-----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, NwzP3SrTedHlHZoiNsGCqMPM4IPKhMrt9LE0+ZMS4s8G3cI8C7kIewTfu8vWF019 eEOW+y2uIkXUy73Ua39Wjw== 0001047469-98-021182.txt : 19980520 0001047469-98-021182.hdr.sgml : 19980520 ACCESSION NUMBER: 0001047469-98-021182 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980519 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: 0201 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-15542 FILM NUMBER: 98627942 BUSINESS ADDRESS: STREET 1: 12413 WILLOWS ROAD N.E. CITY: KIRKLAND STATE: WA ZIP: 98034-8711 BUSINESS PHONE: 2068145461 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/A 1 10-K/A - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A (Mark One) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934: For the fiscal year ended January 31, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934: For the transition period from ________ to ________ Commission File Number 0-15542 ------------------------------ LAMONTS APPAREL, INC. (Exact Name of Registrant as Specified in its Charter) Delaware #75-2076160 (State of Incorporation) (I.R.S. Employer Identification Number) 12413 Willows Road N.E., Kirkland, WA 98034 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (425) 814-5700 (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: Class A Common Stock, par value $0.01 per share Class A Warrants to purchase Class A Common Stock Class B Warrants to purchase Class A Common Stock Class C Warrants to purchase Class A Common Stock (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 15 ,1998, was approximately $7,944,039 (based on the average bid and ask price of such stock on such date). Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13, or 15 (d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a Court. Yes X No --- --- As of April 15, 1998, there were 9,000,000 shares of the Registrant's Class A Common Stock, par value $0.01 per share, outstanding and 10 shares of Registrant's Class B Common Stock, par value $0.01 per share, outstanding. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 1 EXPLANATORY NOTE The principal purpose of this amendment is to amend pro forma loss per share data and to revise the New Accounting Standards contained in Note 2 and Note 3, respectively, to the Consolidated Financial Statements under the caption "Item 8. Financial Statements and Supplementary Data" on the Lamonts Apparel, Inc. Form 10-K for the fiscal year ended January 31, 1998. Such Item 8 has been amended and restated in its entirety herein. 2 Item 8. Financial Statements and Supplementary data. LAMONT APPARAL INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE --------- Report of Independent Accountants.......................................................................... 4 Consolidated Balance Sheets--January 31, 1998 and February 1, 1997......................................... 5 Consolidated Statements of Operations for the 52 weeks ended January 31, 1998, 52 weeks ended February 1, 1997 and 53 weeks ended February 3, 1996................................................................. 6 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the 52 weeks ended January 31, 1998, 52 weeks ended February 1, 1997 and 53 weeks ended February 3, 1996................................ 7 Consolidated Statements of Cash Flows for the 52 weeks ended January 31, 1998, 52 weeks ended February 1, 1997 and 53 weeks ended February 3, 1996................................................................. 8 Notes to Consolidated Financial Statements................................................................. 9
3 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. (the "Company") as of January 31, 1998 and February 1, 1997 and the related consolidated statements of operations, changes in stockholders' equity (deficit) and cash flows for the 52 weeks ended January 31, 1998 and February 1, 1997 and the 53 weeks ended February 3, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 the Company as of January 31, 1998 and February 1, 1997 and the consolidated results of operations and cash flows for the 52 weeks ended January 31, 1998 and February 1, 1997 and the 53 weeks ended February 3, 1996, in conformity with generally accepted accounting principles. On January 31, 1998, the Company emerged from bankruptcy. As discussed in Note 2 to the consolidated financial statements, the Company adopted "Fresh-Start Reporting" principles in accordance with the American Institute of Certified Public Accountant's Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code." As a result of the reorganization and the adoption of Fresh-Start Reporting, the Company's January 31, 1998 consolidated balance sheet is not comparable to the Company's February 1, 1997 consolidated balance sheet since it presents the consolidated financial position of the reorganized entity. COOPERS & LYBRAND L.L.P. /s/ Coopers & Lybrand L.L.P. Seattle, Washington April 10, 1998 4 LAMONTS APPAREL, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
JANUARY 31, FEBRUARY 1, 1998 1997 ----------- ----------- Current Assets: Cash........................................................................ $ 1,301 $ 2,066 Receivables................................................................. 1,703 1,595 Inventories................................................................. 38,617 37,559 Prepaid expenses and other.................................................. 1,500 1,528 Restricted cash and deposits................................................ 1,543 714 ----------- ----------- Total current assets.................................................... 44,664 43,462 Property and equipment........................................................ 42,494 30,653 Leasehold interests........................................................... 8,281 3,477 Excess of cost over net assets acquired....................................... -- 11,591 Deferred financing costs...................................................... -- 1,989 Restricted cash and deposits.................................................. 1,130 1,142 Other assets.................................................................. 899 958 ----------- ----------- Total assets............................................................ $ 97,468 $ 93,272 ----------- ----------- ----------- ----------- Liabilities not subject to settlement under reorganization proceedings: Current Liabilities: Borrowings under the Revolver............................................. $ 18,967 $ -- Borrowings under DIP Facility............................................. -- 23,141 Accounts payable.......................................................... 15,186 13,578 Accrued payroll and related costs......................................... 3,106 2,285 Accrued taxes............................................................. 865 812 Accrued interest.......................................................... 1,007 616 Accrued store closure costs............................................... -- 1,050 Accrued reorganization expenses........................................... 2,497 1,165 Other accrued expenses.................................................... 6,804 4,160 Current maturities of long-term debt...................................... 403 -- Current maturities of obligations under capital leases.................... 1,454 12 ----------- ----------- Total current liabilities............................................... 50,289 46,819 Long-term debt, net of current maturities................................... 10,536 -- Obligations under capital leases, net of current maturities................. 13,835 2,846 Other....................................................................... 2,852 302 ----------- ----------- Total liabilities not subject to settlement under reorganization proceedings........................................................... 77,512 49,967 Liabilities subject to settlement under reorganization proceedings: Related party............................................................... -- 67,600 Other....................................................................... -- 35,258 ----------- ----------- Total liabilities subject to settlement under reorganization............ -- 102,858 Commitments and contingencies Stockholders' equity (deficit): Preferred stock, $.01 par value, 10,000,000 shares authorized; no shares issued and outstanding.................................................. -- -- Common stock, $.01 par value; 40,000,000 shares and 40,000,000 shares authorized; 9,000,000 and 17,900,053 shares issued and outstanding, respectively............................................................ 90 179 Additional paid-in-capital................................................ 19,866 62,972 Accumulated deficit....................................................... -- (122,704) ----------- ----------- Total stockholders' equity (deficit).................................... 19,956 (59,553) ----------- ----------- Total liabilities and stockholders' equity (deficit).................. $ 97,468 $ 93,272 ----------- ----------- ----------- -----------
The accompanying notes are an integral part of the consolidated financial statements. 5 LAMONTS APPAREL, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
52 WEEKS 52 WEEKS 53 WEEKS ENDED ENDED ENDED JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 ----------- ----------- ----------- Revenues................................................................... $ 201,623 $ 203,602 $ 199,548 Cost of merchandise sold................................................... 131,700 130,480 131,677 ----------- ----------- ----------- Gross profit......................................................... 69,923 73,122 67,871 ----------- ----------- ----------- Operating and administrative expenses...................................... 67,844 67,173 71,372 Depreciation and amortization.............................................. 7,141 7,999 9,232 Impairment of long-lived assets............................................ -- 4,170 -- ----------- ----------- ----------- Operating costs...................................................... 74,985 79,342 80,604 ----------- ----------- ----------- Loss from operations before other income (expense), reorganization expenses, fresh-start revaluation, and extraordinary item................ (5,062) (6,220) (12,733) Other income (expense): Interest expense: Cash (contractual interest of $13.1 million, $13.7 million and $13.8 million, respectively)............................................... (5,900) (5,053) (5,098) Other income (expense)................................................... 8 12 196 ----------- ----------- ----------- Loss from operations before reorganization expenses, fresh-start revaluation, and extraordinary item...................................... (10,954) (11,261) (17,635) Reorganization expenses.................................................... (5,995) (6,037) (7,240) Fresh-start revaluation.................................................... 70,495 -- -- ----------- ----------- ----------- Income (loss) before extraordinary item.................................... 53,546 (17,298) (24,875) Extraordinary item--gain on debt discharge................................. 69,158 -- -- ----------- ----------- ----------- Net income (loss).......................................................... $ 122,704 $ (17,298) $ (24,875) ----------- ----------- ----------- ----------- ----------- ----------- Basic and Diluted Earnings (Loss) per Common Share Income (loss) from operations before extraordinary item.................. $ 3.00 $ (0.97) $ (1.39) Extraordinary Item--gain on debt discharge............................... $ 3.86 $ 0.00 $ 0.00 Net income (loss)........................................................ $ 6.86 $ (0.97) $ (1.39)
The accompanying notes are an integral part of the consolidated financial statements. 6 LAMONTS APPAREL, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) (DOLLARS IN THOUSANDS)
MINIMUM ADDITIONAL PENSION NUMBER OF COMMON PAID-IN LIABILITY ACCUMULATED SHARES STOCK CAPITAL ADJUSTMENT DEFICIT TOTAL ----------- ----------- ----------- ------------- ------------ ----------- Balance, January 28, 1995............. 17,900 $ 179 $ 62,843 $ -- $ (80,531) $ (17,509) Net loss for the 53 weeks ended February 3, 1996.................. -- -- -- -- (24,875) (24,875) Compensation expense related to stock option plan................. -- -- 78 -- -- 78 Minimum pension liability adjustment........................ -- -- -- (250) -- (250) ----------- ----- ----------- ----- ------------ ----------- Balance, February 3, 1996............. 17,900 179 62,921 (250) (105,406) (42,556) Net loss for the 52 weeks ended February 1, 1997.................. -- -- -- -- (17,298) (17,298) Compensation expense related to stock option plan................. -- -- 51 -- -- 51 Minimum pension liability adjustment........................ -- -- -- 250 -- 250 ----------- ----- ----------- ----- ------------ ----------- Balance, February 1, 1997............. 17,900 179 62,972 -- (122,704) (59,553) Net income for the 52 weeks ended January 31, 1998.................. -- -- -- -- 122,704 122,704 Minimum pension liability adjustment........................ -- -- -- (438) -- (438) Compensation expense related to stock option plan................. -- -- 38 -- -- 38 Cancellation of the former equity and elimination of accumulated deficit under the Plan............ (17,900) (179) (63,010) 438 -- (62,751) Issuance of new equity under the Plan.............................. 9,000 90 19,866 -- -- 19,956 ----------- ----- ----------- ----- ------------ ----------- Balance, January 31, 1998............. 9,000 $ 90 $ 19,866 $ -- $ -- $ 19,956 ----------- ----- ----------- ----- ------------ ----------- ----------- ----- ----------- ----- ------------ -----------
The accompanying notes are an integral part of the consolidated financial statements. 7 LAMONTS APPAREL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 --------------- --------------- --------------- Cash flows from operating activities: Net income (loss).............................................. $ 122,704 $ (17,298) $ (24,875) Adjustments to reconcile net income (loss) to net cash used by operating activities before reorganization items: Depreciation and amortization................................ 7,141 7,999 9,232 Impairment of long-lived assets.............................. -- 4,170 -- Gain on sale of fixed asset.................................. (177) -- -- Non-cash interest, including interest paid-in-kind and amortization of debt discount.............................. 321 -- -- Stock option expense......................................... 38 51 78 Net change in current assets and liabilities................. 3,900 (2,621) 4,895 Net realizable value adjustment to inventory................. -- -- 500 Decrease (increase) in long term restricted cash and deposits................................................... 11 137 (1,022) Other........................................................ (1,103) (562) (1,425) Reorganization expenses...................................... 5,995 6,037 7,240 Fresh-start revaluation...................................... (70,495) -- -- Gain on debt discharge....................................... (69,158) -- -- --------------- --------------- --------------- Net cash used by operating activities before reorganization expenses................................................. (823) (2,087) (5,377) --------------- --------------- --------------- Operating cash flows used by reorganization expenses: Payment for professional fees or other expenses related to the Chapter 11 proceedings................................. (4,539) (3,241) (2,475) --------------- --------------- --------------- Net cash used by operating activities...................... (5,362) (5,328) (7,852) --------------- --------------- --------------- Cash flows from investing activities: Capital expenditures........................................... (1,507) (699) (1,343) Proceeds from sale of assets................................... 39 4,459 -- Other.......................................................... 257 90 (448) --------------- --------------- --------------- Net cash provided (used) by investing activities........... (1,211) 3,850 (1,791) --------------- --------------- --------------- Cash flows from financing activities: Net post-petition (payments) borrowings under Revolver......... (4,174) 2,807 4,496 Proceeds from Term Loan........................................ 10,000 -- -- Assumption of liabilities subject to compromise................ 939 -- -- Principal payments on obligations under capital leases......... (900) (778) (1,183) Other.......................................................... (57) (66) (61) --------------- --------------- --------------- Net cash provided by financing activities.................. 5,808 1,963 3,252 --------------- --------------- --------------- Net increase (decrease) in cash.................................. (765) 485 (6,391) Cash, beginning of period........................................ 2,066 1,581 7,972 --------------- --------------- --------------- Cash, end of period.............................................. $ 1,301 $ 2,066 $ 1,581 --------------- --------------- --------------- --------------- --------------- --------------- Reconciliation of net change in current assets and liabilities: (Increase) decrease in accounts receivable..................... $ (154) $ 818 $ 692 (Increase) decrease in inventory (excluding adjustment for net realizable value)............................................ 118 (7,158) (2,692) (Increase) decrease in prepaid expenses and other.............. (64) 548 2,018 Increase (decrease) in accounts payable........................ 1,607 5,161 6,663 Increase (decrease) in accrued payroll and related costs....... 821 (111) (517) Increase (decrease) in accrued taxes........................... 53 (9) 288 Increase (decrease) in accrued interest........................ 547 409 (103) Increase (decrease) in accrued store closure costs............. (1,050) (2,204) 303 Increase (decrease) in other accrued expenses.................. 2,022 (75) (1,757) --------------- --------------- --------------- $ 3,900 $ (2,621) $ 4,895 --------------- --------------- --------------- --------------- --------------- --------------- Supplemental Cash Flow Information: Cash interest payments made.................................... $ 4,824 $ 4,783 $ 5,201 Non-cash transactions: Capital lease relating to sale--leaseback of Alderwood store...................................................... -- 2,835 -- Capital leases relating to equipment......................... 759
The accompanying notes are an integral part of the consolidated financial statements. 8 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JANUARY 31, 1998 NOTE 1--REORGANIZATION AND EMERGENCE FROM CHAPTER 11 Lamonts Apparel, Inc. (the "Company" or "Lamonts") is a Northwest-based regional retailer with 38 stores in five states. The Company offers an assortment of moderately priced fashion apparel, and home and fashion accessories at competitive prices for the entire family. On January 6, 1995 ("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 "Bankruptcy Court") for the Western District of Washington at Seattle. The Company's Modified and Restated Plan of Reorganization (the "Plan") was confirmed by the Bankruptcy Court on December 18, 1997 and became effective on January 31, 1998 ("Plan Effective Date"). The overall purpose of the Plan was to (i) alter the debt and capital structure of Lamonts to permit it to emerge from Chapter 11 and (ii) settle, compromise or otherwise dispose of certain claims on terms that Lamonts considered to be reasonable. The Plan resulted in an approximate $90 million net reduction in the total indebtedness and liabilities subject to reorganization of the Company. The Plan provided generally for, among other things, payment in full by the Company of administrative expenses, certain other priority claims and secured claims, other than the claim of BankBoston, N.A. ("BankBoston"), the agent and lender under the Company's bank credit facility (the "BankBoston Facility"), (which was left unimpaired), cancellation of certain indebtedness in exchange for new equity securities of the Company, the discharge of certain other pre-petition claims, the cancellation and/or rejection of existing equity securities of the Company in exchange for new equity securities of the Company, the assumption or rejection of executory contracts and unexpired leases and the designation of a new board of directors. In addition, the Plan provided that the Company assume all of the obligations under the BankBoston Facility, including any unpaid accrued interest, fees, costs and charges. Pursuant to the Plan: (a) an aggregate of 8,800,000 shares of Class A Common Stock, par value $0.01 per share, of the Company ("Common Stock"), 2,203,320 Class A Warrants to purchase Common Stock ("Class A Warrants") and 700,237 Class B Warrants to purchase Common Stock ("Class B Warrants") have been or will be issued to the holders of pre-petition claims against Lamonts; (b) an aggregate of 200,000 shares of Common Stock and 100,000 Class B Warrants were issued to the former holders of Lamonts common stock (the "Old Common Stock"); and (c) 228,639 Class C Warrants to purchase Common Stock ("Class C Warrants") and 10 shares of Class B Common Stock, par value $.01 per share, of the Company ("Class B Common Stock"), were issued to Specialty Investment I LLC (the "Surety"). All such securities were or will be issued in exchange for various pre-petition claims and interests allowed by the Bankruptcy Court, except those issued to the Surety which were issued as required under the BankBoston Facility in consideration of the guaranty made by the Surety of a $10 million term loan made to the Company prior to the Plan Effective Date and in partial exchange for its administrative claim. All shares of Old Common Stock were canceled pursuant to the Plan. As a result, holders of Old Common Stock lost substantially all of their investment in the Company. 9 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 1--REORGANIZATION AND EMERGENCE FROM CHAPTER 11 (CONTINUED) In addition, pursuant to the Plan, the Company granted options ("Stock Options") for the purchase of Common Stock as follows: (i) Stock Options exercisable for the purchase of 1,000,000 shares of Common Stock with an exercise price of $1.00 per share ("Base Options"); (ii) to prevent dilution resulting from the issuance of the Class A Warrants, Stock Options exercisable for the purchase of an additional 244,813 shares of Common Stock with an exercise price of $0.01 per share, exercisable only on or after the date on which the Class A Warrants become exercisable ("Protective A Options"); and (iii) to prevent dilution resulting from the issuance of the Class B Warrants, Stock Options exercisable for the purchase of an additional 88,915 shares of Common Stock with an exercise price of $0.01 per share, exercisable only on or after the date on which the Class B Warrants become exercisable ("Protective B Options" and, together with the Protective A Options, the "Protective Options"). The number of Protective A Options and Protective B Options that may be exercised is limited under certain circumstances. (See Note 12.) In addition, to prevent dilution resulting from the issuance of the Class C Warrants to the Surety, the holders of Stock Options issued on the Plan Effective Date were issued Class C Warrants exercisable for the purchase of an aggregate of 381,060 shares of Common Stock (355,656 shares with an exercise price of $1.25 per share and for an aggregate of 25,404 shares with an exercise price of $.01 per share). (See Note 12.) As compensation to Gordian Group, L.P. ("Gordian") for investment banking services rendered to the Company during the Company's Chapter 11 case, Gordian will be issued, on the 120th day following the Plan Effective Date, warrants (the "Gordian Warrants") exercisable for a number of shares of Common Stock having a value equal to $200,000. See Note 12 for a description of the terms of the Gordian Warrants. In connection with the Plan, the Company entered into a Grant of Registration Rights in favor of certain holders of the Warrants and the Common Stock, pursuant to which, subject to certain exceptions, the Company agreed to file and cause to remain effective a Registration Statement under the Securities Act of 1933, as amended, covering certain of the securities distributed under the Plan. See Note 13 for a description of such registration rights. Also in connection with the Plan, Alan R. Schlesinger and Loren R. Rothschild entered into new employment agreements with the Company which amended and restated the terms of their existing employment agreements. The Plan was filed with the Bankruptcy Court on October 31, 1997. The Disclosure Statement relating thereto, which was filed with the Bankruptcy Court on October 31, 1997 and amended on November 21, 1997, was approved by the Bankruptcy Court on November 24, 1997. The Plan was confirmed by the Bankruptcy Court on December 18, 1997 and became effective on January 31, 1998. With the exception of payments contemplated by the Plan to be made subsequent to the Plan Effective Date, all payments and distributions required under the Plan to be made in respect of pre- 10 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 1--REORGANIZATION AND EMERGENCE FROM CHAPTER 11 (CONTINUED) petition liabilities have been made or otherwise provided for, and, other than as contemplated by the Plan, no further recourse to the Company may be had by any person with respect of such pre-petition claims. The following sets forth the nature and amount of pre-petition liabilities subject to settlement under reorganization proceedings:
PRE-FRESH-START JANUARY 31, FEBRUARY 1, 1998 1997 --------------- ----------- (DOLLARS IN THOUSANDS) Accounts payable and accrued liabilities........................ $ 22,664 $ 23,121 Capital Lease obligations....................................... 10,313 11,216 10 1/4% Notes (including pre-petition accrued interest)......... 67,600 67,600 13 1/2% Notes (including pre-petition accrued interest)......... 838 838 Notes Payable................................................... 31 83 --------------- ----------- $ 101,446 $ 102,858 --------------- ----------- --------------- -----------
Costs associated with the reorganization of the Company were expensed as incurred. Such costs include certain expenses of the committees that represented Lamonts' unsecured trade creditors, bondholders and equity holders (the "Committees"). The amounts charged to reorganization expense by the Company are as follows:
FISCAL FISCAL FISCAL 1997 1996 1995 --------- --------- --------- (DOLLARS IN THOUSANDS) Write-off of property and equipment, net of obligations under capital leases................................................. $ 2,362 Professional fees................................................ $ 2,344 $ 2,128 2,479 Lease related costs.............................................. 196 1,036 925 Payroll related costs............................................ 1,924 411 411 Store closure costs, administrative and other.................... 1,531 2,462 1,063 --------- --------- --------- $ 5,995 $ 6,037 $ 7,240 --------- --------- --------- --------- --------- ---------
NOTE 2--BASIS OF PRESENTATION AND FRESH-START REPORTING Pursuant to the guidance provided by the American Institute of Certified Public Accountants in Statement 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7") (also referred to as "Fresh-Start Reporting"), the Company adopted Fresh-Start Reporting for financial reporting purposes as of January 31, 1998. Under Fresh-Start Reporting, the reorganization value of the Company was allocated to the reorganized Company's net assets on the basis of the purchase method of accounting. This method required the adjustment of the Company's assets and liabilities to reflect their estimated fair value at the Plan Effective Date. In accordance with SOP 90-7, the Company's reorganization value was determined as of the Plan Effective Date. The reorganization value was derived by an independent public accounting firm using various valuation methods, including discounted cash flow analyses (utilizing the Company's projections), 11 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 2--BASIS OF PRESENTATION AND FRESH-START REPORTING (CONTINUED) analyses of the market values of other publicly traded companies whose businesses are reasonably comparable, and analyses of the present value of the Company's equity. The reorganization value was determined to be the fair value of the Company before considering liabilities and approximated the amount a willing buyer would have paid for the assets of the Company immediately after restructuring. The primary methodology used to determine the reorganization value was a weighted average of the historical market guideline method, projected guideline method, and the income approach using the discounted cash flow method. Under the income approach, the terminal value was determined using the discounted cash flow projected for the period from February 1, 1998 through February 3, 2002, using a discount rate of 14.1% and a long-term growth rate of 3.5%, with a capitalization rate at 10.6%. The adjustments to reflect the consummation of the Plan and adoption of Fresh-Start Reporting, including the adjustment to restate assets and liabilities at their respective estimated fair values, the gain on debt discharge for liabilities subject to settlement under reorganization proceedings of $69.2 million, and the elimination of $122.7 million of the prior accumulated deficit, are reflected in the accompanying consolidated financial statements at January 31, 1998. Additionally, a black line is shown to separate the January 31, 1998 consolidated balance sheet from the prior year since it is not prepared on a comparable basis. The effect of the reorganization on the Company's consolidated balance sheet as of January 31, 1998 is as follows:
PRE-FRESH-START FRESH-START BALANCE SHEET BALANCE SHEET JANUARY 31, DEBT FRESH-START JANUARY 31, 1998 DISCHARGE REPORTING 1998 --------------- --------- ----------- ------------- (DOLLARS IN THOUSANDS) Current Assets: Cash............................................ $ 1,301 $ 1,301 Receivables..................................... 1,703 1,703 Inventories..................................... 37,441 $ 1,176(a) 8,617 Prepaid expenses and other...................... 1,500 1,500 Restricted cash and deposits.................... 1,543 1,543 --------------- --------- ----------- ------------- Total current assets........................ 43,488 -- 1,176 44,664 Property and equipment............................ 27,255 15,239(b) 42,494 Leasehold interests............................... 3,049 5,232(b) 8,281 Excess of cost over net assets acquired........... 11,266 (11,266)(c) -- Deferred financing costs.......................... 1,266 $ (1,266)(d) -- Restricted cash and deposits...................... 1,130 1,130 Other assets...................................... 899 899 --------------- --------- ----------- ------------- Total assets................................ $ 88,353 $ (1,266) $ 10,381 $97,468 --------------- --------- ----------- ------------- --------------- --------- ----------- -------------
12 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 2--BASIS OF PRESENTATION AND FRESH-START REPORTING (CONTINUED)
PRE-FRESH-START FRESH-START BALANCE SHEET BALANCE SHEET JANUARY 31, DEBT FRESH-START JANUARY 31, 1998 DISCHARGE REPORTING 1998 --------------- --------- ----------- ------------- (DOLLARS IN THOUSANDS) Liabilities not subject to settlement under reorganization proceedings: Current Liabilities: Borrowings under the Revolver................. $ 18,967 $18,967 Accounts payable.............................. 15,186 15,186 Accrued payroll and related costs............. 3,106 3,106 Accrued taxes................................. 865 865 Accrued interest.............................. 1,163 $ (156)(e) 1,007 Accrued reorganization expenses............... 2,497 2,497 Other accrued expenses........................ 6,442 $ 362(f) 6,804 Current maturities of long-term debt.......... 403 403 Current maturities of obligations under capital leases.............................. 177 1,277(e) 1,454 --------------- --------- ----------- ------------- Total current liabilities................... 48,806 362 1,121 50,289 Long-term debt, net of current maturities....... 10,536 10,536 Obligations under capital leases, net of current maturities.................................... 3,444 10,391(e) 13,835 Other........................................... 1,023 835(f) 994(g) 2,852 --------------- --------- ----------- ------------- Total liabilities not subject to settlement under reorganization proceedings.......... 63,809 1,197 12,506 77,512 --------------- --------- ----------- ------------- Liabilities subject to settlement under reorganization proceedings: Related party................................... 67,600 (67,600)(f) -- Other........................................... 33,846 (23,533)(f) (10,313)(e) -- --------------- --------- ----------- ------------- Total liabilities subject to settlement under reorganization proceedings.......... 101,446 (91,133) (10,313) -- --------------- --------- ----------- ------------- Commitments and contingencies Stockholders' equity (deficit): Preferred stock, $.01 par value, 10,000,000 shares authorized, no shares issued or outstanding................................... -- -- Common stock, $.01 par value; 40,000,000 shares authorized, 9,000,000 shares issued and outstanding................................... 179 88(h) (177)(h) 90 Additional paid-in-capital...................... 63,010 19,424(h) (62,568)(h) 19,866 Minimum pension liability adjustment............ (438) 438(g) -- Accumulated deficit............................. (139,653) 69,158(i) 70,495(j) -- --------------- --------- ----------- ------------- Total stockholders' equity (deficit).......... (76,902) 88,670 8,188 19,956 --------------- --------- ----------- ------------- Total liabilities and stockholders' equity (deficit)................................. $ 88,353 $ (1,266) $ 10,381 $97,468 --------------- --------- ----------- ------------- --------------- --------- ----------- -------------
13 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 2--BASIS OF PRESENTATION AND FRESH-START REPORTING (CONTINUED) - ------------------------ (a) To adjust inventories to fair value. (b) To allocate fair value to identifiable net assets in accordance with purchase method accounting as follows: property and equipment, $15.2 million; and leasehold interests, $5.2 million. (c) To write off the balance of excess of cost over net assets acquired. (d) To write off the balance of deferred financing costs related to debt discharged. (e) To reclassify certain liabilities subject to settlement under reorganization proceedings, where the obligation was assumed. (f) To record the discharge of liabilities subject to settlement under reorganization proceedings, and reclassify pre-petition priority claims and cure amounts. (g) To restate liabilities, including pension liabilities at fair value. (h) To record cancellation of historical Stockholders' equity (deficit) and record reorganization value of $20.0 million, $0.1 million of which is classified as Class A Common Stock, $.01 par value. The remaining $19.9 million is classified as additional paid-in-capital. (i) To record the extraordinary item--gain on debt discharge. (j) To recognize the value of the reorganized Company. 14 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 2--BASIS OF PRESENTATION AND FRESH-START REPORTING (CONTINUED) PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) The following unaudited pro forma consolidated statement of operations reflects the financial results of the Company during Fiscal 1997 as if the Plan had been consummated on February 2, 1997. The pro forma information does not purport to be indicative of the results of operations that would actually have been reported had such transactions actually been consummated on such date or of the results of operations that may be reported by the Company in the future.
AS REPORTED PRO FORMA 52 WEEKS ENDED 52 WEEKS ENDED JANUARY 31, JANUARY 31, 1998 ADJUSTMENTS 1998 -------------- ----------- -------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Total revenue................................................ $ 201,623 $ 201,623 (1)(3) Total cost of merchandise sold, operating expenses, and (4)(5) depreciation and amortization and other income (expense)... 212,577 $ 470(6)(7) 212,107 -------------- -------------- Loss from operations before reorganization expenses, fresh-start revaluation and extraordinary item............. (10,954) (10,484) -------------- -------------- Reorganization expenses...................................... (5,995) 5,995(2) -- Fresh-start revaluation...................................... 70,495 (70,495)(8) -- -------------- -------------- Income (loss) before extraordinary item...................... 53,546 (10,484) Extraordinary item........................................... 69,158 (69,158)(8) -- -------------- ----------- -------------- Net income (loss)............................................ $ 122,704 $(133,188) $ (10,484) -------------- ----------- -------------- -------------- ----------- -------------- Basic and diluted loss per share............................. $ (1.16) -------------- -------------- Weighted average number of shares............................ 9,000,000(9)
- ------------------------ The unaudited pro forma statement of operations has been adjusted to reflect the following: (1) An increase in depreciation and amortization expense of approximately $1.0 million due to the change in the fair value of identifiable assets, property and equipment and leasehold interests. (2) The elimination of approximately $6.0 million in reorganization costs. (3) The elimination of approximately $0.4 million for amortization of excess of cost over net assets acquired. (4) The elimination of approximately $0.7 million for amortization of deferred financing fees associated with outstanding warrants to purchase Old Common Stock which were canceled on the Plan Effective Date. (5) The amortization of approximately $0.5 million in facility fees in respect of the working capital facility. (6) The reduction in rent expense of approximately $0.2 million for several stores where the landlord has agreed to concessions upon assumption of the lease. (7) An increase in interest expense of $0.1 million associated with debt arising from deferred priority tax claims and deferred cure payments. (8) The elimination of Fresh-Start Reporting adjustments totaling approximately $70.5 million and extraordinary item--gain on debt discharge of $69.2 million. 15 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 2--BASIS OF PRESENTATION AND FRESH-START REPORTING (CONTINUED) (9) Pursuant to the Plan, the Company issued 9,000,000 shares of Common Stock and granted warrants and options to purchase Common Stock. Such warrants and options have not been included in the calculation of net loss per common share because the effect of assuming their exercise would be anti-dilutive. NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES FRESH-START REPORTING The Company adopted SOP 90-7, or Fresh-Start Reporting, for financial reporting purposes as of January 31, 1998. Under Fresh-Start Reporting, the Company's assets and liabilities were adjusted to reflect their fair values at the Plan Effective Date. (See 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. 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 to enhance the comparability of the Company's results of operations with other apparel retailers. CASH EQUIVALENTS The Company considers all short term investments with original maturities of three months or less to be cash equivalents. INVENTORIES Inventories are valued at the lower of cost (using the retail last-in, first-out ("LIFO") method) or net realizable value. As part of Fresh-Start Reporting (See Note 2), the LIFO reserve was written off and the base year inventory was restated to the January 31, 1998 value. The carrying value of the Company's inventories as of February 1, 1997 and February 3, 1996 exceeded the weighted average cost of inventories by $1.8 million and $2.1 million, respectively. RESTRICTED CASH AND DEPOSITS Current restricted cash and deposits include amounts deposited in restricted operating accounts for the purpose of ensuring payment of employee payroll, utilities, and certain taxes, including retail sales taxes. Noncurrent restricted cash and deposits include $1.0 million as of January 31, 1998 and $1.0 million as of February 1, 1997 held as a deposit by the Company's buying service for the annual usage of international letters of credit. 16 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PROPERTY AND EQUIPMENT The Company's adoption of Fresh-Start Reporting as of January 31, 1998, required property and equipment to be adjusted to fair value. In prior periods, property and equipment was recorded at cost less accumulated depreciation. The adoption of Fresh-Start Reporting did not result in any material change in the remaining useful lives of the Company's property and equipment. Depreciation is determined using the remaining useful lives based on the following original useful lives: buildings and improvements, 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 (or restated value) 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 improvements 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 The excess of the fair rental value of leased facilities under operating leases over the respective contractual rents was recorded as an asset at its discounted net present value and is being amortized on a straight-line basis over the respective remaining lease terms. During Fiscal 1996, the Company wrote off approximately $0.6 million of leasehold interests due to the adoption of SFAS No. 121 (defined below). The accumulated amortization of leasehold interests approximated $1.7 million and $1.4 million at February 1, 1997 and February 3, 1996, respectively. The adoption of Fresh-Start Reporting did not result in any significant change in the remaining useful lives of the Company's leasehold interests. (See Note 2.) IMPAIRMENT OF LONG-LIVED ASSETS During the 52 weeks ended February 1, 1997 ("Fiscal 1996"), the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). SFAS 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. With the adoption of SFAS No. 121, assets are grouped and evaluated at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets. 17 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Company has identified this lowest level as individual stores. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the estimated future cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount of the impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is measured by discounting expected future cash flows at a rate commensurate with the Company's borrowing rate. During Fiscal 1996, the Company recognized a non-cash impairment loss of $4.2 million. Of the total impairment loss, $2.3 million represented impairment of property and equipment, $1.3 million related to excess of cost over net assets acquired and $0.6 million pertained to leasehold interests. Considerable management judgment is necessary to estimate discounted future cash flows. Accordingly, actual results could vary significantly from such estimates. EXCESS OF COST OVER NET ASSETS ACQUIRED At January 31, 1998, the excess of cost over net assets acquired, net of accumulated amortization of $11.3 million was written off under Fresh-Start Reporting. Prior to the Plan Effective Date, the excess of cost over the fair value of net assets acquired was being amortized on a straight-line basis over 40 years. The accumulated amortization approximated $1.4 million and $1.2 million at February 1, 1997 and February 3, 1996, respectively. During Fiscal 1996, the Company wrote off approximately $1.3 million of the excess of cost over net assets acquired due to the adoption of SFAS No. 121. DEFERRED FINANCING COSTS Costs incurred in connection with the issuance of the Company's debt were amortized using the effective interest method over the term of the related indebtedness. In connection with an amendment to the Company's 10 1/4% Senior Subordinated Notes due 1999 (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 Old Common Stock to the holders of the 10 1/4% Notes. The issuance of the 1994 Warrants resulted in an increase of $2.2 million in deferred financing costs and additional paid-in capital. At January 31, 1998, deferred financing costs, net of accumulated amortization of $1.3 million related to the 10 1/4% Notes and 1994 Warrants was written off and included in the gain on debt discharge. The accumulated amortization of deferred financing costs approximated $2.8 million and $2.1 million at February 1, 1997 and February 3, 1996, respectively. Financing costs incurred by the Company in connection with the BankBoston Facility are amortized using the effective interest method over the term of the related indebtedness. These costs are included in prepaid expenses and other (current) and other assets (noncurrent). ADVERTISING COSTS The Company expenses the production costs of advertising as the associated advertisement is run. Advertising expense approximated $13.2 million, $13.0 million and $12.6 million during the 52 weeks 18 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ended January 31, 1998 ("Fiscal 1997"), Fiscal 1996, and the 53 weeks ended February 3, 1996 ("Fiscal 1995"), respectively. NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997 and requires restatement of earlier periods presented. Management has determined that the requirements of SFAS No. 130 do not impact the Company's financial position and results of operations. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes annual and interim reporting standards for a Company's business segments and related disclosures about its products, services, geographic areas and major customers. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997, and requires the restatement of comparative information for earlier periods. Management has determined that the requirements of SFAS No. 131 do not impact the Company's financial position and results of operation. In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS No. 132"). SFAS 132 significantly changes current financial statement disclosure requirements from those that were required under Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions," Statement of Financial Accounting Standards No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 132 is effective for fiscal years beginning after December 15, 1997, with earlier application encouraged. Management has determined that the requirements of SFAS No. 132 have no material impact on the Company's financial position and results of operations. USE OF ESTIMATES The preparation of consolidated 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 consolidated 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 consolidated financial statements have been reclassified to conform with the current year presentation. 19 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 4--EARNINGS (LOSS) PER COMMON SHARE The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" beginning with its fourth quarter of Fiscal 1997. All prior period earnings per common share data have been restated to conform to the provisions of this statement. Basic earnings per common share is computed using the weighted average number of shares outstanding. Diluted earnings per common share is computed using the weighted average number of shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock. Options to purchase 1.6 million shares of Common Stock in Fiscal 1997 were not included in the computation of diluted earnings per common share because the option price was greater than the average market price of the Common Stock. (See Note 12.) Options to purchase 0.3 million shares and 0.4 million shares of common stock, with an exercise price of $0.01 per share, were not included in Fiscal 1996 and Fiscal 1995, respectively, as they were antidilutive. Net loss per common share is computed by dividing net loss by the weighted average number of common shares outstanding. The weighted average number of shares outstanding for both basic and diluted calculations was 17,875,602, 17,899,906, and 17,893,675 for Fiscal 1997, Fiscal 1996, and Fiscal 1995, respectively.
EARNINGS (LOSS) PER COMMON SHARE FISCAL 1997 FISCAL 1996 FISCAL 1995 - ------------------------------------------------------------------ ----------- ----------- ----------- Basic and diluted earnings (loss) per common share Income (loss) from operations before extraordinary item......... $ 3.00 $ (0.97) $ (1.39) Extraordinary item--gain on debt discharge...................... $ 3.86 -- -- Net income (loss)............................................... $ 6.86 $ (0.97) $ (1.39) SHARES USED IN COMPUTING EARNINGS (LOSS) PER COMMON SHARE FISCAL 1997 FISCAL 1996 FISCAL 1995 - ------------------------------------------------------------------ ----------- ----------- ----------- (IN THOUSANDS) Basic and Diluted................................................. 17,876 17,900 17,894 ----------- ----------- ----------- ----------- ----------- -----------
NOTE 5--PROPERTY AND EQUIPMENT Property and equipment consists of the following:
JANUARY 31, FEBRUARY 1, 1998 1997 ----------- ----------- (DOLLARS IN THOUSANDS) Buildings and equipment under capital leases.................................. $ 20,314 $ 17,605 Buildings and improvements.................................................... 1,989 2,193 Leasehold improvements........................................................ 11,241 15,012 Furniture, fixtures, and equipment............................................ 7,625 16,699 Deferred software costs....................................................... 1,325 6,650 ----------- ----------- 42,494 58,159 Less accumulated depreciation and amortization................................ (0) (27,506) ----------- ----------- $ 42,494 $ 30,653 ----------- ----------- ----------- -----------
The adoption of Fresh-Start Reporting did not result in any significant change in the remaining useful lives of the Company's property and equipment. (See Note 2.) 20 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 5--PROPERTY AND EQUIPMENT (CONTINUED) During Fiscal 1996, the Company wrote off approximately $2.3 million of property and equipment due to the adoption of SFAS No. 121. Accumulated amortization for buildings and equipment under capital leases approximated $5.8 million and $4.6 million at February 1, 1997 and February 3, 1996, respectively. In December 1996, the Company closed a total of four stores located in Spokane, Washington, Twin Falls Idaho; Missoula, Montana and Hillsboro, Oregon. The net book value of furniture, fixtures and equipment associated with these four stores totaled $0.4 million as of February 1, 1997, and was included in the store closure reserve. (See Note 8.) On February 8, 1996, the Company entered into a sale-leaseback transaction for the land and building at the Company's Alderwood store in Seattle, Washington. The proceeds of approximately $5.0 million were used to repay borrowings under the Company's bank credit facility. The Company concurrently entered into a 20-year lease agreement with the purchaser. NOTE 6--LEASES All of the Company's stores are currently operated in facilities leased by the Company, except one which is operated in a building owned by the Company, subject to a ground lease, which expires in 2015. The Company also leases some of its equipment and its office facility. Generally, store leases provide for minimum rentals (which include payment of taxes and insurance in some cases) and contingent rentals (which are 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. Capital lease obligations were revalued under Fresh-Start Reporting. (Note 2.) Operating lease rental expense is summarized as follows:
FISCAL FISCAL FISCAL 1997 1996 1995 --------- --------- --------- (DOLLARS IN THOUSANDS) Minimum rentals............................................................ $ 6,307 $ 7,095 $ 7,300 Contingent rentals......................................................... 616 660 496 Sublease rentals........................................................... (999) (959) (803) --------- --------- --------- $ 5,924 $ 6,796 $ 6,993 --------- --------- --------- --------- --------- ---------
The Company incurred capital lease contingent rental expense of approximately $0.1 million and received sublease rentals of approximately $0.4 million during each of Fiscal 1997, Fiscal 1996 and Fiscal 1995. Capital lease interest expense was $2.0 million, $2.1 million, and $2.0 million during Fiscal 1997, Fiscal 1996, and Fiscal 1995, respectively. 21 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 6--LEASES (CONTINUED) Future minimum rental payments under capital and operating leases assumed in accordance with the Plan are summarized as follows:
CAPITAL OPERATING LEASES LEASES --------- ----------- (DOLLARS IN THOUSANDS) For the fiscal years ending: 1999............................................................................ $ 2,943 $ 6,596 2000............................................................................ 2,958 5,890 2001............................................................................ 2,850 5,101 2002............................................................................ 2,792 4,743 2003............................................................................ 1,984 4,132 Thereafter.................................................................... 11,891 21,475 --------- ----------- Total minimum rental payments............................................... 25,418 $ 47,937 ----------- ----------- Less amounts representing interest................................................ 10,128 --------- Present value of obligations...................................................... $ 15,290 --------- ---------
In addition, the Company guarantees an operating lease of a third party that operates the Company's distribution center in Kent, Washington. The current lease expires in February 2001 with one renewal option for a term of three years. Minimum monthly lease payments guaranteed by the Company pursuant to such lease approximate $21,000 per month. NOTE 7--DEBT REVOLVER AND TERM LOAN The Company entered into the Amended and Restated Debtor-in-Possession and Exit Financing Loan Agreement, dated as of September 26, 1997 (the "Loan Agreement"), between the Company and BankBoston, pursuant to which BankBoston provides Lamonts with (i) a revolving line of credit (the "Revolver") with a maximum borrowing capacity of $32 million; and (ii) a term loan in the amount of $10 million (the "Term Loan"). The Term Loan is guaranteed by the Surety. Pursuant to, and on the terms and conditions set forth in the Loan Agreement, BankBoston is obligated to make loans and advances to Lamonts on a revolving basis, and to issue letters of credit to or for the account of Lamonts (with a sublimit for letters of credit of $3 million) in an aggregate outstanding amount (net of repayments) not to exceed the lesser of $32 million and a borrowing base approximately equal to 65% (subject to adjustment and reserves as specified in the Loan Agreement) of the book value of the Company's first quality finished goods inventory held for sale. The Term Loan was fully disbursed during the Chapter 11 case and no further amounts may be borrowed thereunder. The Revolver will mature on January 31, 2000, subject to earlier maturity (including, as a result of acceleration, mandatory prepayment or otherwise) of the Term Loan. The Term Loan will mature on December 26, 1999, subject to earlier maturity (including, as a result of acceleration, mandatory prepayment or otherwise) of the Revolver. Lamonts will have the option to extend the maturity date of the Term Loan for two additional one-year periods (subject to earlier maturity upon maturity of the Revolver), on the terms and conditions set forth in the Loan Agreement and upon payment of a fee equal to 22 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 7--DEBT (CONTINUED) approximately 5% of the outstanding amount of the Term Loan on the relevant extension date. There are no extension options in respect of the Revolver. Lamonts is required to make principal payments on the Term Loan of $25,000 per month commencing on October 31, 1998. A substantial portion of the principal amount of the Term Loan is scheduled to be outstanding on the maturity date of the Term Loan. Lamonts' borrowings under both the Revolver and the Term Loan bear interest at a floating rate of 1.50% above the annual interest rate announced from time to time by BankBoston as its "base rate" (the "Base Rate") or, at Lamonts' option, at 2.75% above the rate (fully adjusted for applicable reserve requirements) based on the rate offered dollar deposits in the interbank eurodollar market (the "Eurodollar Rate"). The rates are subject to adjustment on June 1, 1998, and annually thereafter, based upon Lamonts' financial results in accordance with the criteria set forth in the Loan Agreement. The default rate of interest under the Revolver is 3% above the Base Rate. The default rate of interest under the Term Loan prior to maturity is 7% above the non-default rate otherwise applicable, and after maturity is 7% above the non-default rate applicable to loans measured by the Base Rate. For Fiscal 1997 and Fiscal 1996, the weighted average interest rate for Base Rate loans was 10.0% and 9.75%, respectively, and the weighted average interest rate for Eurodollar Rate loans was 8.45% and 8.25%, respectively. A facility fee in respect of the Revolver in the amount of $336,000 was paid on the Plan Effective Date and an additional fee in the amount of $224,000 is payable on December 31, 1998. A letter of credit fee of 1.75% per annum will be charged quarterly in arrears based on the average daily maximum aggregate amount available to be drawn by beneficiaries under all outstanding letters of credit. A commitment fee in the amount of 0.5% per annum will be payable monthly in arrears based on the average daily unused amount of the maximum Revolver facility. Both the letter of credit fee and the commitment fee are subject to adjustment on June 1, 1998, and annually thereafter, based upon Lamonts' financial results in accordance with the criteria set forth in the Loan Agreement. In addition to a closing fee in the amount of $500,000 that Lamonts paid at the closing of the Term Loan on September 26, 1997, an additional closing fee in respect of the Term Loan, calculated at the rate of 5% per annum applied to the average daily principal balance of the Term Loan outstanding after September 26, 1998, is payable at the times and in the manner set forth in the Loan Agreement. If the options to extend the maturity date of the Term Loan are exercised, extension fees calculated at the rate of 5% per annum applied to the average daily principal balance of the Term Loan outstanding during the applicable extension period will be payable at the times and in the manner set forth in the Loan Agreement. Advances by BankBoston under the BankBoston Facility are secured by all real and personal property, rights, and assets of Lamonts, including, without limitation, real estate leasehold interests, but excluding any proceeds of bankruptcy causes of action under sections 544 through 550 of the Bankruptcy Code and proceeds from a special account established for unpaid professional fees. The BankBoston Facility required that, as of the Plan Effective Date, in partial exchange for the BankBoston administrative claim against the Company's Chapter 11 estate, and in consideration for the guaranty of the Term Loan, the Surety received (i) 228,639 Class C Warrants exercisable for the purchase of an aggregate of 3,429,585 shares of Common Stock, and (ii) 10 shares of Class B Common Stock, representing all of the authorized and outstanding Class B Common Stock. (See Note 12.) 23 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 7--DEBT (CONTINUED) The Loan Agreement contains, among other things, certain covenants restricting (a) the incurrence of indebtedness, other than (i) indebtedness under the BankBoston Facility, (ii) current liabilities not incurred through the borrowing of money, (iii) indebtedness in respect of taxes or other governmental charges not yet due and payable or being contested in good faith by appropriate proceeding, (iv) scheduled indebtedness not contemplated as being discharged by the Plan, (v) certain purchase money indebtedness limited to 50% of permitted capital expenditures, and (vi) unsecured indebtedness in respect of the limited recourse arrangements under a contractual arrangement relating to the Company's charge card between the Company and Alliance Data Systems, limited to 50% of the amount of cardholders' bad debts; (b) the creation of liens, other than (i) liens securing the obligations under the BankBoston Facility, (ii) scheduled liens not contemplated as being discharged by the Plan, (iii) liens securing taxes or other governmental charges not yet due, (iv) deposits or pledges made in connection with social security obligations, (v) mechanics and similar liens less than 120 days old in respect of obligations not yet due, (vi) immaterial easements and similar encumbrances, (vii) statutory or common law landlord's liens, and (viii) purchase money security interests to the extent the indebtedness is permitted under the Loan Agreement; (c) the payment of dividends, other than (i) dividends payable solely in shares of Common Stock, (ii) distributions by a wholly-owned subsidiary of the Company to the Company and, (iii) dividends and/or distributions contemplated by the Plan; (d) mergers, consolidations or dispositions of assets, other than (i) sales of inventory in the ordinary course, (ii) dispositions of leasehold improvements in connection with permitted store closures, and (iii) dispositions of obsolete fixtures and equipment not to exceed $100,000 in any 12 month period; (e) guarantees with respect to indebtedness of other persons, other than the guarantee of lease payments in respect of the Company's distribution center in Kent, Washington; and (f) capital expenditures, other than capital expenditures of $2,500,000, $6,500,000, $5,500,000 and $1,000,000 during Fiscal 1997, Fiscal 1998, Fiscal 1999 and the period from February 6, 2000 to February 27, 2000, respectively. In addition to the foregoing, the Company is required to maintain certain inventory levels within a range of minimum and maximum book values and a debt service coverage ratio, in each case measured on a quarterly basis as set forth in the Loan Agreement. The Company is currently in compliance with all such covenants. Any necessary waivers of or amendments to such covenants require, with certain exceptions specified in the BankBoston Facility, the concurrence of both BankBoston and the Surety. The Loan Agreement contains customary Events of Default for credit facilities of its type. The Surety has the right, under specified circumstances after a default, to direct BankBoston to declare Lamonts' obligations under the BankBoston Facility immediately due and payable and to cause the exercise of certain of BankBoston's rights and remedies under the Loan Agreement. As of January 31, 1998, the Company had $19.0 million of borrowings outstanding under the Revolver (with additional borrowing capacity thereunder of $4.3 million) and $10.0 million outstanding under the Term Loan. To hedge the interest rate exposure from variable rate loans under the BankBoston Facility, on March 24, 1998, the Company entered into a forward interest rate swap letter agreement ("Swap Agreement") with BankBoston. The Swap Agreement is for a fixed rate of 5.73% plus the margin from time to time applicable to the Eurodollar Loans on a notional amount of $20 million for a period of two years beginning March 25, 1998. BankBoston has the right to terminate the Swap Agreement on March 23, 1999 upon five days prior notice. 24 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 7--DEBT (CONTINUED) CERTAIN DEFERRED PRIORITY TAX OBLIGATIONS Deferred priority tax obligations consist of $0.7 million (of which approximately $0.3 million is included in current maturities of long-term debt) in tax claims which were entitled to priority under the Bankruptcy Code. The holders of these certain deferred priority tax claims will receive deferred cash payments in principal amounts equal in the aggregate to the amount of such claims over a period not exceeding six years from the date of assessment of the tax on which the claim is based. The deferred cash payments are payable in quarterly installments beginning April 30, 1998 through October 31, 2000, together with interest at the prevailing statutory rates. DEFERRED CURE PAYMENTS Certain landlords agreed to accept approximately $0.2 million (of which approximately $0.1 million is included in current maturities of long-term debt) of deferred cure payments of lease arrearages required under the Plan subsequent to the Plan Effective Date. The deferred cash payments, including principal plus simple interest at the rate of 8% per annum, will be paid in equal principal amounts beginning January 31, 1998 through October 31, 2000. Maturities of long-term debt obligations are as follows:
(DOLLARS IN THOUSANDS) -------------------- For fiscal years ending: 1999........................................................ $ 403 2000........................................................ 10,253 2001........................................................ 283 ------- $ 10,939 ------- -------
LETTERS OF CREDIT At January 31, 1998, the Company had no outstanding trade or stand-by letters of credit. NOTE 8--STORE CLOSURE COSTS In January 1996, the Company received permission from the Bankruptcy Court to close an underperforming store and the Company conducted a going-out-of-business sale at this store through March 1996. The Company owned the building subject to a ground lease and attempted to market the building. The Company was unable to sell the building and, as a result, ownership of the building reverted to the owner of the underlying land. The write-off of the net book value of the building and leasehold improvements was included in the $3.0 million charge to reorganization expense recorded in Fiscal 1995 in connection with the closure of this store. In October 1996, the Company received approval by the Court to close four additional underperforming stores. The Company conducted going-out-of-business sales at those stores through December 1996. During Fiscal 1996, $3.1 million was charged to reorganization 25 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 8--STORE CLOSURE COSTS (CONTINUED) expense in connection with the closure of these stores. There were no store closure costs in Fiscal 1997. Store closure costs for Fiscal 1996 and Fiscal 1995 are as follows:
STORE CLOSURE COSTS -------------------- FISCAL FISCAL 1996 1995 --------- --------- (DOLLARS IN THOUSANDS) Write-off of property and equipment, net of obligations under capital leases................................................................... $ -- $ 2,362 Adjustments to inventory carrying values................................... 1,866 450 Lease termination costs.................................................... 1,036 -- Other...................................................................... 186 238 --------- --------- $ 3,088 $ 3,050 --------- --------- --------- --------- Amounts charged to reserve................................................. $ 5,292 $ 3,247 --------- --------- --------- ---------
Revenues associated with the closed stores totaled $13.9 million and $16.1 million in Fiscal 1996 and Fiscal 1995, respectively. Operating income (losses) incurred from these stores, excluding the allocation of corporate expenses, interest and reorganization expenses, were $1.4 million and $(0.9) million in Fiscal 1996 and Fiscal 1995, respectively. NOTE 9--INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS No. 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. 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. In subsequent periods, the Company may reduce the valuation allowance, provided that the possibility of utilization of the deferred tax assets is more likely than not. As defined by SFAS No. 109, any such reduction in the valuation allowance in the near future will result in a corresponding addition to paid-in-capital. 26 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 9--INCOME TAXES (CONTINUED) Significant components of the Company's deferred income tax assets and liabilities are as follows:
JANUARY 31, FEBRUARY 1, 1998 1997 ----------- ----------- (DOLLARS IN THOUSANDS) Deferred income tax assets: Net operating loss carryovers..................................... $ 13,909 $ 34,366 Accrued payroll and related costs................................. 1,190 954 Leasehold interests............................................... 889 2,667 Store closure expenses............................................ 4,731 5,209 Other............................................................. 2,043 2,418 Valuation allowance............................................... (20,716) (44,448) ----------- ----------- Total deferred income tax assets.................................... 2,046 1,166 ----------- ----------- Deferred income tax liabilities: Inventory......................................................... (576) (228) Property and equipment............................................ (1,470) (938) ----------- ----------- Total deferred income tax liabilities............................... (2,046) (1,166) ----------- ----------- Net deferred income taxes........................................... $ 0 $ 0 ----------- ----------- ----------- -----------
As of January 31, 1998, the Company had $40.9 million and $32.4 million of regular tax and alternative minimum tax Net Operating Losses ("NOL"), respectively, which will expire in years 2005 through 2013, and may be limited under section 382, as discussed below. The Company underwent an ownership change in reorganization under Chapter 11 which was approved by the Bankruptcy Court on December 18, 1997. Section 382 of the Internal Revenue Code limits the use of NOLs when an ownership change occurs. The annual limitation under section 382 with respect to such ownership change could significantly limit the Company's ability to use it NOLs to offset future taxable income. Section 382(l)(5) provides a more favorable treatment as to the future utilization of NOLs for a corporation that is in a Title 11 case when the ownership change occurs. Under section 382(l)(5), if the Company experiences another ownership change within two years of the first ownership change date, the Company will lose its NOL carryforwards thereafter. For section 382 purposes, the Company would experience an ownership change if one or more 5% shareholders increase their interests in the aggregate by more than 50% of the total of the Company's Common Stock. NOTE 10--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 AND RESTRICTED CASH The carrying amount for cash approximates fair value because of the short maturity of amounts therein. 27 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 10--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) REVOLVER AND TERM LOAN The fair value is estimated based on current rates offered for similar debt. NOTE 11--COMMITMENTS, CONTINGENCIES AND OTHER The Company is involved in various 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 operating results during the period in which the litigation is resolved. In March 1995, the Company brought an action against one of its landlords, Hickel Investment Company ("Hickel"), to recover overpayments of common area maintenance and other charges made to Hickel. On February 20, 1998, the United States District Court for the District of Alaska entered a final judgment against Hickel for an amount in excess of $1.8 million. Hickel has since appealed the judgment and posted a bond in the amount of $2.1 million to obtain a stay pending appeal. There can be no assurance that the Company will be successful on such appeal. As a result, no amounts related to this judgment have been recorded in the consolidated financial statements. CREDIT CARD PLAN AGREEMENT The Company's proprietary charge card, administered and owned by Alliance Data Systems ("ADS") (which purchased the charge accounts from National City Bank of Columbus), 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 (the "Alliance Agreement"), ADS owns the receivables generated from purchases made by customers using the Lamonts charge card. The Alliance Agreement provides that the Company will be charged a discount fee of 1.95% of Net Sales, as that term is defined in the Alliance Agreement. Additionally, the Alliance Agreement provides for a supplemental discount fee equal to one-tenth of one percent (0.1%) of Net Sales for each one million dollar increment that Net Sales for a subject year are less than $48.0 million (the "Minimum Level") up to a maximum fee of 3% of the Net Sales for the subject year. ADS waived the supplemental discount fee for Fiscal 1997. In the event of store closures, the Alliance Agreement provides that the Minimum Level may be decreased. Additionally, as of March 1, 1996, the Company is no longer responsible for any net bad debt expense. The Alliance Agreement may be terminated by either party after June 22, 1999 upon 180 days prior written notice. The Company paid National City Bank of Columbus and ADS $0.1 million for bad debt expense and $0.9 million in fees during Fiscal 1996. In Fiscal 1997, discount fees totaled approximately $0.9 million. YEAR 2000 The Company has established a compliance program to modify or replace existing information technology systems so that such systems will not generate invalid or incorrect results in connection with processing year dates for the year 2000 and later years. The Company believes that it will achieve Year 2000 compliance by the middle of the 52 weeks ending January 29, 2000 ("Fiscal 1999") and does not 28 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 11--COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED) currently anticipate any material disruption in its operations as a result of any failure by the Company to achieve compliance. The Company spent approximately $324,000 in Fiscal 1997 and estimates it will spend approximately $500,000 during the 52 weeks ending January 30, 1999 ("Fiscal 1998") and $150,000 in Fiscal 1999 to make its computer systems Year 2000 compliant. Additionally, suppliers of the Company and other third parties exchange information with the Company or rely on the Company's merchandising systems for certain sales and stock information. The Company currently does not have any information concerning the compliance status of its suppliers or such other third parties. However, because third-party failures could have a material adverse impact on the Company's ability to conduct business, confirmations are being requested from the Company's major suppliers to certify that plans are being developed to address the Year 2000 issues. NOTE 12--STOCKHOLDERS' EQUITY As provided under the Plan, the authorized capital stock of the Company is 50,000,000 shares and consists of 39,999,990 shares of Common Stock, 10 shares of Class B Common Stock, and 10,000,000 shares of preferred stock, par value $.01 per share (the "Preferred Stock"). All equity interests existing immediately prior to consummation of the Plan were canceled and/or rejected pursuant to the Plan, and the accumulated deficit relating to such equity interests was eliminated under Fresh-Start Reporting. 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 the rights of holders of Preferred Stock, if any, the holders of shares of Common Stock are entitled to dividends when, as and if declared by the Board of Directors from funds legally available therefor and, upon liquidation, to a pro rata share in any distribution to stockholders. The Company does not anticipate declaring or paying any dividends on the Common Stock in the foreseeable future. CLASS B COMMON STOCK Except as set forth in the following paragraphs, the holders of Class B Common Stock shall enjoy the same rights, privileges and preferences and be subject to the same restrictions as the holders of the Common Stock. Upon the affirmative vote of not less than three-fourths of the then outstanding shares of the Class B Common Stock, (a) during the continuance of any event described in Section 11(b) of the Loan Agreement (each, an "Event of Default"), including, without limitation, nonpayment of principal and/or interest, covenant defaults, breach of representations and warranties and certain events of bankruptcy, in each case subject to applicable notice and cure periods, and/or (b) upon acceleration of any of the loans under the Loan Agreement and until such acceleration is rescinded or all amounts due under such accelerated loan 29 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED) are paid in full, the Company shall (i) file a voluntary petition under Chapter 11 of the Bankruptcy Code and (ii) oppose any motion to dismiss the resulting bankruptcy case. Such right of the holders of the Class B Common Stock will terminate upon satisfaction in full of all of the Company's obligations in respect of the Term Loan, whereupon each share of Class B Common Stock will automatically convert into one share of Common Stock. Such right of the holders of the Class B Common Stock shall be coextensive with the right of the Board of Directors at any time to cause such a filing to occur, and such right shall not restrict the ability of the Board of Directors to otherwise cause the Company to file a voluntary petition under the Bankruptcy Code or to oppose any motion to dismiss any bankruptcy case. Subject to certain exceptions set forth in the Company's Second Restated Certificate of Incorporation, shares of Class B Common Stock are non-transferable. As required under the BankBoston Facility, in consideration of the Surety's guaranty of the Term Loan, on the Plan Effective Date the Surety was issued 10 shares of Class B Common Stock representing all of the authorized and outstanding Class B Common Stock. PREFERRED STOCK The Second Restated Certificate of Incorporation of the Company provides for the issuance of 10,000,000 shares of Preferred Stock. The Preferred Stock may be issued in one or more classes or series, and the Board of Directors is authorized to fix for each such class or series such voting powers, full or limited, or no voting powers, and such distinctive designations, preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof. Because the Board of Directors has the power to establish the preferences and rights attributable to the Preferred Stock, 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. WARRANTS Pursuant to the Plan, all outstanding warrants to purchase Old Common Stock were rejected as of the Plan Effective Date. CLASS A WARRANTS AND CLASS B WARRANTS Class A Warrants to purchase an aggregate of 2,203,320 shares of Common Stock and Class B Warrants to purchase an aggregate of 800,237 shares of Common Stock have been or will be issued by the Company in accordance with the Plan pursuant to a Warrant Agreement (the "Class A/B Warrant Agreement") entered into between the Company and Norwest Bank Minnesota, N.A., as Warrant Agent. The Class A Warrants are exercisable, in whole or in part, on the first date on which the Aggregate Equity Trading Value (as defined below) equals or exceeds $20 million and, if not previously exercised, expire on January 31, 2008. The Class B Warrants are exercisable, in whole or in part, on the first date on which the Aggregate Equity Trading Value equals or exceeds $25 million and, if not previously exercised, expire on January 31, 2008. The exercise price for the Class A Warrants and the Class B Warrants is $.01 per share. The number and type of securities issuable upon exercise of the Class A Warrants and the Class B Warrants and the exercise price payable upon exercise thereof are subject to customary antidilution protection as described in the Class A/B Warrant Agreement. 30 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED) "Aggregate Equity Trading Value" means, as of any date, the product of (a) either (i) if the Common Stock is listed on any national securities exchange or quoted on a national quotation system, the average of the daily closing prices of the Common Stock for the five (5) trading days immediately preceding such date, or (ii) if the Common Stock is not so listed or quoted, the fair market value per share of the Common Stock determined in good faith by the Company's Board of Directors as of a date within 30 days of such date, multiplied by (b) the total number of issued and outstanding shares of Common Stock as of such date (assuming for purposes of determining such number of shares the exercise in full of all in-the-money options outstanding on such date to purchase shares of Common Stock and, and for purposes of determining whether the Class B Warrants are exercisable, the exercise of all Class B Warrants which are exercisable as of such date). CLASS C WARRANTS 254,043 Class C Warrants to purchase an aggregate of 3,810,645 shares of Common Stock were issued by the Company in accordance with the Plan pursuant to several Warrant Agreements (collectively, the "Class C Warrant Agreements") entered into between the Company and the initial holders of the Class C Warrants, and were distributed as follows: (i) 228,639 Class C Warrants to purchase an aggregate of 3,429,585 shares of Common Stock were distributed to the Surety as required under the BankBoston Facility and in consideration of the Surety's guaranty of the Term Loan and in partial exchange for the Surety's administrative claim against the Company's Chapter 11 estate; and (ii) 25,404 Class C Warrants to purchase an aggregate of 381,060 shares of Common Stock were distributed to the holders of Stock Options issued on the Plan Effective Date. The Class C Warrants are exercisable, in whole or in part, as follows: (a) at any time until January 31, 2002, the Class C Warrants are exercisable for an aggregate of 3,556,602 shares of Common Stock at an exercise price of $1.25 per share; and (b) at any time after the first date on which the Aggregate Equity Trading Value equals or exceeds $25 million and until January 31, 2008, the Class C Warrants are exercisable for an aggregate of 254,043 additional shares of Common Stock at an exercise price of $.01 per share; provided that the portion of each Class C Warrant otherwise exercisable after the first date on which the Aggregate Equity Trading Value equals or exceeds $25 million shall not be exercisable by any holder thereof unless such holder has exercised in full such holder's portion of such Class C Warrant that is currently exercisable. The number and type of securities issuable upon exercise of the Class C Warrants are subject to customary antidilution protection as described in the Class C Warrant Agreements. GORDIAN WARRANTS As part of the compensation to Gordian for investment banking services rendered to the Company during the Company's Chapter 11 case, Gordian will be issued, on the 120th calendar day following the Plan Effective Date, the Gordian Warrants to purchase an aggregate number of shares of Common Stock equal to 200,000 divided by the Normalized Share Price (as defined below). The Gordian Warrants are immediately exercisable upon issuance thereof and, if not previously exercised, expire five (5) years from their issuance date. The exercise price for the Gordian Warrants is the Normalized Share Price per share. The "Normalized Share Price" is equal to the average of the "Closing Prices" of the Common Stock for the 45 trading days commencing on the 45th calendar day next following the Plan Effective Date. For purposes of determining the Normalized Share Price, the Closing Price means (i) the closing sales price per share on the national securities exchange on which the Common Stock is principally traded, or (ii) if 31 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED) the shares are then traded in an over-the-counter market, the average of the closing bid and asked prices on such market, or (iii) if the shares are not then traded on a national securities exchange or in an over-the-counter market, then such value as the Board of Directors of the Company shall in good faith reasonably determine. If Gordian disagrees with such determination, then an investment banking firm shall be mutually agreed upon, engaged and compensated by the Company for a definitive determination of the Normalized Share Price. STOCK OPTIONS The Stock Options granted pursuant to the Plan are exercisable for the purchase of 1,333,728 shares of Common Stock and consist of: (i) Base Options exercisable for the purchase of 1,000,000 shares of Common Stock with an exercise price of $1.00 per share; (ii) to prevent dilution resulting from the issuance of the Class A Warrants, Protective A Options exercisable for the purchase of an additional 244,813 shares of Common Stock with an exercise price of $0.01 per share, exercisable only on or after the date on which the Class A Warrants become exercisable; and (iii) to prevent dilution resulting from the issuance of the Class B Warrants, Protective B Options exercisable for the purchase of an additional 88,915 shares of Common Stock with an exercise price of $0.01 per share, exercisable only on or after the date on which the Class B Warrants become exercisable. In addition, to prevent dilution resulting from the issuance of the Class C Warrants to the Surety, holders of such Stock Options were issued, on a pro rata basis and with the same vesting schedule as each holder's respective Stock Options, Class C Warrants exercisable for the purchase of an aggregate of 381,060 shares of Common Stock (355,656 shares with an exercise price of $1.25 per share and 25,404 shares with an exercise price of $.01 per share). The number of Protective Options that may be exercised by any holder shall bear the same proportion (based on the total number of Protective Options granted to such holder) to the number of Base Options that have been exercised by such holder (based on the total number of Base Options granted to such holder). The Stock Options and the Class C Warrants are subject to adjustment to prevent dilution upon the occurrence of certain specified events, excluding exercise of the Stock Options, the Class A Warrants, the Class B Warrants, the Class C Warrants, or the Gordian Warrants. The Stock Options granted on January 31, 1998 have a term of 10 years and vest as follows: 50% on the date of grant; and 25% on each anniversary of the date of grant. The Stock Options are governed by the Lamonts Apparel, Inc. 1998 Stock Option Plan (the "Stock Option Plan"), and the Class C Warrants issued in conjunction therewith are governed by a warrant agreement in substantially the form of the Class C Warrant Agreement between the Company and the Surety. Under the terms of the Stock Option Plan, the Company has available, in addition to the shares of Common Stock reserved for issuance upon exercise of the Stock Options granted on the Plan Effective Date, an additional 375,000 shares (subject to adjustment to prevent dilution upon certain events, excluding any exercise of Class A Warrants, Class B Warrants, Class C Warrants, or Stock Options) of Common Stock for possible grants of additional stock options from time to time after the Plan Effective Date if, and to the extent, a committee appointed by the Board of Directors ("Compensation Committee"), may determine that such additional grants would be in the best interest of the Company. On February 26, 1998, the Compensation Committee reserved 335,500 of the 375,000 shares of Common Stock available for issuance upon exercise of Stock Options granted by the Compensation Committee on such 32 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED) date to certain executive officers of the Company, the disinterested members of the Board, and certain other senior and middle level managers of the Company. Such Stock Options have a per share exercise price of $1.00, a term of 10 years and vest as follows: 25% on the date of grant; and 25% on each annual anniversary of the date of grant. The following summarizes the Stock Options granted under the Stock Option Plan during Fiscal 1997: Granted.................................................. 1,333,728 Exercised................................................ 0 --------- Balance, January 31, 1998................................ 1,333,728 --------- ---------
The Company has elected to follow Accounting Principles Board No. 25, "Accounting for Stock Issued to Employees," ("APB No. 25") in accounting for its employee stock options. Under APB No. 25, because the exercise price of the Company's employee options is greater than the market price of the underlying stock on the date of grant, no compensation expense is recognized in the consolidated financial statements. Pro forma information regarding net income and earnings per share is required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). This information is required to be determined as if the Company has accounted for its employee stock options granted subsequent to January 31, 1995, under the fair value method of that statement. The fair value of the options was estimated at the date of grant using the Black-Scholes options pricing model with the following weighted average assumptions for Fiscal 1997: risk free interest rate of 5.7%; a stock price volatility factor of 45%; and expected option life of 10 years following vesting; and no dividend during the expected term. For purposes of pro forma disclosures required by SFAS No. 123, the Company's income and earnings per share ("EPS") would have reflected compensation cost determined based on the estimated fair value of the options at the date of grant. There are no pro forma adjustments for Fiscal 1996 and Fiscal 1995 because no options were granted during these periods. The Company's pro forma information is as follows: Pro Forma Income and EPS from Operations Before Extraordinary Item:
FISCAL 1997 ------------------- (DOLLARS IN THOUSANDS EXCEPT SHARE DATA) Income from operations before extraordinary item: As reported.................................................. $ 53,546 Pro forma net income......................................... $ 52,952 Basic and Diluted EPS from operations before extraordinary item: As reported.................................................. $ 3.00 Pro forma net income per share............................... $ 2.96
33 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED) 1992 STOCK OPTION PLAN Pursuant to the Plan, the Company's previous Nonstatutory Stock Option Plan (the "1992 Stock Option Plan") and all employee stock options outstanding under the 1992 Stock Option Plan were rejected on the Plan Effective Date. The following table summarizes the 1992 Stock Option Plan activity prior to the Effective Date:
NUMBER OF OPTIONS ----------- Balance, January 28, 1995.............................................. 374,740 Granted.............................................................. 0 Exercised............................................................ (11,774) Canceled............................................................. (43,902) ----------- Balance, February 3, 1996.............................................. 319,064 Granted.............................................................. 0 Exercised............................................................ (504) Canceled............................................................. (43,109) ----------- Balance, February 1, 1997.............................................. 275,451 Rejection of options................................................. (275,451) ----------- Balance, January 31, 1998.............................................. 0 ----------- -----------
NOTE 13 - RELATED PARTY TRANSACTIONS In connection with a recapitalization of the Company in October 1992 (the "Recapitalization"), pursuant to which, among other things, the Company issued an aggregate of $75 million in principal amount of its Old 10 1/4% Notes, certain of the Company's post-Recapitalization stockholders, representing an aggregate of approximately 8,717,000 shares or 98% of the Old Common Stock outstanding immediately following the Recapitalization, entered into that certain Voting Agreement dated as of October 30, 1992 (the "Voting Agreement"). The Voting Agreement provided, among other things, that (i) Apollo Retail Partners ("ARP"), a holder of greater than 5% of the Old Common Stock, could 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 which were due February 1995 (the "Old 13 1/2% Notes"), which notes were exchanged for Old Common Stock pursuant to the Recapitalization, could designate two persons to the Board of Directors. Lamonts' obligations under the Voting Agreement were rejected as of the Plan Effective Date. In connection with the Recapitalization, the parties to the agreement effecting the Recapitalization (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 could exercise up to two demand registrations with respect to such Securities. The Company was required to pay all expenses (other than underwriting discounts and commissions) in connection with all such registrations. The agreements also provided for certain piggyback registration rights. The Old Common Stock held by ARP and Morgens Waterfall Vintiadis & Company, Inc. ("Morgens"), a holder of greater than 5% of the 34 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 13 - RELATED PARTY TRANSACTIONS (CONTINUED) Old Common Stock, was covered by the equity registration rights agreement pursuant to its terms. These agreements were rejected as of the Plan Effective Date. As a holder of Old Common Stock, ARP received 76,951 shares of Common Stock and 38,475 Class B Warrants under the Plan based on the amount of shares of Old Common Stock beneficially owned by ARP. All of the Old Common Stock beneficially owned by ARP was canceled on the Plan Effective Date. As holders of Old Common Stock, certain affiliates of Morgens received 16,568 shares of Common Stock and 8,285 Class B Warrants under the Plan based on the amount of Old Common Stock beneficially owned by Morgens as reflected in the Schedule 13D filed by Morgens on February 13, 1998. All of the Old 13 1/2% Notes and the Old Common Stock beneficially owned by Morgens were canceled on the Plan Effective Date. As a holder of Old Common Stock and of Old 10 1/4% Notes, Executive Life Insurance Company of New York ("ELICNY"), a holder of greater than 5% of the Old Common Stock, received 347,074 shares of Common Stock, 209,426 Class A Warrants and 71,577 Class B Warrants pursuant to the first two distributions under the Plan. ELICNY may receive additional shares of Common Stock, Class A Warrants and Class B Warrants following the resolution of pending claims filed against the Company during its Chapter 11 case. All of the Old 10 1/4% Notes and the Old Common Stock beneficially owned by ELICNY were canceled on the Plan Effective Date. As a holder of Old Common Stock and of Old 10 1/4% Notes, certain investment companies and accounts indirectly controlled by FMR Corp. (collectively "Fidelity") received 2,925,142 shares of Common Stock, 1,810,380 Class A Warrants and 581,184 Class B Warrants pursuant to the first two distributions under the Plan. Fidelity may receive additional shares of Common Stock, Class A Warrants and Class B Warrants following resolution of pending claims filed against the Company during its Chapter 11 case. All of the Old 10 1/4% Notes and the Old Common Stock beneficially owned by Fidelity were canceled on the Plan Effective Date. As required by the BankBoston Facility and in partial exchange for its administrative claim, pursuant to the Plan, the Surety received (i) 228,639 Class C Warrants exercisable for the purchase of an aggregate of 3,429,585 shares of Common Stock and (ii) 10 shares of Class B Common Stock representing all of the authorized and outstanding Class B Common Stock. In connection with the Plan, the Company entered into a Grant of Registration Rights in favor of Fidelity and the Surety, pursuant to which, and subject to certain exceptions, the Company has agreed to file and cause to remain effective a Registration Statement under the Securities Act of 1933, as amended, covering certain of the securities distributed under the Plan until no such securities are outstanding. The Company is required to pay all expenses (other than underwriting discounts and commissions) in connection with all such registrations. In addition, the agreement provides for certain "piggyback" registration rights. NOTE 14 - BENEFIT PLANS PENSION PLAN On January 1, 1986, the Company established the Lamonts Apparel, Inc. Employees Retirement Trust (the "Pension Plan"). The Pension Plan is a noncontributory defined benefit pension plan for employees of 35 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 14 - BENEFIT PLANS (CONTINUED) 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 Pension Plan in amounts which comply with the minimum regulatory funding requirements. On February 26, 1998, the Board approved an amendment to the Pension Plan which provides that, effective April 1, 1998, benefits under the Pension Plan will cease to accrue and prohibits the entry of any new participants. Participants that are not yet vested will continue to accrue vesting service after April 1, 1998. The following table sets forth the Company's funded plan status and amounts recognized in the Company's consolidated balance sheets:
JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PERCENTS) Actuarial present value of accumulated benefit obligations, Including vested benefits of $7,215, $5,345 and $5,462 at January 31, 1998, February 1, 1997, and February 3, 1996, respectively $ 7,428 $ 5,598 $ 5,651 ----------- ----------- ----------- ----------- ----------- ----------- Projected benefit obligation............................................... $ 8,422 $ 6,513 $ 6,639 Pension Plan assets at value, primarily money market funds and guaranteed investment contracts 6,528 6,045 5,143 ----------- ----------- ----------- Projected benefit obligation in excess of Pension Plan assets.............. 1,894 468 1,496 Unrecognized net loss from past experience different from that assumed..... -- (347) (1,238) ----------- ----------- ----------- Accrued pension cost....................................................... 1,894 121 258 Charge to equity to recognize minimum liability............................ -- -- 250 ----------- ----------- ----------- Total accrued pension cost................................................. $ 1,894 $ 121 $ 508 ----------- ----------- ----------- ----------- ----------- ----------- Discount rate.............................................................. 7.00% 7.75% 7.25% Rate of increase in future compensation levels............................. 3.5% 3.5% 3.5% Expected long term rate of return on assets................................ 9.0% 9.0% 9.0%
Amounts charged to expense under the Pension Plan were as follows:
FISCAL FISCAL FISCAL 1997 1996 1995 --------- --------- --------- (DOLLARS IN THOUSANDS) Service cost, benefits earned during the period.................. $ 336 $ 404 $ 414 Interest cost on projected benefit obligation.................... 527 461 483 Actual return on assets.......................................... (777) (635) (883) Other, including deferred recognition of asset gain.............. 255 213 559 --------- --------- --------- Net pension cost................................................. $ 341 $ 443 $ 573 --------- --------- --------- --------- --------- ---------
36 LAMONTS APPAREL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) JANUARY 31, 1998 NOTE 14 - BENEFIT PLANS (CONTINUED) 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 were terminated, unfunded plan benefit liabilities would not be material. The Company disputed the claim. PBGC withdrew its claim without prejudice. LAMONTS 401(k) PLAN The Lamonts Apparel, Inc. Tax Relief Investments Protection Plan, as amended and restated effective January 1, 1994 (the "401(k) Plan") provides participants the opportunity to elect to defer an amount from 1% to 15% of their compensation, in increments of 1%. 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). Effective April 1, 1998, the Company increased its matching contribution to 50% of the first 4% of each participant's deferred pay contributions. The Company contributed $0.12 million, $0.14 million, and $0.15 million during Fiscal 1997, Fiscal 1996, and Fiscal 1995, respectively. 37 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 A. Brownfield --------------------------------- Debbie A. Brownfield Executive Vice President and Chief Financial Officer Date: May 18, 1998 38 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 18, 1998 /s/ Loren R. Rothschild Vice Chairman of the Board, Chief - --------------------------- Administrative Officer and Director May 18, 1998 Loren R. Rothschild /s/ Debbie A. Brownfield Executive Vice President and Chief - --------------------------- Financial Officer (Principal Debbie A. Brownfield Financial and Accounting Officer) May 18, 1998 /s/ Stanford Springel - --------------------------- Director May 18, 1998 Stanford Springel - --------------------------- Director John J. Wiesner /s/ Paul M. Buxbaum - --------------------------- Director May 18, 1998 Paul M. Buxbaum
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