employment Agreements." All directors and executive officers are elected for a term of one year and serve until their successors are duly elected and qualified. 41 ITEM 11 - EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth certain information regarding compensation paid during Fiscal 1995, Fiscal 1994 and Fiscal 1993, to (i) the Company's Chief Executive Officer, (ii) the Company's four other most highly compensated executive officers as of the end of Fiscal 1995, and (iii) two additional individuals who would have qualified for inclusion had their employment not been terminated (collectively, the "Named Executive Officers").
Long Term All Other Compensation Compensation Annual Compensation Awards ($) ------------------------------------------------ Securities Supple- Name and Fiscal Underlying TRIP mental Group Principal Position Year Salary Bonus ($) Options/SARs Plan (1) Plan (2) Plan Total ($) (3) - ------------------------------------------------------------------------------------------------------------------------------------ Alan R. Schlesinger, 1995 434,921 100,000 3,600 3,600 Director, Chairman of the 1994 58,270 125,000 Board, President and Chief Executive Officer Loren R. Rothschild, 1995 239,999 ------ 2,790 2,790 Director and Vice 1994 6,462 125,000 Chairman of the Board Peter Aaron, 1995 205,833 30,000 1,500 1,747 3,247 Executive Vice President 1994 183,836 8,160 1,890 42 1,650 3,582 1993 183,836 18,160(4) 2,020 --- 1,671 3,691 Carolyn Morris, 1995 191,512 35,000 425 425 Senior Vice President, General Merchandise Manager Debbie A. Brownfield, 1995 121,249 30,000 967 530 1,497 Senior Vice President, Chief Financial Officer and Secretary Earle J. Spokane, 1995 156,987 358 --- 852 1,210 Executive Vice President, 1994 215,004 --- 896 --- 1,791 2,687 and Chief Administrative 1993 89,585 25,000(5) --- --- 1,579 1,579 Officer (6) Wallace D. Holznagel, 1995 202,053 1,500 --- 3,194 4,694 Executive Vice President 1994 188,664 20,000 950 283 1,758 2,991 (6) 1993 188,664 30,000(4) 1,900 --- 1,770 3,670
(1) Consists of Company contributions to a tax qualified trust under the Company's Tax Relief Investments Protection Plan, as amended and restated effective July 1, 1991. (2) Consists of Company contributions to a grantor trust under the Company's Supplemental (TRIP) Benefit Plan, effective January 1, 1991. (3) Consists of premiums paid by the Company pursuant to the Lamonts Apparel Group Life and Long-Term Disability Plan, effective July 7, 1977. (4) Includes a bonus of $20,000 and $8,160 respectively pursuant to each of Messrs. Holznagel and Aaron's employment agreements, and a one-time bonus of $10,000 for each of Messrs. Holznagel and Aaron based upon the efforts of such executive officers in connection with the Recapitalization. (5) Mr. Spokane was granted 25,000 options upon joining the Company on June 1, 1993. (6) In May 1995, Mr. Holznagel resigned from his position as Executive Vice President of the Company. Mr. Spokane ceased to be employed by the Company in February 1995. See discussion regarding the severance arrangements applicable to Messrs. Spokane and Holznagel described in "Employment Agreements" below. 42 OPTION GRANTS DURING FISCAL 1995 There were no options granted to Named Executive Officers during Fiscal 1995. OPTION VALUES AT 1995 FISCAL YEAR END The following table provides information related to the number and value of options held by the Named Executive Officers at the end of Fiscal 1995. None of the Named Executive Officers exercised any options during Fiscal 1995. AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1995 AND FISCAL YEAR END OPTION/SAR VALUES
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options/SARs Options/SARs at at Fiscal Year End ($) Fiscal Year End (#) (1) --------------------------------- Name Exercisable / Unexercisable Exercisable / Unexercisable - ------------------------ --------------------------------- -------------------------------- Peter Aaron 20,782 / 6,286 $4,988 / $1,509 Debbie Brownfield 4,637 1,346 $1,113 / $ 323 - --------------------
(1) Consists of 1992 Options granted to the Named Executive Officers under the 1992 Option Plan. PENSION PLAN Under the provisions of the Lamonts Apparel, Inc. Employees Retirement Trust (the "Lamonts Pension Plan"), which cover substantially all employees, and the Supplemental Executive Retirement Plan (the "SERP") which covers certain highly compensated employees, monthly retirement benefits for Named Executive Officers hired prior to January 1, 1990 are computed at the rate of one percent (1%) of a participant's highest "average monthly compensation" not in excess of one- twelfth (1/12) of the Social Security Covered Compensation, multiplied by the participant's years of service, plus 1.65% of the participant's highest average monthly compensation in excess of one-twelfth (1/12) of the Social Security Covered Compensation, multiplied by the participant's years of service, less the amount, if any, payable under an annuity purchased upon the termination of the Pay 'n Save Employees Retirement Trust (terminated on December 31, 1985) (the "PNS Trust"). Monthly retirement benefits for those Named Executive Officers hired on January 1, 1990 or thereafter are computed at the rate of 0.5% of a participant's highest "average monthly compensation" not in excess of one- twelfth (1/12) of the Social Security Covered Compensation, multiplied by the participant's years of service, plus 1.0% of the participant's highest average monthly compensation in excess of one-twelfth (1/12) of the Social Security Covered Compensation, multiplied by the participant's years of service. "Average monthly compensation" means the average monthly compensation during the five consecutive calendar years during the last 10 calendar years in which the participant's compensation was the highest. Social Security Covered Compensation is a 35 year average of the taxable wage base. The normal form of benefit is a straight life annuity for single participants and a joint and survivor annuity for a married participant commencing on the participant's Early or Normal Retirement Date (as defined therein). The estimated annual benefits payable under the Lamonts Pension Plan and the SERP upon retirement at normal retirement age for Mr. Aaron and Ms. Brownfield are $31,848, and $21,976, respectively, based on years of credited service through the end of Fiscal 1995. In addition, Mr. Aaron's estimated annual benefit payable under the PNS Trust upon retirement at normal retirement age is $450. As of February 3, 1996, Mr. Aaron had twelve years of credited service. Ms. Brownfield's estimated annual benefit payable under the PNS Trust upon retirement at normal retirement age is $643. As of February 3, 1996, Ms. Brownfield had twenty-three years of credited service. Messrs. Schlesinger and Rothschild and Ms. Morris have not yet earned retirement benefits. COMPENSATION OF DIRECTORS During Fiscal 1995, the Company did not pay any compensation to any person as a director of the Company. 43 EMPLOYMENT AGREEMENTS On October 16, 1994, Mr. Schlesinger entered into an employment agreement with the Company that has a term that runs through November 15, 1998, at a base salary of $450,000, subject to annual review and upward adjustment at the discretion of the Board. Pursuant to Mr. Schlesinger's employment agreement, as amended, Mr. Schlesinger received a signing bonus of $125,000. In addition, Mr. Schlesinger received $168,000 as compensation for all compensation and benefits forfeited by Mr. Schlesinger from his previous employer and $47,000 for moving and related costs. In connection with the Company's Chapter 11 case, the Company and Mr. Schlesinger entered into a new employment agreement approved by the Court. Mr. Schlesinger's new employment agreement has a term that runs through January 5, 1999, at a base salary of $450,000, subject to annual review and upward adjustment at the discretion of the Board. Pursuant to Mr. Schlesinger's new employment agreement, Mr. Schlesinger will receive a guaranteed annual bonus in the sum of $100,000 and a one-time reorganization bonus upon the effective date of a plan of reorganization of $400,000. In addition, upon the effective date of a plan of reorganization, Mr. Schlesinger shall be entitled to receive stock options to purchase 6-8% of the fully diluted number of shares of Common Stock to be outstanding immediately following such effective date based upon the final terms of the plan of reorganization. Mr. Schlesinger's new employment agreement provides that if the Company terminates Mr. Schlesinger's employment without "cause", Mr. Schlesinger shall be entitled to receive his base salary for a period of up to two years or for the remainder of the term of his agreement, whichever is shorter, subject to offset for amounts received by Mr. Schlesinger from any other employer during such period. Upon a "change in control" of the Company (other than solely as a result of any exchange of equity for debt securities upon consummation of a plan of reorganization) after January 5, 1997, the term of Mr. Schlesinger's new employment agreement shall extend to a date which is two years from the date on which such "change in control" is consummated. Upon a "change in control" of the Company on or after the effective date of a plan of reorganization, all options granted to Mr. Schlesinger as described above shall vest and become immediately exercisable. On December 28, 1994, Mr. Rothschild entered into an employment agreement with the Company that has a term that runs until consummation of a Restructuring (as defined therein), at a base salary of $240,000. Pursuant to Mr. Rothschild's employment agreement, Mr. Rothschild received a signing bonus of $125,000. In connection with the Company's Chapter 11 case, the Company and Mr. Rothschild entered into a new employment agreement approved by the Court. Mr. Rothschild's new employment agreement has a term that runs through the 90th day following the effective date of the Plan, at a base salary of $240,000. Pursuant to Mr. Rothschild's new employment agreement, upon the effective date of the Plan, Mr. Rothschild will receive $187,000. In addition, upon the effective date of a plan of reorganization, Mr. Rothschild shall be entitled to receive a number of stock options equal to 25% of the number of options issued to the Company's Chief Executive Officer in a plan of reorganization, which options shall be fully vested upon issuance. Mr. Rothschild's new employment agreement provides that if the Company terminates Mr. Rothschild's employment without "cause", Mr. Rothschild shall be entitled to receive his base salary until the first anniversary of such termination or until the effective date of a plan of reorganization, whichever is sooner. In addition, if a plan of reorganization becomes effective prior to the 270th day following such termination, Mr. Rothschild shall be entitled to receive $350,000 plus the number of stock options described above. In connection with the Recapitalization, Mr. Aaron entered into an employment agreement with the Company which has a term that runs through November 30, 1997, at a base salary of $185,000, subject to annual increases based on such executive's accomplishments during the prior year. Pursuant to Mr. Aaron's employment agreement, Mr. Aaron will receive a yearly performance bonus, based upon the achievement by the Company of goals to be set forth in the management operating profit plan of the Company for each year, not to exceed $65,000. Mr. Aaron is guaranteed a minimum yearly performance bonus of $8,160. Mr. Aaron's employment agreement provides that if the Company terminates such executive's employment without "cause" or if the executive terminates employment for "good reason," such executive will be entitled to receive, for a period of not less than 12 months or more than two years, the base salary and guaranteed minimum bonus that the executive would have received had such termination not occurred and to continue to participate in all benefit plans and receive all other benefits to which the executive was entitled at the time of the termination. Mr. Aaron may elect to receive the severance payment payable under the agreement in a single lump sum payment. In connection with the Recapitalization, Mr. Holznagel entered into an employment agreement with the Company which had a term through November 30, 1997 at a base salary of $190,000, plus an annual performance bonus, not to exceed $80,000. Mr. Holznagel was guaranteed a minimum yearly performance bonus, based upon the 44 achievement by the Company of goals as set forth in management operating profit plans, not to exceed $20,000. Effective May 2, 1995, Mr. Holznagel resigned as Executive Vice President of the Company. Pursuant to a resignation agreement entered into with Mr. Holznagel, the Company paid to Mr. Holznagel $105,000, or an amount equal to six months base salary and the minimum guaranteed bonus under the employment agreement. In addition, the Company paid approximately $14,615 for accrued but unused vacation and continued to provide certain medical benefits through November 1995. In addition, all stock options held by Mr. Holznagel were canceled. In June 1993, Mr. Spokane entered into an employment agreement with the Company, at a base salary of $215,000, plus a yearly performance bonus, based upon the achievement by the Company of goals as set forth in management operating profit plans, not to exceed $85,000. Effective February 24, 1995, Mr. Spokane ceased to be employed by the Company as Executive Vice President and Chief Administrative Officer. Pursuant to a resignation agreement entered into with Mr. Spokane, the Company paid Mr. Spokane $107,000, or an amount equal to six months base salary plus approximately $12,400 for accrued but unused vacation. In addition, the Company continued to provide certain medical benefits through June 30, 1995. In addition, all stock options held by Mr. Spokane were canceled. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The determination of Fiscal 1995 executive compensation was made by the members of the Board of Directors. Messrs. Schlesinger and Rothschild are executive officers of the Company. See "Employment Agreements." INDEMNIFICATION OF OFFICERS AND DIRECTORS Under Section 145 of the General Corporation Law of the State of Delaware, a Delaware corporation has the power, under specified circumstances, to indemnify its directors, officers, employees and agents in connection with actions, suits or proceedings brought against them by a third party or in the right of the corporation, by reason of the fact that they were or are such directors, officers, employees or agents, against liabilities and expenses incurred in any such action, suit or proceeding. Article XI of the Company's Restated Certificate of Incorporation provides that the Company shall indemnify its officers and directors to the fullest extent permitted by Section 145 of the General Corporation Law of the State of Delaware. All current directors and executive officers of the Company have entered into indemnification agreements with the Company pursuant to which the Company will indemnify, to the fullest extent permitted by applicable law, such officer or director against liabilities and expenses incurred by such officer or director in any proceeding or action because such officer or director is or was a director, officer, employee or agent of the Company and other certain other circumstances. The indemnification is in addition to the indemnification provided in the Company's Restated Certificate of Incorporation. In neither case will indemnification be provided if prohibited under applicable law. 45 ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth as of March 1, 1996 information known to the management of the Company concerning the beneficial ownership of Common Stock by (i) each person who is known by the Company to be the beneficial owner of more than five percent of the outstanding shares of Common Stock, (ii) each director and executive officer of the Company and (iii) all directors and executive officers of the Company as a group:
Percentage of Number of Outstanding Shares Owned Shares (1) ------------- ------------ EXECUTIVE OFFICERS AND DIRECTORS Peter Aaron (2) 22,067 * Debbie A. Brownfield (3) 6,737 * Loren R. Rothschild -- -- Alan R. Schlesinger -- -- Carolyn Morris -- -- All directors and executive officers as group (5 persons) (4) 28,804 * 5% STOCKHOLDERS Apollo Retail Partners, L.P. (5) 6,887,133 38.5% c/o Apollo Advisors, L.P. 2 Manhattanville Road Purchase, New York 10577 Executive Life Insurance Company 898,406 5.0% of New York c/o First Boston Asset Management 12 E. 49th Street - 30th Floor New York, New York 10017 FMR Corp. 2,878,424 14.7% Fidelity Management & Research Company (6) * 82 Devonshire Street Boston, Massachusetts 02109 Merrill Lynch Phoenix Fund, Inc. 1,190,420 6.7% 800 Scudders Mill Road Plainsboro, New Jersey 08536 Morgens Waterfall Vintiadis & Co., Inc. (7) 3,082,906 17.2% 610 Fifth Avenue, 7th Floor New York, New York 10020 - --------------------
* Percentage equal to less than 1% (1) Except for applicable community property laws, with respect to the matters covered by the Voting Agreement (hereinafter defined) and as otherwise indicated, each person has the sole power to vote and dispose of all shares of Common Stock listed opposite his or its name. Under the Voting Agreement, these beneficial owners and certain other persons, holding approximately 8,717,000 shares or 48.7% of the outstanding Common Stock, have the right to vote in concert with respect to the election of directors. See "Item 13 - Certain Relationships and Related Transactions." (2) Includes 1,047 shares of Common Stock issuable upon exercise of warrants that have an exercise price of $5.01 per share and 20,782 shares subject to immediately exercisable, non-qualified stock options that have an exercise price of $.01 per share. 46 (3) Includes 4,637 shares of Common Stock subject to immediately exercisable, non-qualified stock options that have an exercise price of $.01 per share. (4) Includes 1,047 shares of Common Stock issuable upon the exercise of warrants that have an exercise price of $5.01 per share and 25,419 shares of Common Stock subject to immediately exercisable, non-qualified stock options that have an exercise price of $.01 per share. (5) The sole general partner of Apollo Retail Partners ("ARP") is AIF II, L.P. ("AIF II"); the managing general partner of AIF II is Apollo Advisors, L.P. ("Apollo Advisors"); and the general partner of Apollo Advisors is Apollo Capital Management, Inc. (6) Fidelity Management & Research Company ("Fidelity") is the investment advisor to various registered investment companies (the "Fidelity Funds") and is a wholly owned subsidiary of FMR Corp. Fidelity Management Trust Company ("FMTC") is the trustee or managing agent for various private investment accounts (the "Accounts") and is a wholly owned subsidiary of FMR Corp. According to the Schedule 13D Filed by FMR Corp. on March 12, 1996, FMR Corp. beneficially owns (i) through Fidelity, as investment advisor to the Fidelity Funds, 2,722,012 shares of Common Stock (approximately 13.91%), including 1,586,860 shares of Common Stock subject to immediately exercisable warrants that have an exercise price of $1.00 per share and (ii) through FMTC, the managing agent for the Accounts, 156,412 shares of Common Stock (approximately .80%), including 105,904 shares of Common Stock subject to immediately exercisable warrants that have an exercise price of $1.00 per share. (7) Morgens Waterfall Vintiadis & Company, Inc. ("Morgens") renders discretionary investment advisory services to (i) Morgens Waterfall Vintiadis N.V. which holds 95,450 shares of Common Stock, (ii) the Bond Fund of the Common Fund for Nonprofit Organizations which holds 211,362 shares of Common Stock and (iii) Betje Partners, which holds 102,264 shares of Common Stock. Messrs. Morgens and Waterfall are the general partners of (i) Morgens Waterfall Income Partners which holds 98,260 shares of Common Stock and (ii) Phoenix Partners which holds 287,089 shares of Common Stock. Messrs. Morgens and Waterfall are officers, directors and stockholders of Prime, Inc., which is the corporate general partner of three limited partnerships, each of which serves as a general partner of (i) Restart Partners, L.P., which holds 623,586 shares of Common Stock, (ii) Restart Partners II, L.P., which holds 1,022,800 shares of Common Stock and (iii) Restart Partners III, L.P., which holds 642,095 shares of Common Stock. 47 ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS See "Item 11 - Executive Compensation" for information regarding certain contracts with executive officers of the Company. In connection with the Recapitalization, certain of the Company's post- Recapitalization stockholders, representing an aggregate of approximately 8,717,000 shares or 98% of the Common Stock outstanding immediately following the Recapitalization (currently 48.7%), entered into that certain Voting Agreement dated as of October 30, 1992 (the "Voting Agreement"). The Voting Agreement provides, among other things, that (i) ARP may designate six persons to the Board of Directors and (ii) a majority of certain former holders of the Company's 13-1/2% Senior Subordinated Notes due February 15, 1995, which notes were exchanged for Common Stock pursuant to the Recapitalization, may designate two persons to the Board of Directors. The Voting Agreement will terminate upon the earlier of (i) October 30, 2002, or (ii) the date upon which at least 25% of the then outstanding shares of Common Stock are publicly held pursuant to one or more underwritten registered offerings of primary shares. Since the Company's Chapter 11 filing, none of the parties to the Voting Agreement has exercised its rights thereunder. In connection with the Recapitalization, the parties to the Recapitalization Agreement (and/or their permitted assignees) entered into an equity registration rights agreement and a debt registration rights agreement. Under certain circumstances, the holders of at least 10% of the aggregate principal amount of the then outstanding Securities (as defined therein) covered by such agreements may exercise up to two demand registrations with respect to such Securities. The Company will pay all expenses (other than underwriting discounts and commissions) in connection with all such registrations. The agreements also provide for certain piggyback registration rights. The Common Stock held by ARP and Morgens is covered by the equity registration rights agreement pursuant to its terms. Pursuant to the Recapitalization, Executive Life Insurance Company of New York ("ELICNY") received 898,406 shares of the Company's Common Stock and $7.8 million ($6.4 million after adjustment for the Infusion) in principal amount of the 10-1/4% Notes. As a result of the Company's Chapter 11 filing, during Fiscal 1995 the Company paid ELICNY no cash interest on the 10-1/4% Notes. In connection with the Infusion, (the Fidelity Funds and the Accounts), the holders of the remaining 10-1/4% Notes, became the holders of more than 5% of the Company's Common Stock. Accordingly, the Company has reflected the entire amount of the 10-1/4% Notes as related party debt for all periods presented. During Fiscal 1994, the Company paid the Fidelity Funds and the Accounts $6.9 million of cash interest on the 10-1/4% Notes. In addition, at October 29, 1994 the Company had accrued $3.6 million of interest on the 10-1/4% Notes, which was subsequently issued to the Fidelity Funds and the Accounts in additional securities of the Company as interest paid in kind. As a result of the Company's Chapter 11 case, during Fiscal 1995 the Company paid no interest to the Fidelity Funds or the Accounts on the 10-1/4% Notes. In addition to the above, see "Item 1 - Business-Reorganization-Background" for a discussion of certain arrangements with the holders of the 10-1/4% Notes. The Company believes that, to the extent applicable, all of the transactions described above were, and intends that all transactions with affiliated parties will continue to be, on terms no less favorable to the Company than those available from unaffiliated parties offering comparable goods and services. 48 PART IV ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) Documents Filed as Part of this Report 1. FINANCIAL STATEMENTS OF LAMONTS APPAREL, INC. - Reference is made to the Index to Consolidated Financial Statements on page 20. 2. FINANCIAL STATEMENT SCHEDULES - All schedules have been omitted as they are either not required or not applicable or because the information required to be presented is included in the financial statements and related notes. 3. EXHIBITS. The exhibits listed below will be furnished to any security holder upon written request for such exhibit, and payment of any reasonable expenses incurred by Lamonts Apparel, Inc., to the Corporate Secretary, 3650 131st Avenue SE, Bellevue, Washington 98006. Exhibit Number Description of Document ------- ----------------------- 3.1 Amended and Restated Certificate of Incorporation of the Registrant. (6) 3.2 Amended and Restated By-laws of the Registrant.(10) 4.1 Specimen Stock Certificate. (5) 4.2 Indenture (the "Indenture"), dated October 30, 1992 between the Registrant and First Trust National Association, as Trustee (the "Trustee"), relating to the Registrant's 10- 1/4% Senior Subordinated Notes due 1999 (the "Notes"). (4) 4.3 First Supplemental Indenture to the Indenture dated October 30, 1992. (5) 4.4 Second Supplemental Indenture to the Indenture dated December 1, 1993. (7) 4.5 Third Supplemental Indenture to the Indenture dated June 10, 1994. (8) 4.6 Fourth Supplemental Indenture to the Indenture dated October 18, 1994.(10) 4.7 Indenture (the "13-1/2% Indenture") dated as of January 31, 1986 (including the form of 13-1/2% Senior Subordinated Guaranteed Note), among the Registrant, Texstyrene Plastics, Inc. ("TPI") and Bankers Trust Company, as Trustee (the "13- 1/2% Trustee") relating to the Registrants 13-1/2% Senior Subordinated Guaranteed Notes due February 15, 1995.(1) 4.8 First Supplemental Indenture to the 13-1/2% Indenture dated December 30, 1986, among the Registrant, TPI and the 13-1/2% Trustee. (3) 4.9 Second Supplemental Indenture to the 13-1/2% Indenture dated October 4, 1988, among the Registrant, TPI and the 13-1/2% Trustee. (2) 4.10 Third Supplemental Indenture to the 13-1/2% Indenture dated October 29, 1992, among the Registrant, TPI and the 13-1/2% Trustee. (4) 4.11 Warrant Agreement dated September 21, 1992 between the Registrant and Society National Bank, as Warrant Agent. (4) 4.12 Warrant Agreement dated June 10, 1994 between the Registrant and the other parties thereto (including the form of Warrant attached thereto as Exhibit A). (8) 4.13 Exchange Agreement, dated October 18, 1994, between the Registrant and the holders of the Notes.(10) 49 4.14 Extension Agreement dated March 27, 1995, between Lamonts Apparel, Inc. and the holders of the Company's 10-1/4% Subordinated Notes due 1999.(11) 10.1 Consulting Agreement dated October 30, 1992, between the Registrant and The Thompson Company. (4)(14) 10.2 Form of Nonstatutory Stock Option Agreement dated September 14, 1992, between the Registrant and each of Leonard M. Snyder, Frank E. Kulp, Andrew A. Giordano, Peter Aaron and Wallace D. Holznagel. (4)(14) 10.3 Form of Nonstatutory Stock Option Agreement dated September 14, 1992, between the Registrant and each officer of the Registrant other than its executive officers. (4)(14) 10.4 Form of Option Exchange Agreement dated September 14, 1992, between the Registrant and each officer of the Registrant. (4)(14) 10.5 Lamonts Apparel, Inc. 1992 Incentive and Nonstatutory Stock Option Plan. (4)(14) 10.6 Employment Agreement dated October 16, 1994, between the Registrant and Alan Schlesinger.(10)(14) 10.7 Modification to Employment Agreement dated January 5, 1995 between the Registrant and Alan Schlesinger.(10)(14) 10.8 Employment Agreement dated April 18, 1995, between the Registrant and Alan Schlesinger.(11)(14) 10.9 Employment Agreement dated December 28, 1994, between the Registrant and Loren Rothschild.(10)(14) 10.10 Employment Agreement dated April 18, 1995, between the Registrant and Loren Rothschild.(11)(14) 10.11 Executive Employment Agreement dated October 30, 1992, between the Registrant and Leonard M. Snyder. (4)(14) 10.12 Resignation Agreement dated November 14, 1994, between the Registrant and Leonard M. Snyder.(10)(14) 10.13 Executive Employment Agreement dated October 30, 1992, between the Registrant and Frank E. Kulp. (4)(14) 10.14 Resignation Agreement dated November 14, 1994, between the Registrant and Frank E. Kulp.(10)(14) 10.15 Executive Employment Agreement dated June 17, 1993, between the Registrant and Earle J. Spokane. (6)(14) 10.16 Waiver and Settlement Agreement, dated February 27, 1995 between Earle J. Spokane and Lamonts Apparel, Inc.(11)(14) 10.17 Executive Employment Agreement dated October 30, 1992, between the Registrant and Peter Aaron. (4)(14) 10.18 Executive Employment Agreement dated October 30, 1992, between the Registrant and Wallace D. Holznagel. (4)(14) 10.19 Resignation Agreement dated May 2, 1995 between the Registrant and Wallace D. Holznagel.(12)(14) 50 10.20 Loan and Security Agreement (the "Foothill Agreement") dated January 13, 1994, between the Registrant and Foothill Capital Corporation ("Foothill"). (7) 10.21 Amendment Number One to the Foothill Agreement dated June 27, 1994. (9) 10.22 Letter Agreement dated October 13, 1994, between the Registrant and Foothill.(10) 10.23 Depository Account Agreement dated January 21, 1994, among the Registrant, Foothill and Seafirst National Bank. (7) 10.24 Loan and Security Agreement dated January 12, 1995 between the Registrant, as debtor-in-possession, and Foothill.(10) 10.25 Loan and Security Agreement by and between Lamonts Apparel, Inc., Debtor-in-Possession and Foothill Capital Corporation, dated February 17, 1995.(11) 10.26 Amendment Number One to Loan and Security Agreement, dated March 6, 1995, between Foothill Capital Corporation and Lamonts Apparel, Inc.(11) 10.27 Amendment Number Two to Loan and Security Agreement dated October 17, 1995 between Foothill Capital Corporation and Lamonts Apparel, Inc.(13) 10.28 Amendment Number Three to Loan and Security Agreement dated November 28, 1995 between Foothill Capital Corporation and Lamonts Apparel, Inc.(13) 10.29 Equity Registration Rights Agreement dated October 30, 1992 among the Company and the parties listed on the signature pages thereto.(4) 10.30 Debt Registration Rights Agreement dated October 30, 1992 among the Company and the holders listed on the signature pages thereto.(4) 10.31 Stockholders Voting Agreement dated October 30, 1992 among the Company and the holders of Common Stock of the Company listed on the signature pages thereto.(4) 10.32 Form of Indemnification Agreement dated October 30, 1992, between the Registrant and each director and officer of the Registrant.(4) 10.33 Credit Card Plan Agreement dated June 20, 1988, as amended September 30, 1992, between the Registrant and National City Bank, Columbus (formerly BancOhio National Bank) (the "Credit Card Plan Agreement").(5) 10.34 Amendment No. 2 dated March 30, 1994 to the Credit Card Plan Agreement.(8) 10.35 Letter Agreement dated November 2, 1994 to the Credit Card Plan Agreement.(10) 10.36 Computer Services Agreement dated November 1, 1991, between the Registrant and Infotech Corporation.(5) 10.37 Computer Services Agreement dated February 1, 1996, between the Registrant and Infotech Corporation. * 10.38 License Agreement dated May 25, 1995 between the Registrant and Shoe Corporation of America, Inc.(12) 21 Subsidiaries of the Registrant. (6) 23 Consent of Coopers & Lybrand LLP.* 27.1 Financial Data Schedule.*
- --------- 51 * Filed herewith (1) Incorporated by reference from Registration Statement Nos. 33-2292 and 33-2292-01 of the Registrant and TPI, respectively, as filed with the Commission on December 19, 1985, and as amended on January 3, 1986, January 29, 1986, February 6, 1986 and February 11, 1986. (2) Incorporated by reference from Quarterly Report on Form 10-Q of the Registrant as filed with the Commission on November 10, 1988. (3) Incorporated by reference from Annual Report on Form 10-K of the Registrant as filed with the Commission on March 31, 1989. (4) Incorporated by reference from Current Report on Form 8-K of the Registrant as filed with the Commission on November 13, 1992. (5) Incorporated by reference from Registration Statement No. 33-56038 of the Registrant, initially filed with the Commission on December 22, 1992. (6) Incorporated by reference from Registration Statement No. 33-68720 of the Registrant, initially filed with the Commission on September 14, 1993. (7) Incorporated by reference from Annual Report on Form 10-K of the Registrant as filed with the Commission on January 28, 1994. (8) Incorporated by reference from Quarterly Report on Form 10-Q of the Registrant as filed with the Commission on June 14, 1994. (9) Incorporated by reference from Quarterly Report on Form 10-Q of the Registrant as filed with the Commission on September 13, 1994. (10) Incorporated by reference from Annual Report on Form 10-K of the Registrant as filed with the Commission on January 27, 1995. (11) Incorporated by reference from Quarterly Report on Form 10-Q of the Registrant as filed with the Commission on April 21, 1995. (12) Incorporated by reference from Quarterly Report on Form 10-Q of the Registrant as filed with the Commission on June 12, 1995. (13) Incorporated by reference from Quarterly Report on Form 10-Q of the Registrant as filed with the Commission on December 12, 1995. (14) Management contract or other compensatory plan, contract or arrangement between the Registrant and any director or named executive officer of the Registrant.
(b) Reports filed on Form 8-K None 52 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. LAMONTS APPAREL, INC. By: /s/ DEBBIE BROWNFIELD --------------------- DEBBIE BROWNFIELD Senior Vice President and Chief Financial Officer Date: May 2, 1996 53 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ Alan R. Schlesinger Chairman of the Board, Chief - ----------------------- Executive Officer, President and Alan R. Schlesinger Director (Principal Executive Officer) May 2, 1996 /s/ Loren R. Rothschild Vice Chairman of the Board, Chief - ----------------------- Administrative Officer and Director May 2, 1996 Loren R. Rothschild /s/ Debbie Brownfield Senior Vice President and Chief May 2, 1996 - --------------------- Financial Officer (Principal Debbie Brownfield Financial and Accounting Officer) 54
EX-10.37 2 EXHIBIT 10.37 InfoTech Corporation COMPUTER SERVICES AGREEMENT 1511 Sixth Avenue, Seattle, WA 98101 Agreement No. 98013101 - -------------------------------------------------------------------------------- EXHIBIT 10.37 Client Name and Address: LAMONTS APPAREL INC. 3650 - 131 AVENUE SE, SUITE 400 BELLEVUE, WA 98006 Effective Date: FEBRUARY 1, 1996 Expiration Date: JANUARY 31, 1998 Term of Agreement: TWENTY-FOUR (24) MONTHS Client Representative: PETER AARON, EXECUTIVE VICE PRESIDENT ------------------------------------------------------------- DOCUMENTS INCORPORATED IN AGREEMENT SCHEDULE PAGE SCHEDULE A - DESCRIPTION OF SERVICE . . . . . . . . . 3 SCHEDULE B - SERVICE CHARGES. . . . . . . . . . . . . 9 SCHEDULE C - PERFORMANCE OBJECTIVES . . . . . . . . . 12 SCHEDULE D - GLOSSARY OF TERMS. . . . . . . . . . . . 15 SCHEDULE E - CLIENT SUBLEASED EQUIPMENT . . . . . . . 17 SCHEDULE F - CLIENT EQUIPMENT AND SOFTWARE. . . . . . 18 TERMS AND CONDITIONS. . . . . . . . . . . . . . . . . 19 ------------------------------------------------------------- InfoTech Corporation (the "Provider") agrees to furnish, and Lamonts Apparel, Inc. (the "Client") agrees to accept, the services described in the above Schedules, for the period indicated above for the fees stated in Schedule "B," all such Schedules being incorporated herein by this reference. This Agreement, which supersedes and replaces the Agreement dated May 25, 1991, and Amendment dated February 3, 1992, is agreed to by both parties and is expressly conditioned upon the Terms and Conditions and Schedules set forth in this Agreement. This Agreement must be accepted by the bankruptcy court before it becomes effective. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LAMONTS APPAREL, INC. INFOTECH CORPORATION Name:................................. Name:.................................. Signature:...........................Signature:................................. - -------------------------------------------------------------------------------- Page 1 - -------------------------------------------------------------------------------- Title:.............................. Title:...................................... Date:................................ Date:........................................ - -------------------------------------------------------------------------------- Page 2 - -------------------------------------------------------------------------------- SCHEDULE A - DESCRIPTION OF SERVICE SCOPE This agreement covers the processing on, and use of, the Provider's hardware and software, and the Client's hardware and software so as to assist the Client in managing its business. All of the products and services listed below are components of Provider's shared environment. The "Base Service Offerings" included in this Schedule "A" are being provided to the extent requested by the Client and agreed to by Provider. - -------------------------------------------------------------------------------- SERVICE AVAILABILITY HOURS (PACIFIC TIME ZONE) IBM Central System 0000-2400 Monday through Saturday 0000-1800 Sunday Operations Support 0000-2400 Monday through Sunday Help Desk 0000-2400 Monday through Sunday - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SHIFT DEFINITIONS Off Shift 0000-0759 Monday Prime Shift 0800-1700 Monday through Friday Off Shift 1701-0759 Monday through Friday Off Shift 1701 Friday through 1759 Sunday Preventive Maintenance 1800-2400 Sunday - -------------------------------------------------------------------------------- BASE PRODUCT OFFERING - SOFTWARE IBM MVS/ESA - JES2, 4.4.2, operating system supporting the following system software: - Assembler H 2.1 - Basic Telecommunication Access Method/System Product (BTAM/SP) 1.1.0 - CA-JARS 6.0 - CA-JARS/DSA 5.1 - CA-Optimizer (for OS/VS COBOL) 5.1 - CICS Application File Control Facility (CAFC) 3.2.02 - CSP/AD 3.3 - CSP/AE 3.3 - COBOL II 1.4.0 - Corporate Tie 2.1.D - Customer Information Control System (CICS) 2.1.2 - Data Facility/Data Set Services (DF/DSS) 2.5 - Data Facility/Hierarchical Storage Manager (DF/HSM) 2.6 - -------------------------------------------------------------------------------- Page 3 - -------------------------------------------------------------------------------- - Data Facility Product (DFP) 3.3.1 - DB2 3.1.0 - Emulation Program (EP) 1.6.1 - Easytrieve Plus (with DB2 interface) 6.1D - Express Delivery 4.2.0 - EZ/IQ (with DB2 interface) 3.0C - FastDASD 4.4 - IDMS 10.2.2 - Interactive System Productivity Feature/Dialog Manager (ISPF/DM) 3.5 - Interactive System Productivity Feature/Program Development Facility (ISPF/PDF) 3.5 - Intertest 4.3 - JCLCheck 6.2 - JES328X 1.0 - Jobtrac 3.2 - Netview/DM 1.2 - Netview/XA 1.3 - Network Control Program (NCP) 4.3.1 - Netview/XA 1.3 - ODE II 4.1 - OMEGAMON/CICS V551 - OMEGAMON/DB2 V270 - OMEGAMON/MVS V750 - OS/VS COBOL 0.2.4 - Panvalet 14.02A - PC File Transfer 1.1.0 - Peregrine Network Management System (PNMS) 4.6 - Query Management Facility (QMF) 3.2.0 - Resource Access Control Facility (RACF) 1.9.0 - Resource Measurement Facility (RMF) 4.2.2 - SAR 6.5.3 - SAR/PC 1.5 - SDF/CICS 5.0 - Service Level Reporter (SLR) 3.3 - Spool Display and Search Facility (SDSF) 1.3.3 - StopX37 3.5.5 - SyncSort 3.5 - System Support Program (SSP) 3.6 - Tape Library Management System (TLMS) 5.3 - Time Sharing Option Extended (TSO/E) 2.4.0 - Virtual Telecommunication Access Method (VTAM) 3.3.0 BASE PRODUCT OFFERINGS - HARDWARE - IBM 3090-300J - -------------------------------------------------------------------------------- Page 4 - -------------------------------------------------------------------------------- - IBM 3990/3390 DASD - IBM 3480 cartridge tape - IBM 3420 open reel tape - IBM 3745 telecommunications controller THE PROVIDER MAY, WITH THE PRIOR APPROVAL OF THE CLIENT, WHICH APPROVAL SHALL NOT BE UNREASONABLY WITHHELD, SUBSTITUTE EQUIVALENT PRODUCTS, WHETHER FROM IBM OR A THIRD PARTY, FOR ANY OF THE PRODUCTS SPECIFIED ABOVE. BASE SERVICE OFFERINGS SUPPORT OF CLIENT'S APPLICATION SOFTWARE - Advisory support for performance analysis and resource consumption - Management reporting of systems performance PRODUCTION SERVICES - Operation of IBM central system in support of Client's processing requirements - Monitor system and notify Client of any problems due to hardware or software failure - Network management: trouble-shooting and problem resolution - Manage and maintain data center support software such as automated report distribution and scheduling systems for Client's use - Manage tape library; provide offsite storage for critical files - Provide support and training in the use of production control systems software for Client - Provide a Help Desk for single point of contact between Client and Provider - Manage and maintain change control and problem management systems - Advisory support for disaster recovery, including recovery job scheduling assistance - Production control for IBM mainframe, RS/6000, and Tandem processing - Store network management - Operational support for the Tandem (technical support for Tandem remains with Client and its contractors) - Printer operation for Xerox 4050 TECHNICAL SERVICES - Telecommunication (data) support, including network design, installation, and problem resolution - System software installation and support for all base product offerings - General technical support for Client's staff including training and consulting on the use of system software, help in the design and coding of applications and resolution of related problems, and specialized coding in Assembler language - Capacity planning and performance analysis/tuning - -------------------------------------------------------------------------------- Page 5 - -------------------------------------------------------------------------------- - Customization of system software to meet Client's requirements including setting system parameters and coding necessary user exits - Disaster recovery support - Technical support for the RS/6000 - Technical support for TIC - DB2 support, which includes 7 x 24 coverage and up to 10 hours of work per month plus 40 additional hours of work per year. Support exceeding these parameters will be charged at the rate of $75.00/hour. CLIENT SERVICES - Coordinate Client/Provider activities - Provide forum for discussion of Client issues - Assist Client in obtaining systems training and support DISASTER RECOVERY - Included in the base costs of this agreement are the capacity requirements and associated resources to provide operational disaster backup of the central IBM base operating system. - In the event of a disaster, CPU capacity up to 50% of Client's CPU capacity requirement also exists. Additionally, disk storage capacity of 30 gigabytes is assigned to Client. - Capacity requirements beyond that noted above for Client's data files, programs, and related activities as well as support of Client-specific application testing, production, and related hardware, software, and network activities may be made available to, and contracted separately by, the Client at an additional fee. - Battery backup (UPS) is available at the Provider's primary data center. Capacity is sufficient to provide a minimum of 15 minutes of ongoing processing in the event of power failure. - Provider will pay current Weyerhaeuser disaster recovery fees for Tandem and RS/6000 and maintain the service levels previously agreed to in the letter of October 22, 1993, from Ken Shefveland to Tim Travaille, and the letter of July 29, 1994, from Ken Shefveland to Beckie Jacobs. PRODUCTS AND SERVICES INCLUDED BUT NOT ELSEWHERE CLASSIFIED - Installation costs for lines between Provider and Client related to move of headquarters to Kirkland - Added monthly costs of lines between Provider and Client related to move of headquarters to Kirkland - Added early morning courier runs between Provider and Client - Consulting costs for support of the RS/6000 - Electrical costs for Client equipment housed at Provider's facility - Costs to upgrade the RS/6000 for remote operation - Added monthly costs to upgrade DC line (T31-6806) to 56 kb - -------------------------------------------------------------------------------- Page 6 - -------------------------------------------------------------------------------- - 56 kb line to RS/6000 and maintenance of equipment - Telephone line (621-3617) for DC dial backup - LAN-to-LAN connection between Provider and Client - Xerox 4050 printer located at Provider's facility will continue to be run on a communication line and not be channel-attached EQUIPMENT HOUSED AT PROVIDER - Tandem - Xerox 4050 - TIC - Store Network PRODUCTS AND SERVICES NOT INCLUDED - Client will be responsible for the continuation of the existing courier runs between Client and Provider. Client will arrange and directly pay for the additional early morning courier run but will be reimbursed for its costs by Provider. Courier runs to deliver output from the 4050 will be as follows: - One additional run with pickup at 7:30 a.m. Tuesday through Sunday and one run on Monday with pickup prior to 7:30 a.m. - One existing run with pickup during business hours on business days. - These runs will be at regularly scheduled times, and delivery will be within one hour from time of pickup. The daytime run will also deliver on-line viewing tapes to Client. - Client is responsible for providing support needed to test and implement network changes in a timely manner. - All other costs associated with Client-specific hardware and software, including supplies, maintenance, installation, related taxes, unique equipment operation (e.g., POS operation), Client's application backup and related disaster recovery and capacity costs, or unique disaster recovery equipment are not included in these base offerings. - -------------------------------------------------------------------------------- Page 7 - -------------------------------------------------------------------------------- RESPONSIBILITY MATRIX RESPONSIBLE PARTY ACTIVITY PROVIDER CLIENT Central system including system software X Central network (3725, local 3X74s, etc.) X Central telecommunications equipment X Central system TSO response time X Central system resource security X Client online system(s) response time X Client resource security X Client database administration X Client application software X Client application(s) response time X X Telecommunications lines X Client premises telecommunications (data) equipment X Client premises (remote to Provider) control unit(s) X Client premises terminal(s) X Client premises printer(s) X Client dedicated DASD space management X Client dedicated DASD performance X - -------------------------------------------------------------------------------- NOTE: Responsibility as indicated above includes availability, reliability, installation, maintenance, problem determination and resolution, and disaster recovery. SPECIAL CONSIDERATIONS The Client understands that the hours between 1800 and 2400 Sunday are generally reserved for preventive maintenance of, and Technical Support testing on, the Central System. Client understands, however, that time needed for production or critical testing by Client will not be unreasonably withheld during the preventive maintenance period. The Client agrees to adhere to those systems management disciplines as defined in the Provider's problem management, change control, and standards manuals, and other disciplines as may be defined in the future by the Provider and agreed to by the Client for the purpose of ensuring overall systems integrity, reliability, and availability. SERVICE RATING AND REPORTING Processing performance in relation to those items that Provider is responsible for as identified in the above Responsibility Matrix will be included in "The InfoTech Operating Report," published monthly. - -------------------------------------------------------------------------------- Page 8 - -------------------------------------------------------------------------------- SCHEDULE B - SERVICE CHARGES During the Service Availability Hours, the Provider will support the Client with the base services as defined in SCHEDULE "A" - DESCRIPTION OF SERVICE. During the month the Provider will collect System Management Facility (SMF) statistics on Client utilization. The Client will be invoiced monthly for resource consumption as detailed in the subsections of this schedule. BASE RESOURCE OFFERING At the beginning of each month, Provider will invoice Client for the base monthly charge. The base resource offerings provided include:
- -------------------------------------------------------------------------------- MONTHLY BASE RESOURCE UTILIZATION BY YEAR Resource FY 96 FY 97 -------- ----- ----- Adjusted CPU hours(1) 500 500 Tape mounts 12,500 12,500 Tape input/output (I/O)(2) 30,000 30,000 Tape cartridges 8,000 8,000 Offsite tape 1,500 1,500 3390-2 DASD volumes 46 46 Telecomm. lines 10 10 Communication ports(3) 21.25 21.25 BASE MONTHLY INVOICE(4) $126,000 $126,000 -------- -------- -------- --------
(1)3081K CPU equivalent hours. Adjusted hours will be calculated as follows: Prime shift batch priority = 100% Off shift batch priority = 70% On-line/started task priority = 120% (2)Units of 1,000 (3)Provider's pricing for telecommunications support includes providing the telephone lines as well as modems, DSU/CSU's, and multiplexers at both ends of all existing circuits. Does not include long distance charges incurred on dial-up lines. (4)All prices in US Dollars - -------------------------------------------------------------------------------- The monthly invoice will be accompanied by a detailed list of resource utilization beyond the monthly base. Provider will accumulate actual resource utilization throughout the year. At the end of the fiscal year, actual utilization in excess of the annualized base utilization for adjusted CPU hours, tape mounts, and tape input/output shall be billed according to the Incremental Resource Charges table. Incremental monthly usage for tape cartridges, offsite tape, 3390 DASD, telephone lines, and - -------------------------------------------------------------------------------- Page 9 - ------------------------------------------------------------------------------- telecommunications ports shall be accumulated and billed with those charges indicated above. The base resource fees for FY96 and FY97 are based upon current projections. At the end of FY96, the average CPU resource utilization for the prior 12 months will be used to establish the subsequent year's CPU base resource utilization fee structure. The FY97 CPU base units will be the average monthly CPU usage in FY96, except that the maximum change in the base units will be limited to 10%. Thus, the maximum base for FY97 is 550 hours and the minimum is 450 hours. The monthly base fee will be raised or lowered by $60.00 for every hour the monthly base CPU usage is raised or lowered. Utilization above the base charges will be priced as follows:
- -------------------------------------------------------------------------------- INCREMENTAL RESOURCE CHARGES Resource Charges(1) -------- ------- Adjusted CPU hours(2) 60.00 Tape mounts 0.45 Tape input/output (I/O)(3) 0.15 Tape cartridges 0.50 Offsite tape 1.50 3390-2 DASD volumes 404.75 Telecomm. lines(4) 125.00 Communication ports(5) 100.00 Impact printer lines(3) 0.25
(1)All prices in US Dollars (2)3081K CPU equivalent hours. Adjusted hours will be calculated as follows: Prime shift batch priority = 100% Off shift batch priority = 70% On-line/started task priority = 120% (3)Units of 1,000 (4)Equipment and telephone lines will be extra and priced as incurred. Tail circuits will be charged one half the normal rate, at $62.50 per line. (5)Includes services for line speeds up to 64KBS. Autodial units requiring two ports will be charged at $125 per month per pair. - -------------------------------------------------------------------------------- NETWORK SAVINGS As a result of Provider's network redesign activities on behalf of Client, which must be preapproved in writing by the Client (such approval not to be unreasonably withheld), the Client will share any savings with the Provider so that the Provider receives the first $25,000 in savings during each of the two years of the Agreement. In addition, Client - -------------------------------------------------------------------------------- Page 10 - ------------------------------------------------------------------------------- agrees to share 50% of any savings over $25,000 during each of the two years of the Agreement with Provider. Any savings due Provider as described above shall appear as a line item on the most recent invoice and shall be due and payable by Client no later than 30 days following the close of business of the fiscal year. Savings shall be calculated as follows: Savings on telephone company line charges as documented by Client on January 9, 1996 (NOTE: Client has represented to Provider that there are no line termination charges and that the costs supplied include all taxes.) LESS Implementation costs (equipment and circuit installation), as well as direct testing costs LESS Cost of equipment lease and maintenance The Client will be responsible for reimbursing the Provider for any direct costs related to this project, pre-approved in writing by the Client Representative or his duly appointed agent. In order to achieve the savings noted above, Provider will acquire certain necessary telecommunications equipment at a price not to exceed $25,000. This equipment will be leased over a three year period in order to obtain the targeted savings. Client will reimburse Provider for the lease costs of the equipment. It is agreed by Client that in the event that Client is not a customer of Provider for the duration of this lease, that Client will assume the remaining lease payments and/or reimburse Provider for said payments. ADDITIONAL COSTS In addition, any expenses not identified by this document but incurred by the Provider solely for the benefit of the Client, as the result of the Client's activities, or as the result of the actions of a Client's vendor will be charged to the Client at cost plus fifteen percent. However, no such expense will be charged to the Client without the Client Representative's prior written approval or that of his duly appointed agent, except in exigent circumstances. Client's approval will be obtained in all non-emergency cases for additional expenditure, or the service or product will not be rendered or procured. Whenever possible, the Provider will work with the Client to plan incremental costs in advance. - -------------------------------------------------------------------------------- Page 11 - -------------------------------------------------------------------------------- SCHEDULE C - PERFORMANCE OBJECTIVES STATEMENT OF PURPOSE These objectives provide a goal for the Provider to strive towards, while also providing the Client with reasonable expectations under normal operating conditions and circumstances and a method to evaluate the quality of service received. It is understood that the Provider shall not be responsible for performance of those items over which it has no reasonable control. RELIABILITY AND PERFORMANCE OBJECTIVES Provider will provide the following guarantees and warranties: - -------------------------------------------------------------------------------- Central system availability: 99.7% of the stated system availability as indicated under "Service Availability Hours" in SCHEDULE "A" - DESCRIPTION OF SERVICE, measured monthly(1) Online systems availability: 98.5% of the stated system availability as indicated under "Service Availability Hours" in SCHEDULE "A" - DESCRIPTION OF SERVICE, measured monthly(2) Production CICS response time (overall average as measured < 2 seconds(3) monthly) TSO response time (overall average as measured monthly, for < 1 second first period transactions) Batch queue time < 1.5 minutes(4) (1)Central system availability will be measured by the ability of the Provider to provide a basic system as defined in SCHEDULE D - "GLOSSARY OF TERMS." (2)Online system availability will be measured by the ability of the Provider to provide online services to the limit of its responsibilities, i.e., the remote communications equipment. See definition of online systems availability in SCHEDULE D - "GLOSSARY OF TERMS." (3)CICS transactions which use such extensive resources that they intrinsically cannot achieve the service levels specified will be excluded from calculation of the performance of the Provider. (4)Wait times for job class N, which is designed for the submission of batch jobs during the day to be run later at night, will be excluded. Wait times will also be excluded for jobs submitted with TYPRUN=HOLD or the submission of multiple jobs with the same name. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Page 12 - -------------------------------------------------------------------------------- Scheduled downtime for hardware, software, or telecommunications (network) changes or maintenance will not be included in the reliability statistics identified above. It is mutually agreed that there are certain times that are more critical than others. A partial loss of function that has little material impact on the Client will not be counted against the Provider's performance if the Provider delays corrective action for the solution of the problem until a time when the impact of the action on the users of the system is minimized, provided however, that Provider consults with and notifies Client prior to any such delay. If Client approval of such delay(s) is requested, such approval shall not be unreasonably withheld. Furthermore, any increase in downtime due to actions taken to minimize impact to users will not be counted as part of the interruption. It is understood that there will be errors in system software out of the control of the Provider. Such a system software error will not be counted against the availability service levels unless it substantially impacts the ability of users to perform their jobs. PENALTIES Failure to perform as indicated will result in the imposition of the following penalties: a. For each interruption to central system availability which has a duration in minutes as set forth below, the associated penalty shall be imposed: Duration of Interruption Penalty ------------------------ ------- 481 - 1,440 $ 5,000 1,441 - 2,880 $10,000 b. All interruptions with a duration of less than 481 minutes in a particular calendar month shall be added together at the end of such month, and if the cumulative number of minutes fits within one of the categories set forth in a. above, the penalty associated with that category shall be imposed. c. In no case will the penalty for any set of multiple interruptions be greater than the penalty which would have been incurred if there had been a single interruption starting at the beginning of the first interruption and ending with the end of the last interruption. d. Penalties imposed under a. and b. above shall be applied against amounts due on the most recent invoice(s) or applied against future charges, as applicable. - -------------------------------------------------------------------------------- Page 13 - -------------------------------------------------------------------------------- CLIENT'S RESPONSIBILITY IN MEETING PERFORMANCE OBJECTIVES As the Provider is guaranteeing response times over which the Client can have substantial impact, the Client agrees to: 1. Allow Provider the opportunity to participate in the design and testing of Client's online applications to make sure that their resource requirements are understood and that efficient design and programming practices are followed. 2. Make such changes in its applications as Provider recommends to bring them into accordance with generally accepted principles of efficient online coding. 3. Make, or allow Provider to make, such changes in DASD file allocation and placement as are necessary to provide acceptable DASD performance. 4. Work with Provider in good faith to do whatever is necessary to bring performance of online applications to acceptable levels. 5. Give Provider sufficient advance notice of requirements for additional capacity so the Provider can acquire the necessary resources. - -------------------------------------------------------------------------------- Page 14 - -------------------------------------------------------------------------------- SCHEDULE D - GLOSSARY OF TERMS AVAILABILITY: The time period(s) during which the Provider commits to provide a particular service. CENTRAL SYSTEM AVAILABILITY: The central system is available when MVS and its critical components are up and operational so that any user system with all its specific components operational can be run. Failures that impact the ability of specific systems to operate will be counted against the availability of those specific systems. CPU: Central Processing Unit; the hardware that controls all computer operations, consisting of three sections: memory, arithmetic/logic, and control. CPU EQUIVALENT HOUR: All CPU hours in this contract refer to a CPU hour on an IBM 3081K with the performance improvement feature. As the Provider upgrades to a different computer, the number of hours provided in the base and the incremental per hour charge will be adjusted to account for the different speeds of the processors. For example, each processor in a 3090- 400E is 1.789 times as powerful as each processor in the Provider's current CPU. If a 3090-400E was placed in service by Provider for Client's use, the Base Service Units for CPU hours would be adjusted to 223.59 hours (400/1.789). The incremental cost would be adjusted to $107.34 per hour ($60 x 1.789). The ratio of the power of the processors on each CPU will be calculated using the internal SRM constant specifying the service units per second of execution time as supplied by the manufacturer of the CPU. DASD: Direct Access Storage Device; magnetic storage device (disk drive). ONLINE SYSTEMS AVAILABILITY: Online systems are available when all components of the online systems under the control of the Provider are up and available to the end user. This includes the online software itself (such as CICS, TSO, and NDM), necessary database systems (such as IDMS and DB2), application data files, and communications facilities. Loss of availability will be counted only during those hours that the system or application was scheduled to be available. In the case of file transfer type facilities such as trickle transmit or NDM, loss of availability will be counted from the time the data normally would have been available and used at the destination. Loss of availability due to failures in components out of the control of the Provider or due to actions of the Client or the failure of the Client to take necessary actions in a timely manner will not be counted in determining the Provider's service level. In the event of a partial failure, such as that of communications facilities or a single system or application, only that portion of the downtime that corresponds to the proportion of users who lose access to the system will be counted against - -------------------------------------------------------------------------------- Page 15 - -------------------------------------------------------------------------------- provided reliability. For example, if 10% of Client's users are down for two hours, then 10% of two hours, or 12 minutes, will be counted against scheduled uptime. It will be the responsibility of the Client to supply the Provider the respective percentages for the failure of any component. The percentages for each component may reflect the importance of the component to the Client as well as the actual number of users impacted. There will be two lists, one for software components and one for communications facilities. It will also be the responsibility of the Client to supply the Provider with the scheduled hours of availability for all its online applications and file transmissions. Recognizing that short interruptions by the Provider can cause longer delays for the Client, an allowance of four (4) hours will be made for the recovery of Client systems from failures of the Provider. That is, the loss of availability as calculated above will be limited to the actual time of any interruption caused by the Provider plus four hours for Client recovery. RELIABILITY: The percentage of total committed time (availability) that a computer component is operative, or a service delivered on time. TAIL CIRCUIT: A communication circuit that does not terminate on Provider's premises for which Provider is responsible for troubleshooting and service restoration. Examples are circuits connected to remote concentrators and/or multiplexors. VOLUME: A data carrier that is mounted and demounted as a unit, for example, a reel of magnetic tape or a disk pack. - -------------------------------------------------------------------------------- Page 16 - ------------------------------------------------------------------------------- SCHEDULE E - CLIENT SUBLEASED EQUIPMENT The following is a list of hardware, software, or occupancy expenditures and leases made on the Client's behalf as of the date of this Agreement. The Client will maintain the financial liabilities represented by this list. HARDWARE Product/Device Serial No. Monthly Cost Lessor Expire Penalty - -------------------------------------------------------------------------------- Not applicable SOFTWARE Product/Device Serial No. Monthly Cost Lessor Expire Penalty - -------------------------------------------------------------------------------- Not applicable - -------------------------------------------------------------------------------- Page 17 - -------------------------------------------------------------------------------- SCHEDULE F - CLIENT EQUIPMENT AND SOFTWARE The following is a list of computer hardware, software, and ancillary items that are owned or leased by Client but housed in the Provider's facility. CENTRAL SYSTEM HARDWARE Manufacturer Model Serial No. Owner Location - --------------------------------------------------------------- Client-specific software information to be supplied by Client at a later date. TELECOMMUNICATIONS Manufacturer Model Serial No. Owner Location - --------------------------------------------------------------- Client-specific software information to be supplied by Client at a later date. SOFTWARE Manufacturer Description Owner System Location - -------------------------------------------------------------------- Client-specific software information to be supplied by Client at a later date. - -------------------------------------------------------------------------------- Page 18 - -------------------------------------------------------------------------------- TERMS AND CONDITIONS 1.0 TERM OF AGREEMENT: After signature and acceptance by both parties, this Agreement shall become effective on the effective date stated on Page 1, and shall continue in effect until the expiration date stated on Page 1, unless earlier terminated under provisions hereof. 2.0 NOTICES: Any notice required to be given pursuant to this Agreement must be transmitted in writing by certified or registered US mail, postage prepaid, return receipt requested, addressed as shown on Page 1. 3.0 PRICE AND PAYMENT TERMS: Provider shall provide a monthly invoice to the Client for all base service offerings to be rendered to Client during the current month, in accordance with SCHEDULE "B" - SERVICE CHARGES of this Agreement. Monthly invoices are due and payable upon receipt by Client. Monthly invoices shall be subject to an interest rate of eighteen percent (18%) per annum or the maximum interest permitted by law, whichever is less if unpaid within thirty (30) days of receipt. Provider shall provide an annual invoice to the Client for all services above the base offering level performed during the preceding year in accordance with SCHEDULE "B" - SERVICE CHARGES of this Agreement. Annual invoices are due and payable within fifteen (15) days of receipt by Client. Annual invoices shall be subject to an interest rate of eighteen percent (18%) per annum or the maximum interest permitted by law, whichever is less if unpaid within fifteen (15) days of receipt. 3.1 TAXES: Client shall, in addition to the other amounts payable under this Agreement, pay all taxes, federal, state or otherwise, however designated, which are levied or imposed by reason of any use, license or purchase of Client-specific software or hardware under this Agreement or the provision of services by Provider, including but not limited to such items actually paid or required to be collected or paid by Provider. 4.0 WARRANTY: Except as otherwise specifically provided in this Agreement, Provider's sole warranty under this Agreement with respect to supplying or providing any of the data processing resources or services contemplated hereunder shall be limited to the rerunning of any inaccurate reports or the correction of any inaccurate data or information provided that such inaccuracies were caused substantially as a result of the Provider's failure to satisfy the requirements of this Agreement. The Client will submit written notice of such inaccuracies to the Provider within ten (10) days of delivery of such report or the providing of such inaccurate data or information. If, after repeated efforts to correct such inaccuracies, the Provider elects not to correct the inaccuracies, or the Client chooses not to correct such inaccuracies; notwithstanding other obligations or requirements under this Agreement, then the Client shall be entitled to recover its actual damages up to a maximum amount that is equal to the monthly fee paid by the Client to the Provider for the calendar month immediately preceding the calendar month in which the notice of inaccuracy or failure was given to the Provider. The Client acknowledges that unless otherwise agreed to in writing by the Client and the Provider, the various performance objectives in this Agreement are indeed targets that the Provider is striving to meet and as such, Client shall not be entitled to terminate this Agreement or to recover any damages caused by the Provider's failure to meet the stated performance objectives except as specifically provided for in this Agreement or in circumstances that threaten the ongoing business of the Client. The Client acknowledges and agrees that the foregoing constitute the exclusive remedies available to it for any claim made by it under this Agreement. 5.0 LIMITATION OF LIABILITY: THE CLIENT AGREES THAT THE FOREGOING WARRANTY IS IN LIEU OF ALL OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS OR ADEQUACY FOR ANY PARTICULAR PURPOSE OR USE, QUALITY, PRODUCTIVENESS OR CAPACITY. Neither party (including such party's agents and/or affiliates) shall be liable to the other party or to any other person claiming through or under such party, including without limitation any customer of such party, for any claim, loss, liability, obligation or expense of any nature whatsoever or for any lost profits or damages of any kind, including but not limited to the loss of data or other electronic information, including but not limited to the hardware, programs, documentation, data files, output, services, or other matters produced or provided hereunder, howsoever caused. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY OR ANY OTHER PERSON FOR LOSS OF BUSINESS, LOST PROFITS OR SPECIAL, INCIDENTAL OR CONSEQUENTIAL DAMAGES EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. - -------------------------------------------------------------------------------- Page 19 - -------------------------------------------------------------------------------- 5.1 PATENT AND COPYRIGHT INDEMNIFICATION: Client, at its own expense, shall indemnify and hold harmless Provider and its subsidiaries and affiliates under its control and their directors, officers, employees and agents and defend any action brought against Provider with respect to any claim, demand, cause of action, debt or liability, including attorneys' fees and expenses, to the extent that it is based upon a claim that any licensed software used within the scope of this Agreement by Client infringes, violates or relates to any patents, copyrights, licenses or other property rights, provided that Client is notified of such claim. In all events, Provider shall have the right to participate in the defense of any such suit or proceeding through counsel of its own choosing. Provider, at its own expense, shall indemnify and hold harmless Client and its subsidiaries and affiliates under its control and their directors, officers, employees and agents and defend any action, debt or liability, including attorneys' fees and expenses, to the extent that it is based upon a claim that any licensed software used within the scope of this Agreement by Provider which is provided by Provider as part of the base offerings infringes, violates or relates to any patents, copyrights, licenses or other property rights, provided that Provider is notified of such claim. In all events, Client shall have the right to participate in the defense of any such suit or proceeding through counsel of its own choosing. In circumstances where the use of software or a system by the Provider for the Client will infringe upon a patent or copyright, Provider reserves the right to elect to: substitute an alternative product of equivalent capability, take action to recover the software or system, or refund to the Client for fair market value of the use of said software; however, such refund shall not exceed the proportion of the amount paid by Client for use of said software. 6.0 FORCE MAJEURE: Provider shall not be liable for and is excused from any failure to deliver or perform or delay in delivery or performance due to any causes where Provider is hindered or prevented from complying because of labor disturbances (including strikes or lockouts), war, acts of God, fires, storms, accidents, government regulations, or any other cause whatsoever, reasonably beyond Provider's control. If Provider is unable to perform Provider's obligations under this agreement due to Force Majeure, Provider shall waive payment until service has been restored. 7.0 DEFAULT: In the event that Client shall become thirty (30) days in arrears in payment for the goods and services rendered in accordance with the terms hereof, or breaches any other part of this Agreement, Provider may at its sole discretion, elect to cancel this Agreement, provided however, that cancellation shall not be made without written notice given to Client Representative by Provider at least fifteen (15) days before the day set for cancellation of this Agreement, such fifteen (15) day notice being given to permit payment of all sums in arrears. Provider may also pursue any other remedies available at law or in equity. Neither party's failure to exercise any of its rights shall constitute a waiver of any past, present or future right or remedy, and all of its rights and remedies shall be cumulative. In the event that Client is unable to execute the activities or requirements of the Client described in PRODUCTS and SERVICES or the obligations of Client set forth in this Agreement(1) and such failure substantially interferes with Provider's performance hereunder, Client shall be in default of this Agreement and Provider may elect to terminate this Agreement and receive payment for services as provided in Section 9.0 herein. In the event that Provider's level of service as defined in SCHEDULE "C" - PERFORMANCE OBJECTIVES falls five percent (5%) below the objectives set in any category for a period of three (3) consecutive months, and where failure to substantially perform at, or near the established objectives, is not directly or indirectly caused by or allowed to be caused by an activity or requirement of the Client, the Provider shall be determined to be performing at a substandard level, and where this deviation from the performance objective is of such significance as to threaten or cause the Client business substantial damage, Client may at its sole discretion, elect to cancel this Agreement, provided however, that cancellation shall not be made without written notice given to Provider by Client at least sixty (60) days before the day set for cancellation of this Agreement, such additional sixty (60) day notice being given to permit Provider a final opportunity to correct substandard performance or otherwise amend the contract. Notwithstanding anything to the contrary herein, if Provider is in material default under this Agreement, Client shall have the right to withhold payment until the default is cured. Provider shall have the right to require Client to deposit said amounts into an interest bearing escrow or third party account mutually acceptable to the parties. - ----------------------------------------- (1)inter alia, Sections 11.0, 12,0, and 13.0 - -------------------------------------------------------------------------------- Page 20 - ------------------------------------------------------------------------------- 8.0 ASSIGNMENT OR TRANSFER: The Client shall not assign its rights or obligations under this Agreement, voluntarily or involuntarily, by operation of law or otherwise, without the prior written consent of Provider, which consent shall not be unreasonably withheld. Furthermore, organizational or name changes of the Provider or Client will not in any manner change the terms and commitments of this Agreement. The Client cannot assign this Agreement without Provider's prior written consent, except for an assignment to a person or entity that controls the Client or is controlled by the Client or which acquires substantially all of the business and assets of the Client; however, no such assignment shall relieve Client of any of its obligations hereunder or require Provider to provide services to any person or entity other than Client solely for its business. For this purpose, control shall mean fifty percent (50%) or more of the common stock or other securities or interests entitled to exercise the voting control over the Client. 9.0 TERMINATION: The parties hereto understand that the Provider will be committing to leases or purchases of equipment, purchases or licenses of software and other commitments of resources for the entire term of this Agreement. Hence, the parties agree that Client will furnish Provider at minimum every six (6) months with copies of adequate financial information evidencing its ability to meet its obligations hereunder. Additionally, if this Agreement is terminated by Client prior to the end of the Agreement and Provider is not in default as defined in section 7.0, the parties have agreed that a reasonable estimate of the damages that will be incurred by the Provider as a result of such termination can be calculated in the following manner: multiply the current minimum monthly payment under SCHEDULE "B" - SERVICE CHARGE by the lesser of (i) 15 months or (ii) the remaining months of the Agreement Period. The Client agrees to pay such amount to the Provider within thirty (30) days of such termination. 10.0 REVISIONS: This Agreement may be modified only in written form, signed by both parties as identified on Page 1. The Client Representative or any other authorized corporate officer of the Client has the authority to bind the Client with respect to all agreements, consents, or other matters requiring action on behalf of the Client. 11.0 TRANSPORTATION OF DATA: Data submitted by the Client to the Provider for processing, and output produced by the Provider, shall be transported at the Client's risk and expense to and from the Provider's offices. In the event that the Client fails to deliver input data to the Provider at the time scheduled, the Provider may extend, as necessary, the time for the completion of processing such data. The Client further agrees that completion of the processing may be extended because of holidays taken by Client. In any event, the Provider does not warrant or represent that shipment, transmission, or availability dates will be met, but will use its reasonable efforts to do so. 12.0 STORAGE: The Client shall assume the risks and Provider shall not be responsible for any damages, liability or expense incurred in conjunction with any delay in delivery of supplies, magnetic media, or any other input data furnished by the Client unless Provider has agreed in writing to assume such responsibility. No more than a normal forty-five (45) day supply of Client-specific forms may be stored at Provider's site. 13.0 SUPPLIES: All special supplies required for processing that are Client specific shall be furnished solely at the Client's expense. 14.0 ADDITIONAL EXPENSES: The Client will be charged directly for time and material expenses at the Provider's normal rates for work that is performed by the Provider that is outside the scope of the services contemplated for the base fees. All additional charges outside of those specified in the contract that are to be the responsibility of the Client will be agreed to in advance and in writing by the Client and before the service or product is rendered, or acquired by the Provider, except in circumstances that are of an exigent nature. 15.0 OWNERSHIP OF DATA: Should services be terminated between the Provider and the Client, the Client following payment of all due but unpaid invoices shall be entitled to remove from the Provider's premises, at the Client's expense, any and all equipment, data, applications, documentation, and procedures that have been identified in writing to Provider as being proprietary to Client. The Client hereby grants to Provider a security interest in all assets, including hardware, software, data, storage devices, disks, and manuals in Provider's possession to secure payment of any amounts and the performance of all obligations under this Agreement. This Agreement shall constitute a security agreement under the Uniform Commercial Code of Washington. Client agrees to cooperate with Provider in any filing of financial and confirmation statements. 15.1 CONFIDENTIALITY: Client will use reasonable measures to prevent exposure by anyone over whom Client has the right to exercise control, - -------------------------------------------------------------------------------- Page 21 - -------------------------------------------------------------------------------- without the consent of Provider of all programs, documentation, systems, techniques, and know-how of Provider. The obligations of the parties under this paragraph shall survive termination of this Agreement. Provider will use reasonable measures to prevent exposure by anyone over whom Provider has the right to exercise control, without the consent of Client of all programs, documentation, systems, techniques, know-how and business plans where information regarding the specific programs has been clearly communicated by the Client in writing to the Provider as being of a confidential nature to the Client. The parties agree that the Client's data is of a confidential nature to Client. Any party or their agents divulging information shall pay for all attorneys' fees of the other in obtaining injunctive relief. This shall be the exclusive remedy of Client against Provider. The obligations of the parties under this paragraph shall survive termination of this Agreement. 15.2 ACCESS: Provider shall allow Client reasonable access to all of the Client's data information or media in the possession of Provider for the term of this Agreement subject to any reasonable Provider charges for copying or reformatting data or otherwise providing services not specified in SCHEDULE "A" - DESCRIPTION OF SERVICE. Client shall not obtain any proprietary rights in the hardware, programs, documentation, techniques, or know-how used by the Provider in providing services hereunder, whether such are developed specifically for performance of this Agreement or otherwise, except under circumstances where the Client is the Licensee of the hardware, programs and/or documentation used by the Provider in providing service to the Client. 16.0 DATA INTEGRITY: The Client is responsible for establishing procedures for the backup of all data, software, and other information provided to the Provider, who is responsible for following those procedures. In the event of a system failure or catastrophe, the Client is responsible for providing procedures to the Provider for the performance of all of the steps necessary for the reconstruction of the data, files, and other information deemed necessary by the Client. Client is responsible for providing at a reasonable time and a reasonable format, all input data required by Provider to provide services herein. Provider shall not be responsible for errors in data entry or other services, programs, hardware, data files, or output provided to or maintained for Client hereunder resulting from errors in Client's input data or from Client's failure to comply with the provisions of this Agreement. 16.1 DISASTER RECOVERY: The Provider will maintain a backup facility capable of providing capacity sufficient to load and run its base IBM operating programs and systems and such other systems as provided for under Disaster Recovery in SCHEDULE "A" - DESCRIPTION OF SERVICE. Client is responsible for backup and disaster recovery of all non-base system equipment that is dedicated to it, or Provider may, for an additional charge, assume the responsibility. Client understands that when disaster processing procedures are activated, normal processing objectives for performance, availability, and reliability are suspended and remain so until thirty (30) days after normal processing is resumed. In the event that the Provider's primary IBM system and/or disaster recovery backup IBM system is unavailable to Client for processing for a period exceeding forty-eight (48) consecutive hours, Provider will incur a penalty of $5,000 per hour for each hour the system is unavailable beyond forty-eight (48) hours. Provider has, and will maintain, in force combined property damage/business interruption/extra expense insurance (all perils). 17.0 SOFTWARE: The software and operating systems employed by Provider together with any improvements therein or any extensions thereof and all copies thereof are proprietary to Provider and its title or license thereto remains in Provider. All applicable rights to patents, copyrights, trademarks and trade secrets in the licensed software operating systems are and shall remain in Provider. Client shall not sell, transfer, publish, disclose, display or otherwise make available to others any licensed software operating system or copies thereof. Client agrees to secure and protect each program, software product and copies thereof in a manner consistent with Provider's rights herein. The software and operating systems employed by the Provider and licensed to the Client together with any improvements therein or any extensions thereof and all copies thereof are proprietary to the Client and its title or license thereto remains with the Client, unless agreement to the contrary has been made by Client with Provider. Provider shall not willfully sell, transfer, publish, disclose, display, or otherwise make available to others any licensed software, operating system, or copies thereof, of products licensed to Client, without the Client's written permission, and shall take reasonable preventive measures to safeguard the software. In - -------------------------------------------------------------------------------- Page 22 - -------------------------------------------------------------------------------- the event that Provider or its agents divulge such information, Provider's financial responsibility shall be limited to the payment of all attorneys' fees of the other in obtaining injunctive relief. Client certifies that all hardware, software, and application programs operated by the Provider for the exclusive use of Client or Client's affiliates are licensed to Client and that Client will indemnify, defend, and hold harmless Provider, its directors, officers, employees, agents, and affiliates for any liability arising out of these services provided by Provider. 18.0 EMPLOYEE RECRUITMENT: For the period of this Agreement, and the first six (6) months immediately following the termination of this Agreement or any extension thereof, neither party shall recruit or offer employment opportunities, directly or indirectly, to any member of the other party's staff without the prior written approval of the other party. 19.0 GENERAL: This Agreement and performance hereunder shall be governed by the laws of the State of Washington. No action, regardless of form, arising out of this Agreement may be brought by the either party more than two (2) years after the cause of action has arisen. The waiver or failure of either party to exercise in any respect any right provided for herein shall not be deemed a waiver of any further right hereunder. Captions used herein are for convenience only and shall not be deemed a part of this Agreement nor shall they be used to construe any of the provisions hereof. Performance of any obligation required of a party hereunder may be waived only by a written waiver signed by the other party, which waiver shall be effective only with respect to the specific obligation described therein. In the event that any provision hereof is found invalid or unenforceable, the remainder of this Agreement shall remain valid and enforceable according to its terms. This Agreement shall be binding upon and inure to the benefit of each of the parties hereto and their representatives and permitted assigns. Nothing contained in this Agreement shall be construed as creating a joint venture, partnership or employment relationship among the parties hereto nor shall any party have the right, power or authority to create any obligation or duty, express or implied, on behalf of any other party. The execution and delivery of this Agreement shall not be deemed to confer any rights or remedies upon, nor obligate any of the parties hereto, any person or entity other than such parties. Where the context of this Agreement so requires, the masculine gender shall include the feminine or neuter, and the singular shall include the plural and the plural the singular. This Agreement may be executed in one or more counterparts each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 19.1 CONTRACT EXPIRATION: If, upon contract expiration, Client elects to contract with an outsourcing vendor other than Provider, Provider shall have the right to match any competitive bid. 19.2 AUDIT: Client will maintain books and records recording compliance with its obligations under this Agreement. Upon receipt of prior notice, Client agrees that Provider will have the right at reasonable intervals to enter upon Client's premises to audit the described books or records. 20.0 ENTIRE AGREEMENT: This Agreement, including the attached schedules and TERMS AND CONDITIONS, constitutes the entire understanding and contract between the parties hereto and supersedes any and all prior or contemporaneous oral or written communications with respect to the subject matter hereof, all of which communications are merged herein. It is expressly understood and agreed that no employee, agent or other representative of the Provider has any authority to bind Provider with regard to any statement, representation, warranty or other expression unless said statement, representation, warranty or other expression is specifically included within the express terms of this Agreement. It is further expressly understood and agreed that, there being no expectations to the contrary between the parties hereto, no usage of trade or other regular practice or method of dealing either within the computer industry or between the parties hereto shall be used to modify, interpret, supplement or alter in any manner the express terms of this Agreement or any part thereof. This Agreement shall not be modified, amended or in any way altered except by an instrument in writing signed by both of the parties hereto. - -------------------------------------------------------------------------------- Page 23
EX-23 3 EXHIBIT 23 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to incorporation by reference in the Registration Statement of Lamonts Apparel, Inc. on Form S-8 (File No. 33-68720) of our report, which contains an explanatory paragraph concerning the substantial doubt which exists about the Company's ability to continue as a going concern, dated April 16, 1996, on our audits of the consolidated financial statements of Lamonts Apparel, Inc. as of February 3, 1996, January 28, 1995, and October 29, 1994, and for the 53 weeks ended February 3, 1996, the quarter ended January 28, 1995 and the 52 weeks ended October 29, 1994 and October 30, 1993, which report is included in this Annual Report on Form 10-K. Coopers & Lybrand L.L.P. Seattle, Washington May 3, 1996 EX-27 4 EXHIBIT 27
5 1,000 YEAR FEB-03-1996 JAN-29-1995 FEB-03-1996 1,581 0 2,458 0 30,401 37,574 42,083 0 102,361 39,822 0 0 0 179 (42,735) 102,361 199,548 199,548 131,677 131,677 87,844 0 5,098 (24,875) 0 (24,875) 0 0 0 (24,875) (1.39) 0 Includes $3,254 accrual for store closure costs. Excludes Liabilities subject to settlement under reorganization proceedings. Includes operating and Administrative expenses of $71,372, depreciation and amortization of $9,232 and Reorganization expenses of $7,240.
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