SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10/A
(Amendment No. 1)
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
WEINER'S STORES, INC.
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 76-0355003
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification no.)
6005 WESTVIEW DRIVE, HOUSTON, TEXAS 77055
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (713) 688-1331
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SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of Each Class Name of Each Exchange on Which
to be so Registered Each Class is to be Registered
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NONE
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SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(Title of class)
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS REGISTRATION STATEMENT, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY WEINER'S STORES, INC. THIS REGISTRATION STATEMENT IS FOR
INFORMATIONAL PURPOSES AND DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO PURCHASE THE COMMON STOCK OF WEINER'S STORES, INC.
OR ANY OTHER SECURITIES. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY
STATE SECURITIES COMMISSION HAS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
REGISTRATION STATEMENT.
Weiner's Stores, Inc. intends to furnish its stockholders with annual
audited financial statements and the related independent auditors' report and
with quarterly unaudited summary financial information for the first three
quarters of each fiscal year.
TABLE OF CONTENTS
Page
Item 1. Business.................................................... 4
General..................................................... 4
Retailing Strategy.......................................... 4
No Prior Market for the Common Stock........................ 5
Absence of Public Market.................................... 5
Limited Post-Chapter 11 Case Operating History.............. 5
Significant Stockholder..................................... 5
Registration Rights Agreement............................... 6
Seasonality................................................. 6
Secured Debt; Ability to Refinance.......................... 6
Capital Expenditure Needs................................... 7
Competition................................................. 7
Certain Tax Matters......................................... 7
Dividend Matters............................................ 7
Preferred Stock............................................. 7
"Fresh Start" Reporting..................................... 8
Merchandising............................................... 8
Store Presentation.......................................... 9
Advertising and Promotion................................... 10
Management Information Systems.............................. 10
Method of Payment........................................... 11
Managers and Other Employees................................ 11
Trademarks and Service Marks................................ 11
Other Information........................................... 11
Item 2. Financial Information....................................... 11
Selected Historical Financial Data.......................... 11
Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 14
Overview............................................... 14
"Fresh Start" Reporting................................ 15
Results of Operations.................................. 15
Liquidity and Capital Resources........................ 17
Impact of Inflation.................................... 19
Seasonality............................................ 19
Recent Accounting Pronouncements....................... 19
Income Tax Matters..................................... 20
Forward-Looking Statements..............................21
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Item 3. Properties.................................................. 23
Item 4. Security Ownership of Certain Beneficial Owners and Management23
Item 5. Directors and Executive Officers..............................25
Item 6. Executive Compensation........................................28
Summary Compensation Table....................................28
Employment Agreements.........................................29
Option Grants in Fiscal Year 1997.............................30
1997 Stock Incentive Plan.....................................30
General ................................................30
Administration...........................................31
Number of Shares Available...............................31
Awards Under the Stock Plan..............................32
Duration, Amendment and Termination......................33
Certain Limitations on Deductibility of Executive Compensation34
Incentive Compensation Plan...................................34
Pension Plan..................................................34
Directors Compensation........................................34
Compensation Committee Interlocks and Insider Participation...35
Board Compensation Committee Report on Executive Compensation.35
Item 7. Certain Relationships and Related Transactions................36
Item 8. Legal Proceedings.............................................38
Item 9. Market Price of and Dividends on the Registrant's Common
Equity and Related Stockholder Matters........................38
Item 10. Recent Sales of Unregistered Securities.......................39
Item 11. Description of Registrant's Securities to Be Registered.......39
Certain Provisions of the Certificate of Incorporation and
Bylaws........................................................40
Item 12. Indemnification of Directors and Officers.....................42
Item 13. Financial Statements and Supplementary Data...................42
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure..........................................42
Item 15. Financial Statements and Exhibits.............................43
INDEX TO HISTORICAL FINANCIAL STATEMENTS.....................................45
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ITEM 1. BUSINESS
GENERAL
Weiner's Stores, Inc., a Delaware corporation (the "Company")
incorporated in December 1991, is a neighborhood family retailer of branded
products for value-conscious customers. The Company operates 132 stores located
primarily in strip shopping centers in Texas and Louisiana, including four
stores opened subsequent to the end of fiscal 1997, and employs approximately
3,600 full- and part-time employees. References herein to "Weiner's Stores,
Inc." or the "Company" are to Weiner's Stores, Inc., together with its
subsidiary, unless the context otherwise indicates.
The majority of the Company's stores are in strip shopping centers and
free standing structures. The current store prototype is approximately 25,000
square feet, with approximately 20,000 square feet for selling space, with the
remaining space for office, receiving and layaway storage. The current stores
range in total size from approximately 16,000 square feet to 51,000 square feet.
After achieving peak sales of $322,805,000 in 1992, the Company
experienced two years of declining sales and profitability. Numerous factors
contributed to the declining results in such periods: the increasing entrance of
competition into the Company's markets, the general weak apparel market
experienced by many retailers across the United States, and weather cycles that
had a negative impact on apparel purchasing. In addition, in early 1995,
primarily as a result of such factors, the Company experienced a decline in
credit availability from both vendors and its lender.
On April 12, 1995 (the "Commencement Date"), the Company commenced its
case (Case No. 95-417(PJW)) (the "Chapter 11 Case") under chapter 11 ("Chapter
11") of title 11 of the United States Code (the "Bankruptcy Code") before the
United States Bankruptcy Court for the District of Delaware (the "Bankruptcy
Court"). The Company operated its business and managed its properties as a
debtor in possession in bankruptcy until August 26, 1997, when the Company's
Amended Plan of Reorganization under Chapter 11 of the Bankruptcy Code, dated
June 24, 1997, as amended (the "Plan"), was confirmed by order of the Bankruptcy
Court on August 13, 1997.
An entirely new management team was installed shortly after the filing
of the Chapter 11 Case. The new management team has taken initiatives to refocus
the retailing strategy, re-establish positive vendor relationships, remodel
store presentation, update and modernize systems, revise promotional strategies
based on demographic analyses, operate more efficiently and inexpensively, and
maximize value in real estate. The Company emerged from bankruptcy on August 26,
1997 (the "Effective Date").
RETAILING STRATEGY
Based on the Company's ongoing demographic analysis and market
research, the Company believes that its customer base is approximately 35%
African American, 40% Hispanic and 25% other, a majority of whom have income
levels of $30,000 or less per household. The Company has strategically laid out
marketing strategies that target the demographic features of its customer base.
These features include the ethnic make-up of its customers, value conscious
women shoppers with more than one child in the household, fashion oriented young
adult males and their strong identification with branded products, and the
Company's dominant neighborhood presence.
The Company's retailing strategy is intended to enhance the Company's
ability to compete effectively with off-price retailers, specialty stores,
discount stores and department stores. The Company believes that its position as
a local neighborhood retailer better enables it to understand the needs of its
shoppers, focus on the distinct priorities and tastes of its customer base,
provide more complete assortments than off-price retailers and
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specialty stores, sell major branded merchandise that is not available to
discount stores and provide more convenient locations and offer better pricing
than department stores.
NO PRIOR MARKET FOR THE COMMON STOCK
Substantially all of the presently outstanding common stock, par value
$.01 per share, of the Company ("Common Stock") was issued on the Effective Date
pursuant to the Plan, which was confirmed on August 13, 1997 by order of the
Bankruptcy Court. Pursuant to the Plan, 18,600,000 shares of Common Stock were
issued for the benefit of holders of general unsecured claims against the
Company, some of whom may prefer to dispose of their shares rather than to
retain them. Of such 18,600,000 issued and outstanding shares of Common Stock,
approximately 319,000 shares are held in a Reserve (as such term is defined in
the Plan) pending the resolution of certain Disputed Claims (as such terms are
defined in the Plan) for distribution to holders of such Disputed Claims or
otherwise pursuant to the Plan.
The actual market value of the Common Stock issued pursuant to the Plan
may have been and may continue to be affected by prevailing interest rates,
conditions in the financial markets, the initial issuance of Common Stock to
holders of claims and other factors. There is currently no established public
trading market for the Common Stock nor is it known whether or when one will
develop. There can be no assurance that an active market will develop. Further,
there can be no assurance as to the degree of price volatility in any such
particular market. While the Plan was developed based on an assumed
reorganization value of $3.36 per share of Common Stock, such valuation is not
an estimate of the price at which the Common Stock may trade in any market. The
Company has not attempted to make any such estimate in connection with the
development of the Plan. No assurance can be given as to the market prices that
will prevail for the Common Stock following the Effective Date.
ABSENCE OF PUBLIC MARKET
There is currently no active trading market for the Common Stock. The
Company has no current intention to apply to list the Common Stock on any
national securities exchange. Although the Company may in the future file an
application for the Common Stock to be included for quotation on the NASDAQ
National Market System ("NASDAQ-NMS"), the Company currently does not qualify
for quotation on NASDAQ-NMS and there can be no assurance that such an
application will be filed in the future or, if so filed, that it would be
approved. There can be no assurance as to the development of any market or as to
the liquidity of any market that may develop for the Common Stock.
LIMITED POST-CHAPTER 11 CASE OPERATING HISTORY
The Company's emergence from Chapter 11 reorganization occurred very
recently, and consequently the Company's subsequent operating history is
limited. Financial statements for such future periods will not be comparable to
the historical financial statements included herein, for the reasons discussed
under "Financial Information -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview."
SIGNIFICANT STOCKHOLDER
Chase Bank of Texas (formerly known as Texas Commerce Bank N.A.)
("Chase") holds approximately 44.8% of the outstanding shares of the Common
Stock. See "Security Ownership of Certain Beneficial Owners and Management."
Accordingly, Chase may be in a position to control the outcome of actions
requiring stockholder approval, including the election of directors. This
concentration of ownership could also facilitate or hinder a negotiated change
of control of the Company and, consequently, have an impact upon the value of
the Common Stock. Further, the possibility that Chase may determine to sell all
or a large portion of its shares of Common Stock in a short period of time may
adversely affect the market price of the Common Stock. See "--
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Registration Rights Agreement" and "Certain Relationships and Related
Transactions -- Transactions and Settlements with Chase Bank of Texas."
REGISTRATION RIGHTS AGREEMENT
The Company has entered into a Registration Rights Agreement, dated as
of August 27, 1997, with Chase (the "Registration Rights Agreement"). Under the
Registration Rights Agreement, Chase may, at any time after the date that is (i)
24 months after the Effective Date and prior to the Termination Date (defined as
the earlier of (a) the date on which Chase ceases to own any Registrable
Securities (i.e., subject to certain limitations, the shares of Common Stock
received by Chase pursuant to the Plan and any other securities issued or
issuable with respect to such Common Stock) and (b) the date that is seven years
after the Effective Date), Chase may make a written request of the Company (a
"Demand Request") for registration (a "Demand Registration") under the
Securities Act of 1933, as amended (the "Securities Act"), of all or part of
Chase's Registrable Securities and (ii) 60 months after the Effective Date and
prior to the Termination Date, Chase may make an additional Demand Request for a
Demand Registration of all or part of Chase's Registrable Securities; provided
that in each case the number of Registrable Securities proposed to be sold by
Chase must be equal to no less than 20% of the number of Registrable Securities
received by Chase pursuant to the Plan. See "Market Price of and Dividends on
the Registrant's Common Equity and Related Stockholder Matters" and "Description
of Registrant's Securities to Be Registered." Sales of or offers to sell a
substantial number of shares of Common Stock by Chase at any time, or the
perception by investors, investment professionals and securities analysts of the
possibility of such sales, could adversely affect the market for and prevailing
prices with respect to the Common Stock. See "Security Ownership of Certain
Beneficial Owners and Management" and "Market Price of and Dividends on the
Registrant's Common Equity and Related Stockholder Matters."
SEASONALITY
The Company's business is seasonal with approximately 44% of the
Company's annual sales being generated during the back-to-school selling season
in July and August and the Christmas selling season of November and December.
Consequently, an amount approximately equivalent to substantially all of the
Company's operating income is earned in those four months and the Company
typically sustains an operating loss in many of the other months. In addition,
the Company's performance, like that of many other retailers, is sensitive to
the overall U.S. economy and economic cycles and related economic conditions
that influence consumer trends and spending patterns.
SECURED DEBT; ABILITY TO REFINANCE
On the Effective Date, the Company entered a three-year revolving
Credit Agreement (the "Revolving Credit Agreement") with The CIT Group/Business
Credit, Inc. ("CIT"), as Agent and Lender. The Revolving Credit Agreement
provides a $40,000,000 working capital facility, including a $15,000,000
subfacility for the issuance of letters of credit. The Revolving Credit
Agreement is secured by substantially all of the Company's assets. The Revolving
Credit Agreement provides that proceeds may be used solely to fund working
capital in the ordinary course of business and for other general corporate
purposes. The Revolving Credit Agreement further stipulates certain borrowing
limitations based on the Company's inventory levels and requires that the
Company comply with certain financial covenants. See "Financial Information --
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
There can be no assurance that the Company, upon the termination of the
Revolving Credit Agreement, will be able to obtain replacement financing to fund
future borrowings and letters of credit or that such replacement financing, if
obtained, would be on terms favorable to the Company.
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CAPITAL EXPENDITURE NEEDS
The Company's capital expenditure plan is designed to allocate funds to
projects that are necessary to support the Company's strategic plan. Pursuant to
such capital expenditure plan, the Company expects to commit funds to the
opening of new stores, major store remodelings, the maintenance and upgrading of
existing store locations, the further enhancement of the Company's management
information systems and the replacement of the Company's point-of-sale systems.
The Company expects to open 30 new store locations in existing and contiguous
markets over the next four-year period. Under the terms of the Revolving Credit
Agreement, capital expenditures are limited to $7,000,000 in each of fiscal
years 1997, 1998 and 1999 and to $5,000,000 for the period commencing January
30, 2000 and ending August 31, 2000, the expiration date of the Revolving Credit
Agreement. See "Financial Information -- Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." There can be no assurance that the Company will have the resources
required to complete its capital expenditure plan.
COMPETITION
The retailing industry is intensely competitive. The Company is in
competition with numerous retail outlets in the geographic areas in which they
operate, including general merchandise stores, off-price stores, large national
discount chains and department stores. Many of the retailers with which the
Company competes have greater financial resources than the Company and may have
various other financial or other competitive advantages over the Company.
CERTAIN TAX MATTERS
In the Company's financial statements included elsewhere in this
Registration Statement, the Company reports consolidated federal income tax net
operating loss ("NOL") carryforwards of approximately $37,000,000 as of January
31, 1998. In accordance with Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), issued by
the American Institute of Certified Public Accountants, the income tax benefit
resulting from any future realization of the NOL carryforwards not recognized as
of the Effective Date will be credited to reorganization value in excess of
amounts allocable to identifiable assets and then to additional paid-in capital.
See "Financial Information -- Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 5 of the Notes to Financial
Statements included elsewhere in this Registration Statement.
DIVIDEND MATTERS
The Company presently does not intend to pay cash dividends in the
foreseeable future. In addition, the terms of the Revolving Credit Agreement
prohibit payment of cash dividends on the Common Stock. The payment of cash
dividends, if any, will be made only from assets legally available for that
purpose, and will depend on the Company's financial condition, results of
operations, current and anticipated capital requirements, restrictions under
then existing debt instruments and other factors deemed relevant by the Board of
Directors of the Company.
PREFERRED STOCK
Until such time (if any) as the Board of Directors of the Company
determines that the Company should issue shares of the Company's preferred
stock, without par value ("Preferred Stock"), and establishes the respective
rights of the holders of one or more series thereof, it is not possible to state
the actual effect of authorization of the Preferred Stock upon the rights of
holders of Common Stock. The effects of such issuance, however, could include,
among others, the following: (i) reduction of the amount of cash otherwise
available for payment of dividends on Common Stock if dividends are also payable
on the Preferred Stock, (ii) restrictions on dividends on Common Stock if
dividends on the Preferred Stock are in arrears, (iii) dilution of the voting
power
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of Common Stock (if the Preferred Stock has voting rights (including, without
limitation, votes pertaining to the removal of directors)) and (iv) restriction
of the rights of holders of Common Stock to share in the Company's assets upon
liquidation until satisfaction of any liquidation preference granted to the
holders of Preferred Stock. In addition, so called "blank check" preferred stock
(such as the Preferred Stock) may be viewed as having possible anti-takeover
effects, if it were used to make a third party's attempt to gain control of the
Company more difficult, time consuming or costly. The Company has no current
plans pursuant to which Preferred Stock would be issued as an anti-takeover
device or otherwise.
"FRESH START" REPORTING
The financial information for the thirty weeks ended August 25, 1997
(Predecessor Company) and for the twenty-three weeks ended January 31, 1998
(Successor Company) included under "Selected Historical Financial Data" reflects
the effectiveness of the Plan and the application of the principles of "fresh
start" reporting in accordance with SOP 90-7, which provides guidance for
financial reporting by Chapter 11 debtors during and upon emergence from Chapter
11 cases. SOP 90-7 is applicable because the Company's pre-reorganization
stockholders received less than 50% of the reorganized Company's newly issued
Common Stock and the enterprise value of the reorganized Company is less than
the total of all prepetition allowed claims and post-petition liabilities.
Accordingly, such financial information is not comparable to the Company's
historical financial information prior to the Effective Date included elsewhere
herein.
The reorganization value used as a basis for the "fresh start"
reporting was determined to be in a range of $70,000,000 to $80,000,000. After
cash distributions of approximately $11,100,000 provided for in the Plan, the
midpoint value is approximately $63,900,000, or $3.36 per share of Common Stock.
Based upon the midpoint reorganization value, the equity value of the Company as
of August 26, 1997 was calculated to be approximately $63,900,000. The range of
reorganization values of the Company was determined based upon a number of
assumptions, including a successful reorganization of the Company's business and
finances in a timely manner, the achievement of the forecasts reflected in the
financial projections, and the availability of certain tax attributes.
Estimates of value do not purport to be appraisals or necessarily
reflect the values that may be realized if assets are sold. The estimates of
value represent hypothetical reorganization values of the Company as the
continuing owner and operator of its business and assets. Such estimates reflect
computations of the estimated reorganization value of the Company through the
application of various valuation techniques and do not purport to reflect or
constitute appraisals, liquidation values or estimates of the actual market
value that may be realized through the sale of any securities issued pursuant to
the Plan, which may be significantly different than the amounts set forth
herein.
"Fresh start" accounting adjustments have been made to reflect the
estimated adjustments necessary to adopt "fresh start" reporting in accordance
with SOP 90-7. "Fresh start" reporting requires that the reorganization value of
the Company be allocated to its assets in conformity with Accounting Principles
Bulletin Opinion No. 16, "Business Combinations," for transactions reported on
the basis of the purchase method. Any reorganization value greater than the fair
value of specific tangible or identified intangible assets is to be included on
the Balance Sheet as reorganization value in excess of amount allocable to
identifiable assets (the "Excess Reorganization Value") and amortized over time.
MERCHANDISING
The Company's merchandising strategy is to closely focus on its markets
and on the desires and preferences of its customer base. This strategy was
undertaken after a review of the markets that the Company serves, including the
demographics and income levels of its customers. In addition, the Company
performed an in-depth analysis with a view toward better understanding the
productivity of the merchandising assortment at a department level in terms of
sales per square foot and gross margin dollar amounts. The Company recognizes
that one of its competitive strengths relative to many other retail apparel
discounters is the availability of several key
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brands such as Nike, Reebok, Fila, Champion, Levi's, Lee and Starter. Much of
the in-store and overall marketing strategies focus on such brands. Management
has and will invest appropriate resources and priority to strengthening these
relationships and adding incremental products from these vendors. Additionally,
the Company has identified several additional brands that will enhance the
assortment and is developing action plans to address appropriate vendors. The
Company has also identified several merchandise departments and classifications
that in the past have been nonexistent or insufficiently funded or spaced at the
Company's stores. The Company is currently defining classifications and/or
items, identifying vendors, creating space allocations and developing pricing
strategies to properly address these matters.
The following table sets forth the percentage of the Company's sales in
fiscal 1997 accounted for by each of the following categories of merchandise:
Fiscal 1997 Percentage of Sales by Merchandise Categories
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Shoes................................... 18.6%
Children's.............................. 21.6%
Accessories............................. 3.5%
Women's................................. 26.7%
Men's................................... 29.6%
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100.0%
Pricing. The Company offers substantially the same merchandise
assortments and prices at all of its stores. The Company prices its merchandise
with the intent that it be perceived by the Company's customers as a good value
at fair prices. The Company believes that its pricing structure must reflect the
environment in which the stores and the customers are located and that sales
prices of merchandise must be extremely competitive with respect to national
mass merchandise discounters and better than the department stores.
Purchasing. The Company purchases merchandise from many top brand-name
companies, primarily through domestic sources. Since January 28, 1995, the
Company has narrowed and consolidated its total number of vendors. This
reduction resulted from a narrowing of the merchandise mix and from management's
initiatives to develop selected vendor relationships which the Company
anticipates will result in long-term partnerships. The Company focused on
merchandise categories and product lines to enable the Company to work with
fewer vendors than do most mall-based retailers. The Company has established
relationships with many of its vendors to plan promotions, review marketing
strategies, exchange information through electronic data interchange, manage
stock levels and develop quick response inventory replenishment systems.
Management believes the appeal of the Company's merchandising strategy to
quality brand-name vendors leads to cooperative advertising funding.
During fiscal 1997, the Company had two major vendors that accounted
for approximately 15% and 10%, respectively, of total Company purchases. The
Company's 20 largest vendors accounted for approximately 55% of total Company
purchases during fiscal 1997. The Company believes that its relationship with
its vendors is strong. The Company's business is driven by brand names, and the
loss of the use of a brand name could have a material adverse effect on the
Company's business, including its results of operations.
STORE PRESENTATION
The Company designed a prototype store to test whether well executed
merchandise strategies and merchandise presentation, a customer friendly store
and a better organized layout could positively impact sales performance. The
store remodeling encompassed a prototype shell, layout, fixturization, signage
and presentation standards that the Company believes are appropriate to possibly
duplicate at other stores.
Since such prototype remodeling, the Company has completed three
additional full remodelings in a similar format. The Company has also developed
a hybrid remodeling in which the shoe department and stock rooms are not moved,
but substantially all other aspects of the prototype are incorporated. As of the
date of this
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Registration Statement, the Company has remodeled 16 stores based on the hybrid
prototype. In addition, the Company has completed a mini-remodeling at
approximately 100 other locations. As of the date of this Registration
Statement, substantially all of the Company's stores have been upgraded to some
extent. Mini- remodelings encompass many of the concepts of a full remodeling at
a significantly lower cost. In addition to adjusted layouts and adjacencies and
upgraded signage, the concepts encompassed by mini-remodelings include most of
the new fixture package, the valance with logos and, depending on the store
configuration, new lighting and power aisles. In addition to opening eight new
stores (four in fiscal 1997 and four in March 1998) in the prototype format, the
Company plans to open additional stores in the prototype format annually and to
complete further remodelings in either the prototype or hybrid prototype format.
These capital expenditures will be funded with cash generated by operations and
borrowings under the Revolving Credit Agreement. See "Financial Information --
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Capital Expenditures."
ADVERTISING AND PROMOTION
All advertising and promotion decisions are made by the Company's
central merchandising and advertising staff. Key advertising and promotional
programs include:
o adjusting the marketing calendar to introduce new events and
replace old events;
o improving the quality of media with more thematic
presentations that appeal to the Company's customer base,
illustration of products with greater impact and color
assortment, and specialized merchandise classifications;
o coordinating with buyers to maximize return, ensure an
in-stock position on ad items and evaluate pricing programs;
o moving the mix of advertising media to more focused
promotional booklets;
o targeting print mailings in a more efficient manner and
focusing on the demographics of different markets; and
o upgrading in-store signage.
The Company has strategically laid out marketing strategies that target
the demographic features of its customer base. These demographic features
include the ethnic make-up of its customers, value conscious women shoppers with
more than one child in the household, fashion oriented young adult males with
strong demand for identification with branded products, and the Company's
neighborhood presence.
MANAGEMENT INFORMATION SYSTEMS
In the fall of 1996, the Company began the installation of an
integrated merchandising package which includes modules for accounts payable,
general ledger, planning, allocation, merchandise analysis, stores and the
Company's distribution center. The accounts payable and the general ledger
package were installed in fall 1996. In spring 1997, the allocations module was
installed and in early fall 1997, the planning module was installed. The
remaining portion of the installation was completed in early 1998. This system
was Year 2000 compliant when purchased.
The complete implementation of such system will generate benefits in
the following areas: a more defined merchandise reporting system with
incremental classification, improved open-to-buy reporting, better information
with regard to markdowns, price line reporting, vendor analysis reporting,
open-to-ship reporting for improved allocation and auto-allocation capabilities
and marketing profitability analysis. As a result of the installation of
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such system, the Company is in a position to install upgraded point-of-sale
("POS") systems and hardware at the store level.
METHOD OF PAYMENT
Approximately 90% of the Company's net sales are made by cash or check,
and 10% by national credit cards. Under the related credit card agreements, the
Company receives daily payments on amounts charged on those cards. Such a
payment is not subject to recovery by such companies unless the charge in
question involved the invalid use of such card. The Company does not have its
own credit card program, but does offer a lay-away program, which accounts for
approximately 10% of the Company's business.
MANAGERS AND OTHER EMPLOYEES
A typical store has three salaried managers and approximately 20 other
employees, of which approximately six are full-time. During fiscal 1997, the
total number of employees (including part-time and seasonal employees) ranged
from a low of 3,500 to a high of approximately 3,800 during the Christmas
selling season. Approximately 63% of the Company's non-salaried employees are
part-time. None of the Company's employees are covered by collective bargaining
agreements. The Company considers its relationship with its employees to be
good.
TRADEMARKS AND SERVICE MARKS
The mark "Weiner's" and other marks using the Company's distinctive
logos are federally registered service marks of the Company, and the Company
considers these marks and the accompanying goodwill and customer recognition to
be valuable to its business. The Company has registrations for other trademarks
and service marks routinely used in the Company's marketing, advertising and
promotions. Such registrations can be kept in force in perpetuity through
continued use of the marks and timely applications for renewal.
OTHER INFORMATION
The Company has not experienced, and does not expect to experience, any
material effects on its capital expenditures, operating performance or
competitive position from the Company's compliance with applicable environmental
laws and regulations.
The Company has no export sales and no foreign-based operations. The
Company is engaged in one line of business, the retail sale of merchandise.
Accordingly, no data with respect to industry segments is reported herein.
The Company has not spent and does not plan to spend material amounts
on Company-sponsored research and development activities.
ITEM 2. FINANCIAL INFORMATION
SELECTED HISTORICAL FINANCIAL DATA
The following table presents selected historical financial data as of
and for each of the fiscal years in the five-year period ended January 31, 1998.
The following selected historical financial data should be read in conjunction
with the financial statements and the related notes and other information
contained elsewhere in this Registration Statement, including information set
forth herein under "-- Management's Discussion and Analysis of Financial
Condition and Results of Operations."
11
<PAGE>
The historical financial data as of and for each of the fiscal years in
the three year period ended January 31, 1998 are derived from financial
statements audited by Deloitte & Touche LLP, independent auditors. Additionally,
information for the fiscal years ended December 31, 1993 and January 28, 1995
has been derived from audited financial statements.
The financial condition and results of operations of the Company as of
and for the twenty-three weeks ended January 31, 1998 reflects the effectiveness
of the Plan and the application of the principles of "fresh start" reporting in
accordance with SOP 90-7. Accordingly, such financial information is not
comparable to the historical financial condition or results of operations of the
Company prior to the Effective Date. See "-- Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
<TABLE>
<CAPTION>
Successor
Predecessor Company Company
-------------------------------------------------------------------------- --------------
Fiscal years ended(a) Thirty Twenty-three
---------------------------------------------------------------- weeks ended weeks ended
December 31, January 28, January 27, January 25, August 25, January 31,
1993 1995 (b) 1996 1997 1997(c) 1998
------------- ----------- ----------- ----------- ----------- -----------
(Dollars in thousands, except per share and per square foot data)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $ 309,646 $ 307,992 $ 260,712 $ 263,666 $ 160,315 $ 103,322
Operating (loss) income (1,230) (19,104) (25,847) (17,864) 1,250 (5,734)
Net income (loss) 363 (19,664) (25,605) (17,220) 18,541 (5,885)
Net income (loss) per share of
common stock (e) $ 3.63 $ (196.64) $ (256.05) $ (172.20) $ 185.41 $ (0.31)
BALANCE SHEET DATA:
Working capital $ 34,927 $ (2,686) $ 64,926 $ 54,728 $ 43,434 $ 41,249
Total assets 113,231 94,106 103,242 91,285 99,241 80,739
Long-term debt 19,328 -- -- -- -- 5,000
SELECTED OPERATING DATA:
Comparable store net sales
(decrease) increase (2.9)% (0.4)% (11.9)% 6.7% (0.1)% (d)
Number of stores
Beginning of period 149 155 158 139 131 134
Opened 8 4 -- -- 3 1
Closed 2 1 19 8 -- 7
End of period 155 158 139 131 134 128
Total sales square feet at end
of period (000's) 3,184 3,247 2,810 2,652 2,602 (d)
Average net sales per store $ 2,037 $ 1,968 $ 1,756 $ 1,953 $ 2,036 (d)
Average net sales per square
foot $ 99 $ 96 $ 86 $ 97 $ 100 (d)
</TABLE>
- -------------------------------------
NOTES:
(a) In 1993, the Company was on a calendar year that ended on December 31, 1993.
Fiscal year 1994 was a thirteen-month period that ended on January 28, 1995.
Fiscal years 1995 and 1996 each contained 52 weeks and ended January 27,
1996 and January 25, 1997, respectively. Fiscal 1997, which contained 53
weeks, ended on the Saturday closest to January 31st (i.e., January 31,
1998).
(b) As of January 1, 1994, the Company changed its fiscal year from a calendar
year to a 52- or 53-week fiscal year. As a result of this change, the
financial information for the period ended January 28, 1995 (fiscal 1994)
includes the results of the calendar year ended December 31, 1994 and the
results from the month of January 1995, a period of 13 months. The Company
has not restated the results of operations on a comparative 52-week basis.
(c) Net income for the thirty weeks ended August 25, 1997 includes $1,519,000 in
"fresh start" expense and $18,683,000 in extraordinary gain related to debt
discharge.
(d) Amount presented is for the fiscal year ended January 31, 1998.
12
<PAGE>
(e) Net income (loss) per share of common stock for fiscal years 1993, 1994,
1995 and 1996 and the thirty weeks ended August 25, 1997 is based on a
weighted average number of common shares outstanding of 100,000 common
shares, while for the twenty-three weeks ended January 31, 1998 it is based
on a weighted average number of shares of Common Stock outstanding of
19,000,000 shares of Common Stock. Earnings per share for the Predecessor
Company is not comparable due to the Company's reorganization.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
As used herein, unless the context requires otherwise, "1997" refers to
the Company's 53-week fiscal year ended January 31, 1998, "1996" refers to the
Company's 52-week fiscal year ended January 25, 1997 and "1995" refers to the
Company's 52-week fiscal year ended January 27, 1996.
OVERVIEW
The Company's financial results have changed significantly over the
past three years, principally as a result of its filing for reorganization under
Chapter 11 of the Bankruptcy Code on April 12, 1995 and subsequent emergence
from Chapter 11 reorganization on August 26, 1997.
The Company's net income for 1997 was $12,656,000 compared to a net
loss of $17,220,000 and $25,605,000 in 1996 and 1995, respectively. An
extraordinary gain for debt discharge of $18,683,000 favorably impacted the
results in 1997. Comparable 53-week stores' sales were virtually flat in 1997.
In 1996, comparable 52-week stores' sales increased 6.7%. The Company had an
operating loss as a percentage of sales of 1.7% in 1997, 6.7% in 1996 and 9.9%
in 1995.
The Company incurred a net loss of $5,885,000 for the twenty-three
weeks ended January 31, 1998 (Successor Company). This loss was primarily due to
high seasonal markdowns and competitive pressure during the holiday season.
The Company emerged from Chapter 11 reorganization in 1997. The Company
incurred reorganization expenses of $2,406,000, $10,742,000 and $9,753,000 in
1997, 1996 and 1995, respectively. These charges included, over such three year
period, approximately $8,100,000 in relation to the closing of unprofitable
stores and a warehouse facility, $8,000,000 in professional fees, $3,200,000 of
system and store reorganization costs, $2,800,000 of administrative
reorganization costs, and approximately $801,000 of other reorganization costs.
In 1996, the Company wrote off $3,044,000 of impaired assets as a
result of management's decision to replace the Company's point-of-sale equipment
in the future, the effect of which was to significantly reduce the estimated
useful lives of such point-of-sale equipment and associated hardware and
software.
On the Effective Date, the Company restructured its capitalization in
accordance with the Plan. The application of "fresh start" reporting provisions
of Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7") as of the Effective Date
included adjustments to certain assets, which resulted in a $1,519,000 one-time
charge to expense. Further, the Company recognized reorganization value in
excess of amounts allocable to identifiable assets ("Excess Reorganization
Value") of $5,905,000. This Excess Reorganization Value is being amortized by
the straight line method over 15 years. Also on the Effective Date, the value of
the cash and securities distributed by the Company in settlement of the claims
resulted in an extraordinary gain of $18,683,000.
In 1997, the Company entered into the Revolving Credit Agreement, which
provides a $40,000,000 working capital facility and a subfacility of $15,000,000
for letters of credit. Borrowings under the Revolving Credit Agreement are
restricted for the sole use of funding working capital requirements in the
ordinary course of business and for other general corporate purposes. Under the
terms of the Revolving Credit Agreement, capital expenditures are limited to
$7,000,000 in each of fiscal years 1997, 1998 and 1999 and to $5,000,000 in the
period commencing January 30, 2000 and ending August 31, 2000, the expiration
date of the agreement.
14
<PAGE>
"FRESH START" REPORTING
As a result of "fresh start" reporting under SOP 90-7, the financial
information for the twenty-three weeks ended January 31, 1998 is not comparable
to the information for the thirty weeks ended August 25, 1997 or the fiscal
years ended January 25, 1997 and January 27, 1996. However, except as described
below, the Company believes that the impact of the "fresh start" reporting
adjustments, while material, is identifiable, and that combining the
twenty-three weeks ended January 31, 1998 with the thirty weeks ended August 25,
1997 provides a useful basis for comparison to the prior periods. Therefore, the
following discussion assumes the periods in fiscal 1997 are combined.
RESULTS OF OPERATIONS
The following table sets forth income statement data for 1997, 1996 and
1995 expressed as a percentage of sales:
<TABLE>
<CAPTION>
1997(1) 1996 1995
-------------- --------------- ---------------
<S> <C> <C> <C>
Net sales............................................................. 100.0% 100.0% 100.0%
Cost of goods sold.................................................... 67.8% 68.0% 69.0%
-------------- --------------- ---------------
Gross margin.......................................................... 32.2% 32.0% 31.0%
Selling, administrative and other operating costs..................... 33.0% 33.6% 37.2%
Reorganization expense................................................ 0.9% 4.0% 3.7%
Impairment of assets.................................................. 0.0% 1.1% 0.0%
-------------- --------------- ---------------
Operating loss........................................................ -1.7% -6.7% -9.9%
Interest income (expense), net........................................ 0.0% 0.2% 0.0%
Fresh start adjustments............................................... -0.6% 0.0% 0.0%
-------------- --------------- ---------------
Loss before income taxes and extraordinary gain....................... -2.3% -6.5% -9.9%
Deferred income tax benefit........................................... 0.0% 0.0% 0.1%
-------------- --------------- ---------------
Loss before extraordinary gain........................................ -2.3% -6.5% -9.8%
Extraordinary gain.................................................... 7.1% 0.0% 0.0%
-------------- --------------- ---------------
Net income (loss)..................................................... 4.8% -6.5% -9.8%
============== =============== ===============
</TABLE>
- --------------------
(1) Reflects the combining of the twenty-three weeks ended January 31, 1998
(Successor Company) and the thirty weeks ended August 25, 1997 (Predecessor
Company).
1997 Compared to 1996. Net sales decreased slightly to $263,637,000 in
1997 from $263,666,000 in 1996. Fiscal year 1997 was a period of 53 weeks
compared to a period of 52 weeks in fiscal year 1996. This decrease in sales was
primarily attributable to the closing of 15 stores over the last two years and
the slight decline in comparable stores' sales of .01% on a 53-week comparable
basis, offset by the opening of four new stores in 1997.
Cost of goods sold decreased $506,000 to $178,658,000 in 1997 from
$179,164,000 in 1996. As a percentage of sales, cost of goods sold decreased to
67.8% in 1997 from 68.0% in 1996. Gross margin increased
15
<PAGE>
$477,000 to $84,979,000 in 1997 from $84,502,000 in 1996. Gross margin as a
percentage of sales increased to 32.2% in 1997 from 32.0% in 1996. The
improvement is primarily attributable to an improvement in initial markup.
Selling, general and administrative expenses decreased $1,523,000 to
$87,057,000 in 1997 from $88,580,000 in 1996. This reduction is primarily
attributable to the closing of 15 stores over the last two years, offset by the
opening of four new stores in 1997. As a percentage of sales, selling, general
and administrative expenses decreased to 33.0% in 1997 from 33.6% in 1996.
Reorganization expense decreased $8,336,000 to $2,406,000 in 1997 from
$10,742,000 in 1996. This decrease is a result of the Company's emergence from
Chapter 11 reorganization on August 26, 1997. Reorganization expense in 1997
was primarily professional fees.
The Company recorded net interest expense of $24,000 in 1997 compared
to net interest income of $596,000 in 1996. The decline is primarily due to the
reduction in cash available for investment in 1997 as compared to 1996, lowering
interest income significantly. During its bankruptcy proceedings, the Company
discontinued accruing interest on substantially all of its prepetition debt.
Interest expense has increased as a result of the Company's emergence from
Chapter 11 reorganization on August 26, 1997.
The Company recorded $1,519,000 in "fresh start" expense in relation to
its emergence from Chapter 11 reorganization in 1997. Related "fresh start"
adjustments of $15,905,000 were credited to retained earnings in 1997 to
eliminate the Company's cumulative deficit as of the Effective Date.
The Company recorded no current or deferred income tax benefit in 1997.
In 1996, a deferred tax benefit of $48,000 was recorded. The recognition of
income tax benefits in both periods has been affected by limitations on the
Company's ability to utilize NOL carryforwards.
Extraordinary gain of $18,683,000 related to debt discharged in the
Company's emergence from Chapter 11 reorganization was recognized in August
1997.
1996 Compared to 1995. On April 12, 1995, the Company filed for
reorganization under Chapter 11. Net sales increased $2,954,000 to $263,666,000
in 1996 from $260,712,000 in 1995. This increase was primarily attributable to a
6.7% increase in comparable stores' sales, which was partially offset in 1996 by
closing a total of 27 stores during 1996 and 1995.
Cost of goods sold decreased $770,000 to $179,164,000 in 1996 from
$179,934,000 in 1995. As a percentage of sales, cost of goods sold decreased to
68.0% in 1996 from 69.0% in 1995. Gross margin increased $3,724,000 to
$84,502,000 in 1996 from $80,778,000 in 1995. Gross margin as a percentage of
sales increased to 32.0% in 1996 from 31.0% in 1995. This increase was primarily
due to lower markdowns taken on clearance merchandise.
Selling, general and administrative expenses decreased $8,292,000 to
$88,580,000 in 1996 from $96,872,000 in 1995, primarily due to the closing of 27
unprofitable stores in 1996 and 1995. As a percentage of sales, selling, general
and administrative expenses decreased to 33.6% in 1996 from 37.2% in 1995. This
decrease as a percentage of sales was primarily the result of continued
improvement in the productivity of store sales employees and corporate personnel
through more effective utilization of technology and the closing of unprofitable
stores.
Reorganization items increased $989,000 to $10,742,000 in 1996 from
$9,753,000 in 1995. Reorganization items represent expenses incurred as a result
of Chapter 11 case and subsequent reorganization efforts and include
professional fees and related expenses and provisions for closed stores. The
increase in 1996
16
<PAGE>
is primarily a result of professional fees and related expenses and provisions
for closed stores in 1996 as compared to 1995.
During March 1995, the Financial Accounting Standards Board issued SFAS
121, which the Company adopted in 1996. As a result of management's decision to
replace the Company's point-of-sale equipment with more advanced equipment in
the future, an impairment charge of $3,044,000 was recorded in 1996.
The Company recorded net interest income of $596,000 in 1996 compared
to net interest expense of $58,000 in 1995. Upon filing for Chapter 11
reorganization, the Company discontinued accruing interest on substantially all
of its prepetition debt.
The Company recorded a deferred income tax benefit of $48,000 in 1996
and $300,000 in 1995. The recognition of income tax benefits in 1996 and 1995
has been affected by limitations on the Company's ability to utilize NOL
carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
Cash from Operations and Working Capital. The Company's primary sources
of liquidity have been cash flow from operations and borrowings under the
Revolving Credit Agreement.
For the three fiscal years ended January 31, 1998, net cash flow from
operations was as follows ($ in thousands):
<TABLE>
<CAPTION>
1997(1) 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) $ 12,656 $ (17,220) $ (25,605)
Depreciation and amortization 4,083 3,644 3,706
Other non-cash charges (14,723) 14,067 10,369
Changes in current assets and liabilities (15,425) (4,897) 35,127
----------------- ------------------ ----------------
Net cash (used in) provided by operating activities $ (13,409) $ (4,406) $ 23,597
================= ================== ================
</TABLE>
- --------------------
(1) Reflects the combining of the twenty-three weeks ended January 31, 1998
(Successor Company) and the thirty weeks ended August 25, 1997 (Predecessor
Company).
In 1997, the increase in cash used in operating activities from 1996
reflects the Company's emergence from Chapter 11 reorganization and the cash
payment of certain claims. In 1996, the increase in cash used in operating
activities from 1995 is primarily attributable to normal changes in working
capital items, reductions in receivables and increases in inventories. The cash
provided by operations in 1995 was impacted favorably by an increase in cash and
cash equivalents due to the filing of the Chapter 11 Case.
17
<PAGE>
The Company's working capital, current ratio, and ratio of sales to
average working capital at the end of the three fiscal years ended January 31,
1998 were as follows ($ in thousands):
1997 1996 1995
------------------------------------------
Working capital $ 41,249 $54,728 $ 64,926
Current ratio 3.4 3.4 4.2
Ratio of sales to average working capital 5.5 4.4 8.4
The decrease in working capital resulted primarily from the reduction
in cash and cash equivalents due to debt settlement in the Company's emergence
from Chapter 11 reorganization and the reduction in inventory. The Company funds
inventory purchases through cash flows from operations, from borrowings under
the Revolving Credit Agreement and favorable payment terms the Company has
established with its vendors.
Net cash provided by financing activities was $5,000,000 in 1997, zero
in 1996 and $1,479,000 in 1995.
Revolving Credit Agreement. On August 26, 1997, the Company entered
into the three-year Revolving Credit Agreement. The Revolving Credit Agreement
provides a $40,000,000 working capital facility, including a $15,000,000
subfacility for the issuance of letters of credit. The Revolving Credit
Agreement is secured by substantially all of the Company's assets. The Revolving
Credit Agreement provides that proceeds may be used solely to fund working
capital in the ordinary course of business and for other general corporate
purposes. Borrowings under the Revolving Credit Agreement bear interest at the
reference rate thereunder plus .375% or, at the option of the Company, the
Eurodollar Rate thereunder plus 2.25%.
Under the terms of the Revolving Credit Agreement, capital expenditures
are limited to $7,000,000 in each of fiscal years 1997, 1998 and 1999 and to
$5,000,000 for the period commencing January 30, 2000 and ending August 31,
2000, the expiration date of the Revolving Credit Agreement. The Revolving
Credit Agreement further stipulates certain borrowing limitations based on the
Company's inventory levels and requires that the Company comply with certain
financial covenants.
At January 31, 1998, the Company had approximately $18,100,000 of
availability under the Revolving Credit Agreement, after considering borrowings
and outstanding letters of credit. At January 31, 1998, the outstanding letters
of credit thereunder were approximately $4,800,000.
The Company believes that its internally generated cash flow, together
with borrowings under the Revolving Credit Agreement, will be adequate to
finance the Company's operating requirements, debt repayments and capital needs
during the foreseeable future. Any material shortfalls in operating cash flow
could require the Company to seek alternative sources of financing or to reduce
capital expenditures.
Capital Expenditures. The Company's primary capital requirements have
been for the remodeling of existing stores, the opening of new stores and the
enhancement of management information systems. The Company spent approximately
$8,100,000 during the three-year period ended January 31, 1998 to open new
stores and upgrade/remodel existing stores. Also during the past three years,
approximately $3,300,000 was invested in new management information systems
including an upgraded technology infrastructure throughout the organization and
improved distribution center technology. The new management information systems
were purchased Year 2000 compliant. As of March 31, 1998, the Company has not
incurred any capital expenditures solely as a result of Year 2000 compliance
issues.
18
<PAGE>
In connection with the technology upgrade, the Company believes that
its management information system is Year 2000 compliant and that the Company
will not incur any significant costs for Year 2000 compliance. The Company is
not certain whether its customers, suppliers and other constituents are Year
2000 compliant. If any such customers, suppliers and other constituents are not
Year 2000 compliant, the resolution of their Year 2000 issues could represent a
material event or uncertainty that could reasonably be expected to significantly
impact the Company's future results of operations.
The Company's capital expenditures are expected to be between
approximately $6,500,000 and $7,000,000 in fiscal 1998 for the opening of new
stores, remodeling of existing stores and management information systems
enhancements. The Company will fund these capital expenditures from cash
generated by operations and borrowings under the Revolving Credit Agreement.
IMPACT OF INFLATION
In recent years, the impact of inflation on the Company's results of
operations has been insignificant. As operating expenses have increased, the
Company has been unable, due to competitive pressure, to recover these increases
in costs by increasing prices over time. Future results of the Company will
depend on, among other things, the competitive environment, the prevailing
economic climate and the ability of the Company to adapt to these conditions.
SEASONALITY
The Company's business is seasonal with approximately 44% of the
Company's annual sales being generated during the back-to-school selling season
in July and August and the Christmas selling season of November and December.
Consequently, an amount approximately equivalent to substantially all of the
Company's operating income is earned in those four months and the Company
typically sustains an operating loss in many of the other months. In addition,
the Company's performance, like that of many other retailers, is sensitive to
the overall U.S. economy and economic cycles and related economic conditions
that influence consumer trends and spending patterns.
RECENT ACCOUNTING PRONOUNCEMENTS
At the beginning of fiscal 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." In fiscal
1996, the Company adopted Statement of Accounting Standards No. 121 ("FAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." In accordance with FAS 121, the Company, in 1996, wrote off
$3,044,000 of impaired assets as a result of the Company's decision to replace
its point-of-sale equipment in the future.
In fiscal 1997, the Company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share." For fiscal 1997, there is no difference
between basic and diluted earnings per common share, as the inclusion of 898,500
options of common shares granted pursuant to the Company's 1997 Stock Incentive
Plan (the "Stock Plan") would have an anti-dilutive effect.
The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
effective for fiscal years beginning after December 15, 1997. The Company
believes this statement will have no impact on its financial presentation.
Further, FASB has issued Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information," also
effective for fiscal years beginning after December 15, 1997. The Company does
not have industry segments and does not believe this pronouncement will impact
its financial presentation.
19
<PAGE>
INCOME TAX MATTERS
Pursuant to the Plan, Administrative Expenses and Priority Claims
generally were paid in full. Other claims against the Company were paid at a
discount. Payments of claims at a discount resulted in cancellation of
indebtedness ("COD") income. COD income in the amount of $18,683,000 arose from
payment of claims at a discount.
This COD income ultimately may be excluded from the Company's taxable
income pursuant to certain bankruptcy exclusion rules, which the Company plans
to use. However, if the Company excludes COD income from its taxable income
because of the bankruptcy exclusion rules, generally, after the determination of
the Company's tax for the taxable year of discharge, the amount excluded from
the gross income must be applied to permanently reduce the following relevant
tax attributes of the Company in the order and in the amounts set forth below.
o first NOLs for the taxable year of the discharge and then NOL
carryovers to such taxable year,dollar-for-dollar;
o general business credit carryovers to or from the taxable year
of discharge, 33-1/3 cents for each dollar of excluded income;
o the minimum tax credit available under Section 53(b) of the
Tax Code as of the beginning of the taxable year immediately
following the taxable year of discharge, 33-1/3 cents for each
dollar of excluded income;
o any net capital losses for the taxable year of the discharge
and any capital loss carryover to such taxable year, dollar-
for-dollar;
o the basis of the taxpayer's assets, both depreciable and
nondepreciable, held by the taxpayer at the beginning of the
taxable year following the taxable year in which the discharge
occurs dollar-for-dollar, but the basis reduction shall not
exceed the excess of the aggregate bases of the property held
by the taxpayer immediately after the discharge over the
aggregate of the liabilities of the taxpayer immediately after
the discharge.
In the Company's financial statements and the related notes included
elsewhere in this Registration Statement, the Company reported a federal income
tax NOL carryforward of approximately $37,000,000 as of January 31, 1998.
Tax attributes remaining after the application of the above COD rules
would then be subject to limitation- on-utilization rules. The Tax Code imposes
limitations on the utilization of tax attributes, such as NOL carryovers, after
certain changes in the ownership of a loss company. The Company is a loss
company.
In general, pursuant to Tax Code Section 382, an ownership change of
more than 50% of the value of stock of a loss corporation within a three-year
testing period (an "Ownership Change") will trigger limitations as to the use of
a loss corporation's NOL carryovers ("Section 382 Limitation"). After an
Ownership Change, the amount of a loss corporation's taxable income that can be
offset by existing NOL carryovers cannot exceed an amount equal to the value of
the loss corporation (excluding certain contributions to capital) multiplied by
a specific rate of return periodically published by the Internal Revenue Service
("IRS") (the U.S. long-term, tax exempt bond rate). In any given year, this
Section 382 Limitation may be increased by certain built-in gains realized
after, but accruing economically before, the ownership change and the carryover
of unused Section 382 limitations from prior years. (The long-term tax-exempt
rate for ownership change during the month of August 1997 is 5.64%).
No NOL carryovers or credit carryovers will survive an Ownership Change
if a continuity of business enterprise requirement is not met during the
two-year period beginning on the date of the Ownership Change of the loss
corporation. Under this continuity requirement, the loss corporation is required
to continue its historic
20
<PAGE>
business or to use a significant portion of its assets in such a business. The
Company believes that the continuity of business enterprise requirement will be
met.
Under the Plan, all of the shares of the Company held by its former
stockholders were canceled and 100% of the outstanding Common Stock was issued
to the Company's creditors (other than 400,000 shares of Common Stock issued to
management; see "Executive Compensation - 1997 Stock Incentive Plan - General").
Accordingly, the Company will have an Ownership Change within the meaning of Tax
Code Section 382.
Section 382 of the Tax Code also contains a provision, Section
382(l)(5), which provides that in a Title 11 or similar case under the
jurisdiction of a Bankruptcy Court (a "Title 11 Case"), the Section 382
Limitation will not apply to certain Ownership Changes. In the case of the
Company, there are specific rules which make Section 382(l)(5) undesirable. The
Company may elect instead to be subject to a special valuation rule under Tax
Code Section 382(l)(6). Under this special valuation rule, for purposes of
computing the annual Section 382 Limitation, the value of the loss corporation
is determined by including the increase in the value of such stock that occurs
as the result of any surrender or cancellation of the claims of creditors. This
special rule might result in a greater value for the Company, and therefore a
less onerous Section 382 Limitation on the use of the Company's NOL or credit
carryovers.
The Company intends to elect to have its NOL be governed by the Section
382(l)(6) exception. Based on its federal income tax returns as filed and the
advice of the Company's tax consultants, the Company believes it will have an
NOL of approximately $37,000,000.
Thus, the Company believes that under the Section 382(l)(6) limitation,
since the fair market value of the equity of the Company immediately after the
reorganization was approximately $63,000,000 and the long-term tax-exempt rate
is 5.64%, the annual utility of the Company's NOL is approximately $3,500,000,
subject to certain adjustments. If the Company has a net unrealized built-in
gain with respect to its assets, the annual limitation may be augmented to the
extent the Company realizes such gain within the five-year recognition period
following the reorganization.
The amount of NOLs available to the Company is based on factual and
legal issues with respect to which there can be no certainty. The actual annual
utility of the NOL carryovers related to pre-change years will be determined by
actual market value, which may be different from amounts estimated herein, and
the actual long-term exempt rate at the date of reorganization. Therefore, the
amount of NOL carryovers is subject to adjustments by the IRS and it is entirely
possible that the NOLs could be significantly less than $37,000,000.
A corporation is required to pay alternative minimum tax to the extent
that 20% of "alternative minimum taxable income" ("AMTI") exceeds the
corporation's regular tax liability for the year. AMTI is generally equal to
regular taxable income with certain adjustments. For purposes of computing AMTI,
a corporation is entitled to offset no more than 90% of its AMTI with NOLs (as
computed for alternative minimum tax purposes). Section 382 is applicable to the
alternative minimum tax net operating loss. If the Company's consolidated group
is subject to the alternative minimum tax in future years, a federal tax of 2%
(20% of the 10% of AMTI not offset by NOLs) will apply to any net taxable income
earned by the Company's consolidated group in future years that is otherwise
offset by NOLs.
FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements. The words
"anticipate," "believe," "expect," "plan," "intend," "seek," "estimate,"
"project," "will," "could," "may" and similar expressions are intended to
identify forward-looking statements. These statements include, among others,
information regarding future operations, future capital expenditures and future
net cash flow. Such statements reflect the Company's current views with respect
to future events and financial performance and involve risks and uncertainties,
including, without limitation, general economic and business conditions, changes
in foreign, political, social and economic
21
<PAGE>
conditions, regulatory initiatives and compliance with governmental regulations,
the ability of the Company and its competitors to predict fashion trends and
customer preferences and achieve further market penetration and additional
customers, consumer apparel buying patterns, adverse weather conditions,
inventory risks due to shifts in market demand, and various other matters, many
of which are beyond the Company's control. Should one or more of these risks or
uncertainties occur, or should underlying assumptions prove to be incorrect,
actual results may vary materially and adversely from those anticipated,
believed, estimated or otherwise indicated. Consequently, all of the
forward-looking statements made in this document are qualified by these
cautionary statements and there can be no assurance that the actual results or
developments anticipated by the Company will be realized or, even if
substantially realized, that they will have the expected consequences to or
effect on the Company or its business or operations. The Company does not
undertake and expressly disclaims any obligation to publicly update or revise
any such forward-looking statements even if experience or future changes make it
clear that the projected results expressed or implied therein will not be
realized.
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<PAGE>
ITEM 3. PROPERTIES
The Company's principal owned or leased properties include 132 leased
stores, of which 110 are in Texas and 22 are in Louisiana, as well as the
Company-owned and operated distribution center/headquarters facility located in
Houston, Texas.
The Company leases all of its 132 stores. Most leases are long-term net
leases (i.e., lease contracts without a purchase option) which expire on varying
dates through 2008. Most of the store leases include renewal options for an
additional 5 to 15 years and require the Company to pay taxes, insurance and
certain common area maintenance costs in addition to specified minimum rent.
Most of the leases also require the payment of contingent rent based upon a
specified percentage of sales in excess of a base amount.
The following table sets forth, as of March 31, 1998, the number of
leases that will expire in each of the indicated calendar years and the number
of such leases in each year that have renewal options of five or more years:
Number of
Leases
Number of Containing
Calendar Year Leases Expiring Renewal Option
------------- --------------- --------------
1998 23 23
1999 33 31
2000 26 24
2001 21 21
2002 15 14
Thereafter 14 11
-- ---
Total 132 124
Most of the Company's stores are either free standing structures or
anchors in strip shopping centers. The vast majority of the stores were opened
from the mid-1970's to the early 1990's. The Company did not open any new stores
in fiscal 1995 or fiscal 1996. Consistent with the Company's operating
strategies, the Company opened four new stores in fiscal 1997. Furthermore, in
fiscal 1996 and 1997, the Company remodeled 20 existing stores to the prototype
or hybrid prototype format. See "Business -- Store Presentation." The Company
enters into and terminates leases from time to time in the ordinary course of
business as new stores are opened and stores are closed.
The Company's distribution center/headquarters facility in Houston,
Texas contains approximately 376,000 square feet and is located on approximately
8.2 acres of land. Such real property is subject to an encumbrance created by
the Deed of Trust, Assignment of Rents, Security Agreement and Financing
Statement entered into by the Company for the benefit of CIT in connection with
the Revolving Credit Agreement.
The Company considers its distribution center/headquarters facility to
be suitable and adequate for its operations for the foreseeable future.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the
beneficial ownership as of March 31, 1998 of Common Stock by (a) each
stockholder known by the Company to own beneficially in excess of five percent
of the Common Stock, (b) each executive officer named in "Executive Compensation
- -- Summary Compensation Table" and each member of the Board of Directors and (c)
all such executive officers and members of the Board of Directors as a group.
Except as otherwise indicated, all persons listed below have (i) sole voting
power and investment power, except to the extent that authority is shared by
spouses under applicable law, and (ii)
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<PAGE>
both record and beneficial ownership with respect to the shares of Common Stock
indicated as being beneficially owned by them.
<TABLE>
<CAPTION>
Name of Number of Shares Estimated
Beneficial Owner Beneficially Owned Percentage Ownership (1)
- ------------------------------------------------ -------------------- -------------------------
<S> <C> <C>
Chase Bank of Texas. ........................... 8,558,252 44.8%
707 Travis Street
Houston, Texas 77002
Magten Asset Management Corp. (2)............... 1,233,110 6.5%
35 East 21st Street
New York, New York 10010
Pengo Securities Corp. (3)...................... 1,135,435 5.9%
885 Third Avenue
New York, New York 10022
Herbert R. Douglas (4).......................... 243,333 *
Raymond J. Miller (5)........................... 80,000 *
Jerome L. Feller (5) ........................... 80,000 *
James L. Berens (5)............................. 40,000 *
Joseph J. Kassa (5)............................. 40,000 *
Michael G. Klaiman (5) ......................... -- --
Merwin F. Kaminstein............................ -- --
Randall L. Lambert.............................. -- --
Gasper Mir...................................... -- --
F. Hall Webb (6)................................ (6) (6)
Melvyn L. Wolff................................. -- --
All directors and named executive officers as a
group (11 persons) (4), (5), (6).......... 9,041,585 47.4%
</TABLE>
- -----------------------------
*Less than one percent of the Common Stock.
(1) Based on the total number of shares of Common Stock required to be
issued pursuant to the Plan. The Plan required the Company to issue an
aggregate of 18,600,000 shares of Common Stock (excluding 400,000
shares of Restricted Stock issuable pursuant to the Stock Plan),
assuming the allowed amount of all claims filed against the Company by
its general unsecured creditors will not exceed $85,200,000, the
Company's current estimate of the total amount needed to settle such
claims. As of March 31, 1998, approximately 319,000 shares of Common
Stock are held in a Reserve pending the resolution of certain Disputed
Claims pursuant to the Plan. See "Business-- No Prior Market for the
Common Stock," "Market Price of and Dividends on the Registrant's
Common Equity and Related Stockholder Matters" and "Description of
Registrant's Securities to Be Registered."
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<PAGE>
(2) Magten Asset Management Corp. is a registered investment advisor that
manages a number of discretionary accounts including Magten Partners,
LP, Magten Group Trust, The Saturn Fund, and Hughes Master Retirement
Trust. Magten Asset Management Corp. disclaims any beneficial ownership
of such Common Stock.
(3) Pengo Securities Corp. is a registered investment advisor that manages
a number of discretionary accounts including Pengo, L.L.C., Pengo
Industries, Inc., RDS Group Holdings, Inc., SDR Group Holdings, Inc.,
and Randall D. Smith.
(4) Includes 160,000 shares of Common Stock granted pursuant to the Stock
Plan and 83,333 shares of Common Stock issuable pursuant to options
granted pursuant to the Stock Plan which are currently exercisable.
Does not include 166,667 shares of Common Stock issuable pursuant to
options granted pursuant to the Stock Plan, none of which options are
currently exercisable or will become exercisable within 60 days of the
date of this Registration Statement. See "Executive Compensation --
Option Grants in Fiscal Year 1997" and "-- 1997 Stock Incentive Plan --
General."
(5) Does not include shares of Common Stock issuable pursuant to options
granted to members of management, including Messrs. Miller (125,000),
Feller (125,000), Berens (75,000), Kassa (75,000) and Klaiman (25,000),
respectively, in each case pursuant to the Stock Plan, none of which
options are currently exercisable or will become exercisable within 60
days of the date of this Registration Statement. See "Executive
Compensation -- Option Grants in Fiscal Year 1997" and "-- 1997 Stock
Incentive Plan."
(6) Mr. Webb, who is a Director of the Company, is Senior Vice President of
Chase Bank of Texas and may therefore be deemed to share beneficial
ownership of the 8,558,252 shares of Common Stock shown as beneficially
owned by Chase Bank of Texas. Mr. Webb disclaims beneficial ownership
of such shares of Common Stock.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages, and positions with the
Company of executive officers and members of the Board of Directors, as well as
the year each joined the Company and/or its Board:
<TABLE>
<CAPTION>
Year Joined
Name Age Company Position Held
- ----------------------------- ------- -------------- ---------------------------------------------------------
<S> <C> <C> <C>
Herbert R. Douglas........... 56 1995 Chairman, President, Chief Executive Officer and Director
Raymond J. Miller............ 46 1995 Vice President, Chief Financial Officer and Director
Jerome L. Feller............. 57 1995 Vice President, General Merchandise Manager
James L. Berens.............. 49 1996 Vice President, Stores
Joseph J. Kassa.............. 42 1996 Vice President, Marketing, Sales Promotion and Real Estate
Merwin F. Kaminstein......... 63 1997 Director
Randall L. Lambert........... 40 1997 Director
Gasper Mir................... 51 1997 Director
F. Hall Webb................. 49 1997 Director
Melvyn L. Wolff.............. 66 1997 Director
</TABLE>
Messrs. Douglas and Miller are the only members of the Board who are
also officers of the Company. Each of the remaining directors listed below
became a member of the Board of Directors on the Effective Date. In connection
with the development of the Plan, representatives of the Company consulted with
the committee of unsecured creditors appointed by the United States Trustee (the
"Creditors Committee") regarding the composition of the Board of Directors.
The Board of Directors elects officers to hold office until the next
annual meeting of the Board of Directors or until their successors are elected,
or until their resignation or removal. The Chairman may appoint
25
<PAGE>
additional officers to hold office until their successors are appointed, or
until their resignation or removal. The current officers were most recently
elected by the Board of Directors on September 4, 1997. No family relationships
exist among the directors and executive officers of the Company.
Herbert R. Douglas, Chairman, President, Chief Executive Officer and
Director. Mr. Douglas has served as a Director of the Company and as Chief
Executive Officer and President since December 1995 and was elected as Chairman
of the Board of Directors in September 1997. Mr. Douglas served as President and
Chief Executive Officer of Jamesway Corporation, a New Jersey-based discount
store chain, from 1994, beginning after the commencement of its bankruptcy
proceedings under Chapter 11 of the Bankruptcy Code, and continuing through its
emergence from Chapter 11 reorganization and until its liquidation under Chapter
11 in 1995. Mr. Douglas served in various executive positions in merchandising
for Bradlees, Inc., a Massachusetts-based discount store chain, from 1986 to
1994, most recently as Senior Vice President for Merchandising.
Raymond J. Miller, Vice President, Chief Financial Officer and
Director. Mr. Miller has served as a Director of the Company since August 1997
and has held his current position since January 1996. Mr. Miller served as Chief
Financial Officer from February 1995 until January 1996. Mr. Miller served as
Executive Vice President Finance and Operations of Carlisle Retailers, Inc., an
Ohio-based specialty retail store chain, from 1988 to 1995. Carlisle Retailers,
Inc. commenced bankruptcy proceedings under Chapter 11 of the Bankruptcy Code in
1993 and emerged from Chapter 11 reorganization in 1994. Prior to his service
with Carlisle Retailers, Inc., he served as Vice President - North America
Operations of Industrial Equity Pacific Limited, a Hong Kong-based international
investment firm.
Jerome L. Feller, Vice President, General Merchandise Manager. Mr.
Feller has served as Vice President, General Merchandise Manager since December
1995. Mr. Feller served as Senior Vice President, General Merchandise Manager of
Jamesway Corporation, a New Jersey-based discount store chain, in 1995. From
1992 to 1994, Mr. Feller was owner and Chief Executive Officer of More For Less,
Inc., a women's specialty clothing store in Florida.
James L. Berens, Vice President, Stores. Mr. Berens has served as Vice
President, Stores since January 1996. Mr. Berens served as Vice President
Regional Store Management of Jamesway Corporation, a New Jersey- based discount
store chain, in 1995. Mr. Berens served in various management positions for
Caldor Corporation, a Connecticut-based discount store chain, from 1991 to 1994,
most recently as District Store Manager.
Joseph J. Kassa, Vice President, Marketing, Sales Promotion and Real
Estate. Mr. Kassa has served as Vice President, Marketing, Sales Promotion and
Real Estate since April 1997. Prior thereto, Mr. Kassa served as Vice President,
Marketing and Sales Promotion since February 1996. Mr. Kassa served as Senior
Vice President of Advertising, Marketing & Sales Promotion of Jamesway
Corporation, a New Jersey-based discount store chain, from 1991 to 1995. Prior
to his service with Jamesway Corporation, he served as Vice President of
Marketing and Advertising with Consumers/Singers, a manufacturer and catalog
retailer based in New Jersey.
Merwin F. Kaminstein, Director. Mr. Kaminstein is Chairman of the
Board of Brookstone Company, Inc. ("Brookstone"), a specialty retail store chain
based in Massachusetts. From 1990 until 1995, Mr. Kaminstein served Brookstone
as Chairman of the Board and Chief Executive Officer. Prior to his employment
with Brookstone, Mr. Kaminstein was an independent consultant and a partner at
the Pyramid Companies, a retail real estate development company based in upstate
New York.
Randall L. Lambert, Director. Mr. Lambert is the Senior Managing
Director of Chanin Kirkland Messina LLC, a distressed and specialty situation
brokerage firm based in New York. Mr. Lambert is currently a director of Today's
Man Inc., a publicly traded retailer of men's apparel. Prior to his service with
Chanin Kirkland Messina LLC, he served as Managing Director of Private
Transactions of BDS Securities, LLC, a distressed and specialty situation
brokerage firm based in New York, from 1995 to 1997. Mr. Lambert served as
26
<PAGE>
Vice President of Brian M. Enterprises, Inc., an investment banking firm in
Millburn, New Jersey, from 1993 to 1995.
Gasper Mir, Director. Mr. Mir is the founder of the professional
accounting firm of Mir-Fox & Rodriguez, P.C., based in Houston, Texas, and has
served as its President since 1983.
F. Hall Webb, Director. Mr. Webb is the Senior Vice President with
Chase Bank of Texas based in Houston, Texas, since 1987. Mr. Webb held various
executive positions with Chemical Bank/Chase Bank from 1973 to present.
Melvyn L. Wolff, Director. Mr. Wolff is the Chairman of the Board and
Chief Executive Officer of Star Furniture Company, a furniture retailer based in
Texas. He has held both positions for over five years, prior to which he was the
owner and President for 30 years.
Election of Directors. The Company's Restated Bylaws (the "Bylaws") fix
the size of the Board of Directors at no fewer than five and no more than nine
members, to be elected annually by a plurality of the votes cast by the holders
of the Common Stock, and to serve until the next annual meeting of stockholders
and until their successors have been elected, or until their earlier resignation
or removal. The Company's Restated Certificate of Incorporation (the
"Certificate of Incorporation") does not provide for cumulative voting or
classification of directors into separate classes. The Bylaws require the first
annual stockholders meeting to be held in May 1998 and succeeding meetings to be
held annually in May thereafter, or such other date designated by the Board of
Directors. The Certificate of Incorporation requires any amendment by the
stockholders which would increase the size of the Board of Directors to be
approved by the affirmative vote of the holders of at least two-thirds (2/3) of
the outstanding shares of Common Stock. For additional discussion of these and
other corporate governance matters, see "Certain Relationships and Related
Transactions" and "Description of Registrant's Securities to Be Registered," as
well as the Certificate of Incorporation, Bylaws and other documents referred to
under such sections and filed as exhibits to this Registration Statement.
Board Committees. The Company's Bylaws require the Board of Directors
to create an Audit Committee and permit the Board of Directors to create
additional committees comprised of members of the Board of Directors appointed
by the Board of Directors. Following the Effective Date, the Board of Directors
established the committees described below.
The Audit Committee consists of three directors independent of
management and free of any relationship that, in the opinion of the Board of
Directors, would interfere with the exercise of independent judgment as a
committee member. The Audit Committee recommends the selection of the Company's
independent auditors, periodically reviews the adequacy of the Company's
internal financial controls, reviews with the Company's independent auditors the
annual audit, and periodically reviews the terms of material transactions
between the Company and its affiliates and subsidiaries. The Audit Committee
currently consists of Messrs. Mir, as its chairman, Webb and Lambert.
The Compensation Committee consists of three directors independent of
management, and its function includes administration of the Stock Plan and other
management compensation matters. The Compensation Committee currently consists
of Messrs. Wolff, as its chairman, Kaminstein and Mir.
The Executive Committee consists of three directors and functions such
that, between meetings of the Board of Directors, it has and may exercise,
except as otherwise provided by law, all the powers of the Board of Directors in
the management of the property, business and affairs of the Company. The
Executive Committee currently consists of Messrs. Douglas, as its chairman, Webb
and Wolff.
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<PAGE>
The Nominating Committee functions will be performed by the Executive
Committee, which will recommend to the Board of Directors the names of persons
to be nominated for election as members of the Board of Directors of the
Company.
ITEM 6. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the cash and non-cash compensation for
the Company's last completed fiscal year, to the extent applicable, earned by
(i) the Chairman, President and Chief Executive Officer, (ii) the four other
most highly compensated executive officers of the Company who were serving as
executive officers of the Company on January 31, 1998 and (iii) one additional
individual who would have been included among the four other most highly
compensated executive officers of the Company for the fiscal year ended January
31, 1998 but for the fact that such individual was not serving as an executive
officer of the Company on January 31, 1998.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
------------------------------------------- -----------------------------
Awards
-----------------------------
Other Restricted Securities
Annual Stock Underlying
Salary Bonus Compensation Awards Options/ All Other
($) ($) ($) ($)(1) SARS(#)(2) Compensation(3)
----------- ------------ --------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Herbert R. Douglas....... $ 450,000 $ 100,000 $ 3,681 $ 184,000 250,000 $ 995
Chairman, President and
Chief Executive Officer
Raymond J. Miller........ 200,000 -- -- $ 92,000 125,000 525
Vice President and Chief
Financial Officer
Jerome L. Feller......... 200,000 -- 2,100 $ 92,000 125,000 1,125
Vice President, General
Merchandise Manager
James L. Berens.......... 156,928 -- -- $ 46,000 75,000 525
Vice President, Stores
Joseph J. Kassa.......... 131,986 -- 17,676 $ 46,000 75,000 308
Vice President,
Marketing, Sales
Promotion and Real
Estate
Michael G. Klaiman....... 150,000 -- -- -- 25,000 513
Divisional Merchandise
Manager
</TABLE>
- --------------------------------
(1) As of January 31, 1998, the executive officers of the Company held, in
the aggregate, 400,000 shares of restricted Common Stock, the aggregate
value of which, based on a valuation of $1.15 per share, which is the
Company's estimate of the fair market value per share of Common Stock
as of January 31, 1998, was $460,000. The Stock Plan Committee (as
hereinafter defined) granted the restricted stock awards hereinabove
set forth (i.e., a total of 400,000 shares of Common Stock) to the
named executive officers in September 1997 pursuant to the Plan. One
hundred percent of each such stock award will become transferable on
January 15, 2000, except that one hundred percent of the stock award
granted to Mr. Douglas will become transferable on January 15, 1999. In
addition, such stock awards will become transferable upon a "change in
control" of the Company, as defined in the Stock Plan. The respective
named executive officers shall have the right to receive, in respect of
their restricted Common Stock as set forth above, any dividends paid
with respect to the Common Stock. See "- 1997 Stock Incentive Plan --
General" and "-- Awards Under the Stock Plan -- Stock Awards."
(2) Options were granted in September 1997 and November 1997 pursuant to
the Stock Plan. See "- Option Grants in Fiscal Year 1997."
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<PAGE>
(3) Reflects the dollar value of insurance payments by the Company with
respect to term life insurance for the benefit of each named executive
officer.
EMPLOYMENT AGREEMENTS
Herbert R. Douglas. On December 5, 1995, the Company entered into an
employment agreement with Mr. Douglas, as President and Chief Executive Officer
of the Company, which was subsequently amended on May 1, 1997 (as amended, the
"Douglas Agreement"). The Douglas Agreement terminates on January 31, 1999. The
Douglas Agreement provides that Mr. Douglas will receive a base salary of not
less than $450,000 per year. In addition, Mr. Douglas is entitled to performance
bonuses as follows in each of fiscal years 1996, 1997 and 1998: (1) 3% of first
$2 million of EBIT; plus (2) 4% of next $3.5 million of EBIT in excess of $2
million (i.e., total potential performance bonus of $200,000 each fiscal year);
plus (3) an amount equal to the amount calculated pursuant to (2), provided that
aggregate amount of performance bonuses under (3) shall not exceed $300,000
during the term of the Douglas Agreement. For fiscal 1996 Mr. Douglas was
guaranteed a minimum performance bonus of $200,000 and for fiscal 1997 Mr.
Douglas was guaranteed a minimum performance bonus of $100,000. Performance
bonuses (1) and (2) are earned if Mr. Douglas is employed as of October 31 of
each fiscal year and are payable 30 days after completion of audited financial
statements for each fiscal year. Performance bonuses earned pursuant to (3)
shall be earned if Mr. Douglas is employed on October 31 of each fiscal year but
shall be payable 30 days after completion of audited financial statements for
fiscal year 1998. The minimum portion of the performance bonuses for the fiscal
years 1996 and 1997 are to be paid on the first business day of January 1997 and
1998, respectively.
Raymond J. Miller. On February 24, 1995, the Company entered into an
employment agreement with Mr. Miller as Chief Financial Officer of the Company
which was subsequently amended on April 7, 1995 and May 1, 1997 (the "Miller
Agreement"). Such amended employment agreement terminates on January 31, 2000.
Pursuant to the Miller Agreement, Mr. Miller will be paid a base salary of
$200,000 for fiscal 1997 and $220,000 per year thereafter.
Jerome L. Feller. On December 13, 1995, the Company entered into an
employment agreement with Jerome L. Feller as General Merchandise Manager and
Vice President which was subsequently amended May 1, 1997 (the "Feller
Agreement"). The Feller Agreement terminates on January 31, 2000. Pursuant to
the Feller Agreement, Mr. Feller is paid a base salary of $200,000 for fiscal
1997 and $220,000 per year thereafter.
Other Employment Agreements. The Company has entered into agreements
with certain key employees in an effort to retain the continuity of the core
management team for a meaningful period following the Effective Date. In
addition, with respect to certain of its officers, other than Messrs. Douglas,
Miller and Feller, the Company has, while not in any way altering such
employees' employment at will status, provided for a separation payment equal to
twelve months base salary in the event of their termination other than for
cause. The Company has also in respect to certain key employees, while not in
any way altering such employees' employment at will status, provided for a
separation payment equal to six months base salary in the event of their
termination other than for cause. The purpose of such agreements is to provide
the Company with continuity of management by providing its officers and key
employees with appropriate assurances of employment security sufficient to allow
them to concentrate on their duties for the Company without distraction.
The above-mentioned agreements, including the employment agreements of
Messrs. Douglas, Miller and Feller, provide for lump-sum severance payments if
the executives or key employees are terminated for other than cause (as such
term is defined in each respective agreement). The lump-sum severance payment
equals 200% of base salary plus bonus in the case of Mr. Douglas, 100% of base
salary in the cases of Messrs. Miller, Feller, Kassa and Berens and 50% of base
salary in the case of Mr. Klaiman. In the event that all of the executives and
key employees were terminated, the Company's aggregate lump-sum severance
payment obligation would be approximately $1,750,000.
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<PAGE>
OPTION GRANTS IN FISCAL YEAR 1997
On September 4, 1997 and November 17, 1997, pursuant to the Plan and
the Stock Plan, the Company granted options to purchase Common Stock to certain
officers and key employees of the Company at an exercise price of $1.15 per
share, the fair market value as determined by the Compensation Committee. The
following table sets forth information concerning the stock options granted
under the Stock Plan to the named executive officers:
<TABLE>
<CAPTION>
Number of Potential Realizable Value
Securities % Total at Assumed Annual Rates
Underlying Options Exercise of Stock Price
Options Granted to Price Expiration Appreciation for Option Term
Granted (#) (1) Employees ($/Sh) (2) Date 5% ($) 10% ($)
----------------- ------------ ----------- --------------- ---------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Herbert R. Douglas........ 250,000 27.8 $1.15 09/04/2007 $180,807 $458,201
Raymond J. Miller......... 125,000 13.9 1.15 09/04/2007 90,404 229,100
Jerome L. Feller.......... 125,000 13.9 1.15 09/04/2007 90,404 229,100
James L. Berens........... 75,000 8.3 1.15 09/04/2007 54,242 137,460
Joseph J. Kassa........... 75,000 8.3 1.15 09/04/2007 54,242 137,460
Michael G. Klaiman........ 25,000 2.8 1.15 09/04/2007 18,081 45,820
</TABLE>
- --------------------------------
(1) One-third of the options for Mr. Douglas vested on January 15, 1998 and the
remainder will vest on January 15, 1999. All other options vest equally over
three years, at a rate of one-third of such options per year on each
anniversary of the date of the grant, beginning one year from the date of
the grant. All options expire in ten years. The Stock Plan provides for an
acceleration of the vesting in the event of a change in control (as therein
defined).
(2) Pursuant to the Stock Plan, the exercise price of the options shall not be
less than 100% of the Fair Market Value (as therein defined) on the date the
stock option is granted.
The options listed above were the only options covering the Company's
securities held as of January 31, 1998 by the persons named. Other than the
83,333 options for Mr. Douglas that vested on January 15, 1998, none of the
options is currently exercisable.
1997 STOCK INCENTIVE PLAN
GENERAL
The Board of Directors has adopted the Stock Plan, which became
effective on the Effective Date, and which is administered by the Compensation
Committee of the Board of Directors (the "Stock Plan Committee"), which
consisted of at least three Board Members who were "disinterested persons" (as
such term is defined in the rules and regulations under Section 16 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")). The Stock
Plan is intended to provide incentives to eligible employees to remain employed
by the Company and achieve the performance goals and objectives of the Company.
The Chief Executive Officer and 38 other officers and other management employees
(collectively, the "Eligible Employees") were deemed by the Stock Plan Committee
to be eligible to participate in the Stock Plan. Pursuant to the Stock Plan, the
Stock Plan Committee in September 1997 and November 1997 granted to Eligible
Employees, subject to vesting, incentive stock options to purchase 900,000
shares of Common Stock.
30
<PAGE>
Also, in September 1997, pursuant to the Plan, the Stock Plan Committee
granted stock awards to the following persons in the following total numbers of
shares of Common Stock:
Name and Title Total
- ---------------------------------------------------------------------- --------
Herbert R. Douglas,.................................................... 160,000
President and Chief Executive Officer
Raymond J. Miller,..................................................... 80,000
Vice President and Chief Financial Officer
Jerome L. Feller,...................................................... 80,000
Vice President, General Merchandise Manager
Joseph J. Kassa,....................................................... 40,000
Vice President, Marketing, Sales Promotion and Real Estate
James L. Berens,....................................................... 40,000
-------
Vice President, Stores
TOTAL.................................................................. 400,000
=======
One hundred percent of each stock award shall become transferable on
January 15, 2000, except that one hundred percent of the stock award granted to
Mr. Douglas shall become transferable on January 15, 1999. The stock awards
granted to Messrs. Douglas, Miller, Feller, Kassa and Berens shall become
transferable upon a "change in control" of the Company, as defined in the Stock
Plan. These five individuals will also receive an additional amount from the
Company equal to the income tax gross-up at such person's marginal tax rate in
the year(s) that income on the stock award(s) resulting from the removal of
restrictions on such stock award(s) becomes taxable. In addition, these five
individuals have agreed to waive their right to make elections under Section
83(b) of the Tax Code with respect to such stock awards.
The following summary of certain terms of the Stock Plan is qualified
in its entirety by reference to the full text thereof, which is set forth as
Exhibit 10.1 to this Registration Statement.
ADMINISTRATION
Unless the Board of Directors otherwise determines, the Stock Plan will
be administered by a committee or subcommittee appointed by the Board of
Directors from among its members, all of which will qualify as (i) a
"Non-Employee Director" within the meaning of Rule 16b-3(b)(3) (or any successor
rule) promulgated under the Exchange Act and (ii) an "outside director" within
the meaning of Section 162(m) of the Tax Code. Subject to the limitations set
forth in the Stock Plan, such plan vests broad powers to the Stock Plan
Committee to administer the Stock Plan, including authority to (1) select the
persons to be granted awards thereunder, (2) determine the size and type of
awards granted thereunder, (3) construe and interpret the Stock Plan and (4)
establish rules and regulations for the administration of such plan.
NUMBER OF SHARES AVAILABLE
The Stock Plan provides for the grant of up to 1,400,000 shares of
Common Stock in any one, or a combination, of stock options or stock awards. The
maximum number of shares of Common Stock with respect to which stock awards may
be granted under the Stock Plan during the term of the Stock Plan shall not
exceed 400,000 shares. The maximum number of shares of Common Stock with respect
to which awards may be granted or measured to any individual participant under
the Stock Plan during the term of the Stock Plan shall not exceed 750,000
shares, provided that the maximum number of shares of Common Stock with respect
to which stock
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options may be granted to an individual participant under the Stock Plan during
the term of the Stock Plan shall not exceed 500,000 shares (in each case,
subject to certain adjustments).
Any shares subject to an award that remain unissued upon termination of
the award will become available for additional awards under the Stock Plan. In
the event of a stock split, recapitalization or similar event, or a corporate
transaction, such as a merger, consolidation or similar event, an adjustment
will be made to each outstanding stock option and the Stock Plan Committee will
have the authority to equitably adjust the aggregate number and kind of shares
subject to such plan and the number, kind and price of shares subject to
outstanding awards.
AWARDS UNDER THE STOCK PLAN
Awards and Eligibility. The Stock Plan permits the issuance of the
following awards: (1) nonqualified stock options ("NQSOs") and incentive stock
options ("ISOs") and (2) stock awards. Participants shall consist of such key
employees and non-employee directors of the Company and any of its subsidiaries
as the Stock Plan Committee in its sole discretion determines to be
significantly responsible for the success and future growth and profitability of
the Company and whom the Stock Plan Committee may designate from time to time to
receive awards under the Stock Plan. Notwithstanding the foregoing, only key
employees of the Company or any of its subsidiaries on the date of grant are
eligible to receive grants of ISOs.
Stock Options. Under the Stock Plan, the Stock Plan Committee has the
authority to grant to any participant one or more ISOs, NQSOs, or both. Each
stock option granted under the Stock Plan will have such per share exercise
price as the Stock Plan Committee may determine on the date of grant, provided
that the per-share exercise price shall not be less than 100 percent of the Fair
Market Value (as defined in the Stock Plan) of the Common Stock on the date the
stock option is granted. Fair Market Value is defined in the Stock Plan as (i)
the closing price of the Common Stock on the date of calculation (or on the last
preceding trading date if Common Stock was not traded on such date) if the
Common Stock is readily tradeable on a national securities exchange or other
market system or (ii) if the Common Stock is not readily tradeable, the amount
determined in good faith by the Board of Directors as the fair market value of
the Common Stock.
The stock option exercise price may be paid in cash or, at the
discretion of the Stock Plan Committee, by the delivery of shares of Common
Stock then owned by the participant, by the withholding of shares of Common
Stock for which a stock option is exercisable, or by a combination of these
methods. At the discretion of the Stock Plan Committee, payment may also be made
by delivering a properly executed exercise notice to the Company together with a
copy of irrevocable instructions to a broker to deliver promptly to the Company
the amount of sale or loan proceeds to pay the exercise price. The Stock Plan
Committee may prescribe any other method of paying the exercise price that it
determines to be consistent with applicable law and the purpose of the Stock
Plan, including, without limitation, in lieu of the exercise of a stock option
by delivery of shares of Common Stock then owned by a participant, providing the
Company with a notarized statement attesting to the number of shares owned,
where upon verification by the Company, the Company would issue to the
participant only the number of incremental shares to which the participant is
entitled upon exercise of the stock option.
Stock options granted under the Stock Plan will be exercisable at such
time or times and subject to such terms and conditions as shall be determined by
the Stock Plan Committee, provided that no stock option shall be exercisable
later than 10 years after the date it is granted.
The aggregate market value (determined as of the time the stock option
is granted) of the Common Stock with respect to which ISOs (under all option
plans of the Company) are exercisable for the first time by a participant during
any calendar year shall not exceed $100,000. For the purposes of the preceding
sentence, (i) ISOs will be taken into account in the order in which they are
granted and (ii) ISOs granted before 1987 will not be taken into account. ISOs
may not be granted to any participant who, at the time of grant, owns stock
possessing (after the application of the attribution rules of Section 424(d) of
the Tax Code) more than 10% of the
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total combined voting power of all outstanding classes of stock of the Company
or any of its subsidiaries, unless the option price is fixed at not less than
110% of the Fair Market Value of the Common Stock on the date of grant and the
exercise of such option is prohibited by its terms after the expiration of five
years from the date of grant of such option. In addition, no ISO shall be issued
to a participant in tandem with an NQSO.
All stock options granted pursuant to the foregoing provisions, and the
compensation attributable to such stock options, are intended to (i) qualify as
Performance-Based Awards (as described below) or (ii) be exempt from the
deduction limitation imposed by Section 162(m) of the Tax Code.
Stock Awards. The Stock Plan Committee may, in its discretion, grant
stock awards consisting of Common Stock issued or transferred to participants
with or without other payments as additional compensation for services to the
Company. Stock awards may be subject to such terms and conditions as the Stock
Plan Committee determines appropriate, including, without limitation,
restrictions on the sale or other disposition of such shares, and the right of
the Company to reacquire such shares for no consideration upon termination of
the participant's employment within specified periods. The Stock Plan Committee
may require that the stock certificates evidencing such shares be held in
custody or bear restrictive legends until the restrictions thereon shall have
lapsed. The stock award agreement shall specify whether the participant shall
have, with respect to the shares of Common Stock subject to a stock award, all
of the rights of a holder of shares of Common Stock, including the right to
receive dividends and to vote the shares. Certain stock awards granted under the
foregoing provisions, and the compensation attributable to such stock awards,
are intended to (i) qualify as Performance-Based Awards (as described below) or
(ii) be exempt from the deduction limitation imposed by Section 162(m) of the
Tax Code.
Performance-Based Awards. Certain awards granted under the Stock Plan
may be granted in a manner such that the awards qualify for the
performance-based compensation exemption of Section 162(m) of the Tax Code
("Performance-Based Awards"). Unless otherwise exempt from the deduction
limitation imposed by Section 162(m) of the Tax Code, all stock options granted
under the Stock Plan are intended to qualify as Performance- Based Awards. With
respect to stock awards that are intended to qualify as Performance-Based
Awards, the Stock Plan Committee, in its sole discretion, will determine that
the granting or vesting (or both) of such Performance-Based Awards will be based
on certain performance measures. Performance-Based Awards will be based on one
or more of the following factors: net sales; pre-tax income before allocation of
corporate overhead and bonus; budget; earnings per share; net income; division,
group or corporate financial goals; return on stockholders' equity; return on
assets; attainment of strategic and operational initiatives; appreciation in
and/or maintenance of the price of the Common Stock or any other publicly traded
securities of the Company; market share; gross profits; earnings before interest
and taxes; earnings before interest, taxes, depreciation and amortization;
economic value-added models; comparisons with various stock market indices;
and/or reductions in costs. In addition, with respect to stock awards that are
intended to qualify as Performance-Based Awards, (i) the Stock Plan Committee
will establish in writing (x) the objective performance-based goals applicable
to a given period and (y) the individual employees or class of employees to
which such performance-based goals apply by certain specified deadlines and (ii)
no Performance-Based Awards shall be payable to or vest with respect to, as the
case may be, any participant for a given period until the Stock Plan Committee
certifies in writing that the objective performance goals (and any other
material terms) applicable to such period have been satisfied. In addition, with
respect to stock awards intended to qualify as Performance-Based Awards, after
establishment of a performance goal, the Stock Plan Committee will not revise
such performance goal or increase the amount of compensation payable thereunder
(as determined in accordance with Section 162(m) of the Tax Code) upon the
attainment of such performance goal. Notwithstanding the preceding sentence, the
Stock Plan Committee may reduce or eliminate the number of shares of Common
Stock or cash granted or the number of shares of Common Stock vested upon the
attainment of such performance goal.
DURATION, AMENDMENT AND TERMINATION
No award will be granted more than 10 years after the effective date of
the Stock Plan, provided that the terms and conditions applicable to any award
granted prior to such date may thereafter be amended or modified by
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mutual agreement between the Company and the participant or such other persons
as may then have an interest therein. Also, by mutual agreement between the
Company and a participant under the Stock Plan, or under any other present or
future plan of the Company, awards may be granted to such participant in
substitution and exchange for, and in cancellation of, any awards previously
granted such participant under the Stock Plan, or any other present or future
plan of the Company. The Board of Directors may amend the Stock Plan from time
to time or suspend or terminate the Stock Plan at any time but no such action
shall reduce the amount of any existing award or change the terms and conditions
thereof without the participant's consent. No amendment of the Stock Plan shall,
without approval of the stockholders of the Company, (i) increase the total
number of shares which may be issued under the Stock Plan, (ii) increase the
maximum number of shares with respect to stock options and stock awards that may
be granted to any individual under the Stock Plan, (iii) modify the requirements
as to eligibility for the awards under the Stock Plan or (iv) disqualify any
ISOs granted under the Stock Plan.
CERTAIN LIMITATIONS ON DEDUCTIBILITY OF EXECUTIVE COMPENSATION
With certain exceptions, Section 162(m) of the Tax Code denies a
deduction to publicly held corporations for compensation paid to certain
executive officers in excess of $1,000,000 per executive per taxable year
(including any deduction with respect to the exercise of an NQSO or the
disqualifying disposition of stock purchased pursuant to an ISO). One such
exception applies to certain performance-based compensation provided that such
compensation has been approved by stockholders in a separate vote and certain
other requirements are met. Also, the limitations of Section 162(m) do not apply
to corporations that are not publicly held corporations. It is possible that the
Stock Plan may qualify for the performance-based compensation exception to
Section 162(m) or that Section 162(m) would not apply because the Company was
not a publicly held corporation at the time the Stock Plan was adopted. However,
this conclusion is not free from doubt.
INCENTIVE COMPENSATION PLAN
In January 1996, the Company adopted a Management Incentive
Compensation Plan (the "Incentive Compensation Plan") for the purpose of
maximizing operating results of the Company by instilling in key employees a
sense of participation in the Company's success. Pursuant to the Incentive
Compensation Plan, cash awards are payable based upon the Company meeting
pre-determined earnings before depreciation and amortization, interest, taxes
and reorganization items amount. No cash awards were earned in 1996. The Company
intends to continue the incentive compensation plan.
PENSION PLAN
The Company sponsors a profit sharing plan for its employees.
Contributions to the profit sharing plan are at the discretion of the Board of
Directors and are limited to the amount deductible under the Tax Code.
The Company also sponsors a 401(k) defined contribution plan that
covers all salaried employees. Employees may contribute up to 15% of their
compensation for any year. Company contributions are at the discretion of the
Board of Directors.
DIRECTORS COMPENSATION
The Board of Directors may fix the compensation of Directors and may
provide for the payment of all expenses incurred by them in attending meetings
of the Board of Directors. Any Director who is an employee of the Company
receives no compensation for service on the Board of Directors or its
committees.
Beginning as of the Effective Date, the outside directors' compensation
has consisted of (i) a $25,000 annual retainer, (ii) a $2,000 per meeting fee
for attendance in person and (iii) a $3,000 Committee Chairman retainer. The
annual retainer is designed to cover the annual stockholders meeting, regular
board meetings, and up to six telephonic meetings. There are no fees for
committee meetings.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of three directors, all of whom are
independent of management, and its function includes administration of the Stock
Plan and other management compensation matters. The Compensation Committee
currently consists of Mr. Wolff, as its chairman, Mr. Kaminstein and Mr. Mir,
none of whom was, during fiscal 1997 or prior thereto, an officer or employee of
the Company or of its subsidiary.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The following report concerning the specific factors, criteria and
goals underlying decisions on payments and awards of compensation to each of the
executive officers of the Company for fiscal 1997 is provided by the
Compensation Committee of the Company's Board of Directors.
The Compensation Committee was not formed until after the Effective
Date. Except with respect to (i) approval of amendments to the Severance
Agreements between the Company and each of James L. Berens and Joseph J. Kassa
to provide in each case for a severance payment equal to 12 months' of such
officer's then current salary and (ii) the granting of stock awards and stock
options pursuant to the Plan and the Stock Plan, neither the Compensation
Committee, nor any other committee of the Board of Directors, or the Board as a
whole made any recommendations or decisions concerning compensation of the
Company's executive officers during fiscal 1997. See "- Employment Agreements,"
"- Option Grants in Fiscal Year 1997" and "- 1997 Stock Incentive Plan." Going
forward, recommendations regarding compensation of the Company's executive
officers (other than the Chief Executive Officer) will be prepared by Herbert R.
Douglas and submitted to the Compensation Committee of the Board of Directors
for approval. Herbert R. Douglas and Raymond J. Miller, who are ad hoc members
of the Compensation Committee, do not participate in the preparation of
recommendations, or the review, modification or approval thereof, with respect
to their own compensation, and do not vote on proposals before the Compensation
Committee. With regard to the Chief Executive Officer, such compensation for
fiscal 1997 was determined pursuant to the Douglas Agreement in accordance with
the Plan. See "Executive Compensation - Employment Agreements - Herbert R.
Douglas." Going forward, decisions regarding compensation of the Company's Chief
Executive Officer will be made by the Compensation Committee, subject to and in
accordance with the Douglas Agreement and the Plan. Such decisions may be
determined subjectively, and not necessarily tied to corporate performance, with
consideration given to the Chief Executive Officer's level of responsibility and
importance to the Company relative to other executives of the Company, his time
served with the Company, individual performance and contributions to the
successful implementation of significant initiatives that are expected to
benefit the Company in the future. No fixed, relative weights are assigned to
these subjective factors.
The objectives of the Company's executive compensation policy are to
align the interests of the stockholders and management while motivating and
retaining key employees. The Company's executive compensation policies combine
annual base compensation, incentive bonuses based on operating performance, and
long term equity based incentives in order to achieve their overall objective.
The Company believes that its programs, taken together, will attract and retain
qualified executives who have a significant stake in the long term success of
the Company.
All compensation for the other executive officers will be determined
annually by the Compensation Committee and may be increased based on (a) the
contribution of the individual to the Company, (b) increases in the scope and
complexity of the individual's primary responsibilities, (c) increases in the
cost of living, (d) increases in competitive salaries and (e) individual
performance and contributions to the successful implementation of significant
initiatives that are expected to benefit the Company. Such decisions may be
determined subjectively, and not necessarily tied to corporate performance. No
fixed, relative weights are assigned to these subjective factors.
Long term incentives are provided by the grant of stock options. The
purposes of these equity based incentives are to retain these employees and to
align the long term interests of management with the stockholders. Stock options
are granted at their fair market value. Options vest over a period of time, as
determined by the Compensation Committee. Factors determining stock option
grants are similar to the factors determining increases in base pay.
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The Compensation Committee believes that the Company's overall
compensation policies are appropriate to align the interests of management and
the stockholders and to retain key executives.
THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
Melvyn L. Wolff, Chairman
Merwin F. Kaminstein
Gasper Mir
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no relationships or related transactions between the Company
and its officers, directors and other related parties, except for certain
transactions and certain settlements related to the Chapter 11 Case described
below (i) with certain persons who on the Effective Date held five percent or
more of the outstanding Common Stock and (ii) with persons who were formerly
members of the Board of Directors. Each such transaction and settlement was
negotiated on an arms length basis.
Transactions and Settlements with Chase Bank of Texas. In respect to
claims of Chase against the Company, pursuant to the Plan, Chase was issued, on
the Effective Date, 8,558,252 shares of Common Stock. Also on the Effective
Date, the Company and Chase entered into the Registration Rights Agreement. See
"Business -- Registration Rights Agreement." As of the Effective Date, the
Company executed and delivered the General Release to Chase. In consideration of
such release provided for in Section 13.6 of the Plan, Chase has agreed to waive
its claims, if any, for an administration expense on account of having made a
substantial contribution pursuant to section 503(b) of the Bankruptcy Code. See
"Market Price of and Dividends on the Registrant's Common Equity and Related
Stockholder Matters" and "Description of Registrant's Securities to Be
Registered."
Settlement with Former Owners and Certain Members of the Board of
Directors. All of the outstanding Equity Interests (as defined in the Plan) were
previously held by Messrs. Sol and Leon Weiner, members of their respective
families or trusts for the benefit of immediate members of their respective
families or relatives. Additionally, Messrs. Sol and Leon Weiner were previously
members of the Board of Directors of the Company. Messrs. Sol and Leon Weiner
retained, at their expense, certain professionals who provided them with
independent advice in their capacities as members of the Board of Directors and
as holders of Equity Interests. Based on the advice of their professionals
regarding the potential value of the Company, it is the Company's understanding
that, notwithstanding that the Plan does not provide for any distributions to
holders of Equity Interests, Messrs. Sol and Leon Weiner believe that such value
is sufficient to enable the Company to make distributions to both holders of
Allowed Claims (as defined in the Plan) and holders of Equity Interests.
Additionally, they had asserted Debenture Claims (as defined in the Plan) in the
aggregate amount of $8,200,000 and Dividend Claims (as defined in the Plan)
aggregating $1,100,000. It is the Company's further understanding that, as part
of an overall resolution of issues and disputes regarding the treatment afforded
to the Debenture Claims and the Dividend Claims pursuant to Sections 4.6(f) and
5.5(e) of the Plan, which provide for the allowance of the Debenture Claims in
the aggregate amount of $5,860,000 and the disallowance of the Dividend Claims,
respectively, and in consideration of the releases and exculpations provided in
Sections 13.4, 13.5 and 13.7 of the Plan, Messrs. Sol and Leon Weiner were
willing to forgo their arguments and positions regarding the potential value of
the Company under the consensual treatment afforded to Debenture Claims under
the Plan.
The treatment afforded to the Debenture Claims and the Dividend Claims
pursuant to Sections 4.6(f) and 5.5(e) of the Plan shall be deemed a compromise
and settlement as of the Effective Date pursuant to section 1123 of the
Bankruptcy Code and Bankruptcy Rule 9019 of Causes of Action of the Debtor (as
defined in the Plan) and the holders of Debenture Claims and Dividend Claims in
respect to the extent, validity and priority of the Debenture Claims and the
Dividend Claims and in respect of the potential value of the Company.
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Debtors Limited Release of Directors and Officers. Section 13.4 of the
Plan provides that as of the Effective Date, the Company shall be deemed to have
waived and released its present and former directors and officers who were
directors and officers, respectively, during the Chapter 11 Case and on or
before the Commencement Date from any and all claims of the Company, including,
without limitation, claims which the Company otherwise has legal power to
assert, compromise or settle in connection with the Chapter 11 Case; provided,
however, that Section 13.4 of the Plan shall not operate as a waiver or release
of any claim (i) in respect of any loan, advance or similar payment by the
Company to any such person and (ii) in respect of any contractual obligation
owed by such person to the Company.
Claim Holders' Release of Directors and Officers from Claims and
Liabilities. Section 13.5 of the Plan provides that as of the Effective Date,
each of the Company's present and former directors and officers who were
directors and officers, respectively, during the Chapter 11 Case and on or
before the Commencement Date (a "Released Director or Officer") shall be
released and discharged from any and all claims, obligations, rights, Causes of
Action and liabilities which any holder of a Claim against the Company may be
entitled to assert, whether known or unknown, foreseen and unforeseen, existing
or hereafter arising, based in whole or in part upon any act or omission or
other event occurring on or at any time prior to the Effective Date in any way
relating to the Company, the Chapter 11 Case or the Plan; provided, however,
such release shall not operate as a waiver or release of any claim (i) in
respect of any loan, advance or similar payment by any holder of a Claim to a
Released Director or Officer and (ii) in respect of any contractual obligation
owed by a Released Director or Officer to a holder of a Claim; provided,
further, however, a Released Director or Officer retains the right to assert and
prosecute (x) any direct claim, counterclaim, cross-claim, separate action or
similar claim against any entity which maintains that it has a Cause of Action
against a Released Director or Officer that has not been released and discharged
under the Plan or (y) any claim for indemnification, contribution or otherwise,
however denominated, against any entity relating to any Cause of Action against
a Released Director or Officer that has not been released and discharged under
the Plan. Each holder of a Claim, other than the United States of America, shall
be deemed to have agreed to the provisions of Section 13.5 of the Plan, and
shall be bound thereby, by reason of, among other things, its acceptance of the
Plan and its receipt of any distributions under the Plan.
Exculpation. In accordance with the Plan and subject to Sections 13.4
("Debtor's Limited Release of Directors and Officers") and 13.5 ("Claim Holders'
Release of Directors and Officers from Claims and Liabilities") of the Plan,
neither the Company nor the Creditors Committee nor any of their respective
members, officers, directors, employees, advisors or agents will have or incur
any liability to any holder of a Claim or Equity Interest for any act or
omission in connection with, or arising out of, the Chapter 11 Case, the pursuit
of confirmation of the Plan, the consummation of the Plan or the administration
of the Plan or the property to be distributed under the Plan except for willful
misconduct or gross negligence, and, in all respects, the Company, the Creditors
Committee and each of their respective members, officers, directors, employees,
advisors and agents shall be entitled to rely upon the advice of counsel with
respect to their duties and responsibilities under the Plan; provided, however,
that nothing contained in the Plan shall exculpate, satisfy, discharge or
release any claims against officers, directors or employees of the Company in
their individual capacities.
Worthless Stock Deduction. The Company will have available certain NOL
carryforwards and will utilize the same to offset taxable income. The ability of
the Company to utilize such carryforwards may be adversely affected by the
actions of the equity security holders of the Company in taking worthless stock
deductions with respect to the Equity Interests in the Company during certain
tax years. See "Business -- Certain Tax Matters" and "Financial Information --
Management's Discussion and Analysis of Financial Condition and Results of
Operations." Accordingly, the Company received from "50-percent shareholders" of
the Company (as that term is defined in the Tax Code) an executed stipulation,
approved by the Bankruptcy Court, pursuant to which they will agree not to claim
a worthless stock deduction for any taxable year of such stockholders ending
prior to the Effective Date.
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ITEM 8. LEGAL PROCEEDINGS
General. The Company is party to ordinary routine litigation,
arbitrations and proceedings incidental to its business, the disposition of
which is not expected to have a material adverse effect on the Company's
business or financial condition.
Consummation of the Chapter 11 Case and Related Matters. On August 13,
1997, the Bankruptcy Court entered an order confirming the Plan. As of the
Effective Date, all property of the Company is free and clear of all claims and
interests that arose prior to such Confirmation Date, unless the Plan provided
otherwise. As of the Effective Date, except as otherwise provided in the Plan,
in exchange for the treatment and rights under the Plan, all such claims against
and equity interests in the Company were satisfied, discharged, and released in
full and all persons are precluded from asserting against the Company, its
assets or properties any other or further claims or equity interests based upon
any act or omission, transaction, or other activity of any kind or nature that
occurred prior to the Confirmation Date. The Bankruptcy Court retains
jurisdiction to hear and determine disputes arising in connection with the
interpretation, implementation or enforcement of the Plan. For further
information, reference is made to the Plan, a copy of which is filed as an
exhibit to this Registration Statement.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Market Information. There is currently no active trading market for the
Common Stock. The Company has no current intention to apply to list the Common
Stock on any national securities exchange. Although the Company may in the
future file an application for the Common Stock to be included for quotation on
NASDAQ- NMS, the Company currently does not qualify for quotation on NASDAQ-NMS
and there can be no assurance that such an application will be filed in the
future or, if so filed, that it would be approved. There can be no assurance as
to the development of any market or as to the liquidity of any market that may
develop for the Common Stock.
Substantially all of the presently outstanding Common Stock was issued
on or about the Effective Date pursuant to the Plan. The consummation of the
Plan on the Effective Date resolved the Chapter 11 Case. Pursuant to the Plan,
all shares of Common Stock presently outstanding were issued to holders of
certain claims against the Company, some of whom may prefer to dispose of their
shares rather than retain them. With respect to amounts of Common Stock subject
to outstanding options or that could be sold pursuant to Rule 144 under the
Securities Act or that the Company has agreed to register under the Securities
Act, see "Executive Compensation -- Option Grants in Fiscal Year 1997,"
"Security Ownership of Certain Beneficial Owners and Management," "Certain
Relationships and Related Transactions -- Transactions and Settlements with
Chase Bank of Texas" and "Business -- Significant Stockholder" and "--
Registration Rights Agreement."
The actual market value of the Common Stock issued pursuant to the Plan
may have been and may continue to be affected by prevailing interest rates,
conditions in the financial markets, the initial issuance of Common Stock to
holders of claims and other factors. There is currently no established public
trading market for the Common Stock nor is it known whether or when one will
develop. There can be no assurance that an active market will develop therefor.
Further, there can be no assurance as to the degree of price volatility in any
such particular market. While the Plan was developed based on an assumed
reorganization value of $3.36 per share of the Common Stock, such valuation is
not an estimate of the price at which the Common Stock may trade in the market.
The Company has not attempted to make any such estimate in connection with the
development of the Plan. No assurance can be given as to the market prices that
will prevail for the Common Stock following the Effective Date.
Holders. There were approximately 500 record holders of the Company's
Common Stock as of March 31, 1998.
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Dividends. The Company did not declare or pay any cash dividends with
respect to the Common Stock during fiscal 1995, fiscal 1996 or fiscal 1997. The
Company presently does not intend to pay cash dividends in the foreseeable
future. In addition, the terms of the Revolving Credit Agreement prohibit
payment of cash dividends on the Common Stock. The payment of cash dividends, if
any, will be made only from assets legally available for that purpose, and will
depend on the Company's financial condition, results of operations, current and
anticipated capital requirements, restrictions under then existing debt
instruments and other factors deemed relevant by the Board of Directors.
Registration Rights Agreement. The Company and Chase have entered into
the Registration Rights Agreement. Under this agreement, Chase may, at certain
times, make certain Demand Requests for Demand Registration of all or part of
Chase's Registrable Securities, provided that in each case the number of
Registrable Securities proposed to be sold by Chase must be equal to no less
than 20% of the number of Registrable Securities received by Chase pursuant to
the Plan. See "Business -- Registration Rights Agreement." Moreover, most of the
stockholders will be permitted to dispose of their shares of Common Stock in
public market transactions not requiring registration under federal or state
securities laws. Sales of or offers to sell a substantial number of shares, or
the perception by investors, investment professionals and securities analysts of
the possibility of such sales, could adversely affect the market for and
prevailing prices with respect to the Common Stock. See "Security Ownership of
Certain Beneficial Owners and Management."
The Plan required the Company to issue an aggregate of 18,600,000
shares of Common Stock, which were allowed in respect of all claims filed
against the Company by its general unsecured creditors. See "Business -- No
Prior Market for the Common Stock."
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
Pursuant to the Plan, the Company has issued or is in the process of
issuing shares of Common Stock in the amounts and on the terms summarized
elsewhere in this Registration Statement. See "Executive Compensation -- 1997
Stock Incentive Plan -- General," "Market Price of and Dividends on the
Registrant's Common Equity and Related Stockholder Matters" and "Description of
Registrant's Securities to Be Registered," without registration under the
Securities Act, or state or local law, in reliance on the exemptions provided
for in Section 1145(b) of the Bankruptcy Code. The Company has not issued any
other securities within the past three years.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
The Company is authorized to issue up to 50,000,000 shares of Common
Stock. There are currently no outstanding securities which are convertible into,
or exchangeable or exercisable for, shares of Common Stock other than certain
options granted pursuant to the Stock Plan. See "Executive Compensation --
Option Grants in Fiscal Year 1997" and "-- 1997 Stock Incentive Plan." Following
consummation of the transactions contemplated by the Plan on the Effective Date
and the issuance of 400,000 shares of Common Stock pursuant to the Stock Plan,
19,000,000 shares of Common Stock were issued and outstanding. See "Business --
No Prior Market for the Common Stock" and "Executive Compensation -- 1997 Stock
Incentive Plan -- General."
Holders of Common Stock are entitled to one vote for each share held
and are not entitled to cumulative voting for the purpose of electing directors
and have no preemptive or similar right to subscribe for, or to purchase, any
shares of Common Stock or other securities to be issued by the Company in the
future. Accordingly, the holders of more than 50% in voting power of the shares
of Common Stock voting generally for the election of directors will be able to
elect all of the Company's directors.
Holders of shares of Common Stock have no exchange, conversion or
preemptive rights and such shares are not subject to redemption. All outstanding
shares of Common Stock, upon issuance thereof pursuant to the Plan, are duly
authorized, validly issued, fully paid and non-assessable. Subject to the prior
rights, if any, of holders of any outstanding class or series of capital stock
having a preference in relation to the Common Stock as
39
<PAGE>
to distributions upon the dissolution, liquidation and winding-up of the Company
and as to dividends, holders of Common Stock are entitled to share ratably in
all assets of the Company which remain after payment in full of all debts and
liabilities of the Company, and to receive ratably such dividends, if any, as
may be declared by the Company's Board of Directors from time to time out of
funds and other property legally available therefor.
Preferred Stock. The Company is authorized to issue up to 10,000,000
shares of Preferred Stock. The Board of Directors, without further action by the
stockholders, is authorized to designate and issue in series Preferred Stock and
to fix as to any series the dividend rate, redemption prices, preferences on
dissolution, the terms of any sinking fund, conversion right, voting rights, and
any other preferences or special rights and qualifications. Shares of Common
Stock are subject to the preferences or special rights and powers of any such
shares of Preferred Stock as set forth in the Certificate of Incorporation and
in the resolutions establishing one or more series of Preferred Stock. Holders
of the Preferred Stock, if and when issued, will be entitled to vote as required
under applicable Delaware law. Such law includes provisions for the voting of
the Preferred Stock in the case of any amendment to the Certificate of
Incorporation affecting the rights of holders of the Preferred Stock, the
payment of certain stock dividends, merger or consolidation, sale of all or
substantially all of the Company's assets and dissolution. The Company has no
agreements or understandings for the designation of any series of Preferred
Stock or the issuance of shares thereunder.
Until such time as the Board of Directors determines the Company should
issue one or more series of its Preferred Stock, and establishes the respective
rights of the holders of such series, it is not possible to state the actual
effect of the authorization of the Preferred Stock upon the rights of holders of
Common Stock. The effects of such issuance could include, however: (i) reduction
of the amount of cash otherwise available for payment of dividends on Common
Stock if dividends are also payable on the Preferred Stock, (ii) restrictions on
dividends, if any, on Common Stock if dividends on the Preferred Stock are in
arrears, (iii) dilution of the voting power of holders of Common Stock and (iv)
restriction of the rights of holders of Common Stock to share in the Company's
assets upon any liquidation until satisfaction of any liquidation preference
granted to the holders of Preferred Stock. In addition, so-called "blank check"
preferred stock (such as the Preferred Stock) may be viewed as having possible
anti-takeover effects, if it were used to make a third party's attempt to gain
control of the Company more difficult, time consuming or costly. The Company has
no present intention to issue any Preferred Stock.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
The following summary of certain terms of the Certificate of
Incorporation and Bylaws is qualified in its entirety by reference to the full
text thereof, which are set forth as Exhibits 3.1 and 3.2, respectively, to this
Registration Statement.
Board of Directors. Under applicable provisions of Delaware law and the
Bylaws, the size of the Board of Directors may be changed by action of the
stockholders or, within certain limits, by the Board of Directors. The
Certificate of Incorporation provides that any action to increase the size of
the Board (which is currently set at seven members) requires the approval of the
holders of at least two-thirds (2/3) of the outstanding shares of Common Stock.
The Bylaws also provide that no person will be eligible for election as
a director at a meeting of stockholders unless nominated by the Board of
Directors or by a stockholder who gives timely written notice thereof to the
Company in the manner specified in the Bylaws and who is a stockholder of record
both at the time such notice is given and on the record date for the meeting. To
be timely, a stockholder's notice must be given at the Company's principal
office, either by personal delivery to the Secretary of the Company or by United
States mail, postage prepaid, addressed to the Secretary of the Company. Any
such notice must be received (i) with respect to an election to be held at the
Annual Meeting of Stockholders, not less than 60 calendar days prior to the
anniversary date of the date of the immediately preceding Annual Meeting (or if
there was no such prior annual meeting, not less than 60 calendar days prior to
the date which represents the fourth Thursday in May of the
40
<PAGE>
current year), and (ii) in the case of a special meeting called for the purpose
of electing directors, not later than the close of business on the fifth
calendar day following the day on which notice of the special meeting is first
delivered to stockholders. The notice must contain the information specified in
the Bylaws regarding the stockholder giving the notice and each person whom the
stockholder wishes to nominate for election as a director and must be
accompanied by the written consent of each proposed nominee to serve as a
director if elected.
Meetings of Stockholders. The Bylaws require the first annual
stockholders meeting to be held on such date as may be designated by resolution
of the Board of Directors or, if no such date is designated, in May 1998 and
succeeding meetings to be held annually in May, or such other date designated by
the Board of Directors. Special meetings of the stockholders may be called by
the Chairman or the Chief Executive Officer, by a majority of the Board of
Directors of the Company or by stockholders holding of record at least 40% of
the issued and outstanding shares of Common Stock.
The Bylaws also require that a stockholder desiring to bring any
business before an annual meeting (other than business which the stockholder has
sought to have included in the Company's proxy statement for such meeting) must
give timely written notice thereof to the Company and must be a stockholder of
record both at the time such notice is given and on the record date for the
meeting. To be timely, a stockholder's notice must be given at the Company's
principal office, either by personal delivery to the Secretary of the Company or
by United States mail, postage prepaid, addressed to the Secretary of the
Company. Any such notice must be received not less than 60 calendar days in
advance of the anniversary date of the previous year's annual meeting of
stockholders (or if there was no such prior annual meeting, not less than 60
calendar days prior to the date which represents the fourth Thursday in May of
the current year); provided, however, that in the event that the date of the
annual meeting is advanced by more than 20 days, or delayed by more than 60
days, from such anniversary date, then, to be considered timely, notice by the
stockholder must be received not later than the close of business on the later
of (x) the 60th day prior to such annual meeting or (y) the seventh day
following the date on which the notice of the date of the annual meeting was
mailed to stockholders or public disclosure thereof was otherwise made. The
notice must set forth a brief description of the business desired to be brought
before the meeting and the reasons for wanting to conduct such business as well
as certain information concerning the stockholder proposing such business,
including the stockholder's name and address, the class and number of shares of
the Company's stock beneficially owned, any interest which the stockholder may
have in such business and a representation that such stockholder is a
stockholder of record at the time notice is given and intends to appear in
person or by proxy at the meeting to present such business.
Special Voting Requirements. Under applicable provisions of Delaware
law, (i) action by stockholders of a Delaware corporation on certain significant
matters, including, in most cases, amendment of the certificate of
incorporation, merger, sale of all or substantially all of the corporation's
assets and dissolution of the corporation, requires the approval of the holders
of a majority of the outstanding shares entitled to vote on the matter unless
the certificate of incorporation provides for a greater or lesser vote and (ii)
stockholder action on most other matters requires the approval of a majority of
the votes cast with respect to such matters unless the certificate of
incorporation provides for a greater vote. The Certificate of Incorporation of
the Company requires the affirmative vote of the holders of at least two-thirds
(2/3) of the outstanding shares of Common Stock to (i) remove any director(s)
from the Board of Directors or increase the number of directors constituting the
entire Board of Directors or (ii) amend the Certificate of Incorporation (except
as set forth in the paragraph NINTH thereof) or the Bylaws or (iii) approve any
merger or other business combination, share exchange, or the sale, lease or
exchange of all or substantially all of the Company's assets and property (other
than in the usual and regular course of business) or a reclassification of
securities or recapitalization of the Company or (iv) change the state of
incorporation of the Company.
Registration Rights Agreement with Chase. For discussion of the
Company's Registration Rights Agreement with Chase, see "Market Price of and
Dividends on the Registrant's Common Equity and Related Stockholder Matters."
41
<PAGE>
Potential Effect of Certain Provisions upon an Attempt to Acquire
Control of the Company. Certain of the foregoing provisions of the Certificate
of Incorporation, Bylaws and agreements with stockholders summarized above may
discourage or make more difficult the acquisition of control of the Company by
means of a tender offer, open market purchase, proxy fight or otherwise,
including certain types of coercive takeover practices and inadequate takeover
bids. These provisions are intended to encourage persons seeking to acquire
control of the Company first to negotiate with the Company. The Company believes
the foregoing measures, many of which are substantially similar to the
takeover-related measures in effect for many other publicly held companies,
provide benefits by enhancing the Company's potential ability to negotiate with
the proponent of any unfriendly or unsolicited proposal to take over or
restructure the Company that outweigh the disadvantages of discouraging such
proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms.
Transfer Agent. The Transfer Agent for the Common Stock is American
Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 102 of the Delaware General Corporation Law ("DGCL") allows a
corporation to eliminate the personal liability of directors of a corporation to
the corporation or to its stockholders for monetary damages for a breach of his
fiduciary duty as a director, except in the case where the director breached his
duty of loyalty, failed to act in good faith, engaged in intentional misconduct
or knowingly violated a law, authorized the payment of a dividend or approved a
stock repurchase in violation of the DGCL or obtained an improper personal
benefit. The Company's Certificate of Incorporation contains a provision which,
in substance, eliminates directors' personal liability as set forth above.
Section 145 of the DGCL allows a corporation to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation), by reason of the fact that he is or was a director or officer of
the corporation, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The Company's Certificate
of Incorporation contains a provision which, in substance, provides for
indemnification as set forth above, effective as of noon on August 26, 1997, to
the fullest extent and in the manner set forth in and permitted by the DGCL, and
any other applicable law, as from time to time in effect.
See also "Certain Relationships and Related Transactions -- Claim
Holders' Release of Directors and Officers from Claims and Liabilities."
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
For the information required by this item, refer to the Index to
Historical Financial Statements appearing on page 44 of this Registration
Statement.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
42
<PAGE>
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
See the Index to Historical Financial Statements.
(b) Exhibits:
Exhibit
No. Description
------- -----------
2.1* Weiner's Stores, Inc.'s Amended Plan of
Reorganization Under Chapter 11 of the Bankruptcy
Code, dated June 24, 1997
2.2* Modification of the Weiner's Stores, Inc.'s
Amended Plan of Reorganization Under Chapter
11 of the Bankruptcy Code, made pursuant to
the order of the Bankruptcy Court confirming
the Plan pursuant to section 1129 of the
Bankruptcy Code, dated August 13, 1997
3.1* Restated Certificate of Incorporation of the
Company
3.2* Restated Bylaws of the Company
4.1* Registration Rights Agreement between the Company
and Texas Commerce Bank N.A. dated August 26, 1997
4.2* Form of Specimen Common Stock Certificate
10.1* Weiner's Stores, Inc. 1997 Stock Incentive Plan
10.2* Form of Incentive Stock Option Agreement
between the Company and each of the eligible
employees pursuant to Schedule A of the
Stock Plan
10.3* Form of Nonqualified Stock Option Agreement
between the Company and each of the eligible
employees pursuant to Schedule A of the
Stock Plan
10.4* Form of Restricted Stock Agreement between
the Company and each of the named executive
officers named on Schedule B to the Stock
Plan
10.5* Employment Agreement between the Company and
Herbert R. Douglas dated December 5, 1995
10.6* Amendment, dated May 1, 1997, to Employment
Agreement between the Company and Herbert R.
Douglas
10.7* Employment Agreement between the Company and
Raymond J. Miller dated February 24, 1995
10.8* Amendment, dated April 7, 1995, to Employment
Agreement between the Company and Raymond J. Miller
43
<PAGE>
10.9* Amendment, dated May 1, 1997, to Employment
Agreement between the Company and Raymond J. Miller
10.10* Employment Agreement between the Company and Jerome
L. Feller dated December 14, 1995
10.11* Amendment, dated May 1, 1997, to Employment
Agreement between the Company and Jerome L. Feller
10.12* Severance Agreement between the Company and James
L. Berens dated January 29, 1996, conformed as
amended May 1, 1997 and November 10, 1997
10.13* Severance Agreement between the Company and Joseph
J. Kassa dated February 5, 1996, conformed as
amended May 1, 1997 and November 10, 1997
10.14* Revolving Credit Agreement among the
Company, various Lending Institutions and
The CIT Group/Business Credit, Inc., as
Agent, dated August 26, 1997
10.15* First Amendment, dated as of September 30, 1997, to
the Revolving Credit Agreement
10.16* Transportation Agreement between the Company and
Roadrunner Moving & Storage, Inc., dated February
11, 1998
21.1* Subsidiaries of the Company
27.1** Financial Data Schedule
- ------------------
* Previously Filed
** Filed Herewith
44
<PAGE>
WEINER'S STORES, INC.
INDEX TO HISTORICAL FINANCIAL STATEMENTS
Page
Management's Responsibility for Financial Reporting..............46
Independent Auditors' Report.....................................47
Balance Sheets...................................................48
Statements of Operations.........................................49
Statements of Changes in Stockholders' Equity (Deficiency).......50
Statements of Cash Flows.........................................51
Notes to Financial Statements ...................................52
Note: The financial condition and results of operations of the Company after
giving effect to the Plan and the transactions contemplated thereby
will not be comparable to the financial condition and results of
operations of the Company as of any dates or for any periods prior to
the Plan Effective Date. See "Financial Information -- Management's
Discussion and Analysis of Financial Condition and Results of
Operations."
45
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The Company's management is responsible for the fair presentation of
the financial statements and the related financial data presented in this
Registration Statement. The statements were prepared in accordance with
generally accepted accounting principles and include amounts determined by
management's estimates and judgments, based on currently available information,
which it believes are reasonable under the circumstances.
Actual results could differ from those estimates.
The Company maintains a system of internal controls which management
believes provides reasonable assurance that the financial statements are
reliably prepared, assets are properly accounted for and safeguarded, and
transactions are properly recorded and authorized. The concept of reasonable
assurance implies that the cost of controls should not exceed their benefits,
recognizing that limitations exist within any system.
The Board of Directors oversees management's administration of the
Company's financial and accounting policies and practices and the preparation of
the financial statements. The Audit Committee, which consists of three
non-management directors, meets regularly with management and the independent
public accountants to review their activities. The independent public
accountants have direct access to the Audit Committee and meet regularly with
the Audit Committee, with and without management representatives present.
/s/ Raymond J. Miller
- -----------------------------------------
Raymond J. Miller
Vice President and Chief Financial Officer
46
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of Weiner's Stores, Inc.
Houston, Texas
We have audited the accompanying balance sheets of Weiner's Stores, Inc. as of
January 31, 1998 (Successor Company balance sheet) and January 25, 1997
(Predecessor Company balance sheet), and the related statements of operations,
changes in stockholders' equity (deficiency) and of cash flows for the
twenty-three weeks ended January 31, 1998 (Successor Company operations), the
thirty weeks ended August 25, 1997, and the years ended January 25, 1997 and
January 27, 1996 (Predecessor Company operations). These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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.
As discussed in Notes 1 and 6 to the financial statements, on August 13, 1997
the Bankruptcy Court entered an order confirming the plan of reorganization of
Weiner's Stores, Inc., which became effective after the close of business on
August 25, 1997. Accordingly, the accompanying financial statements have been
prepared in conformity with AICPA Statement of Position 90-7, "Financial
Reporting for Entities in Reorganization Under the Bankruptcy Code" for the
Successor Company as a new entity with assets, liabilities, and a capital
structure having carrying values not comparable with prior periods as described
in Note 7.
In our opinion, the Successor Company financial statements present fairly, in
all material respects, the financial position of Weiner's Stores, Inc. as of
January 31, 1998, and the results of its operations and its cash flows for the
twenty-three weeks ended January 31, 1998 in conformity with generally accepted
accounting principles. Further, in our opinion, the Predecessor Company
financial statements referred to above present fairly, in all material respects,
the financial position of the Predecessor Company as of January 25, 1997, and
the results of its operations and its cash flows for the thirty weeks ended
August 25, 1997 and the years ended January 25, 1997 and January 27, 1996 in
conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Houston, Texas
March 19, 1998
47
<PAGE>
WEINER'S STORES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SUCCESSOR PREDECESSOR
COMPANY COMPANY
JANUARY 31, 1998 JANUARY 25, 1997
------------------------- ---------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............................... $ 3,574,000 $ 18,719,000
Receivables............................................. 1,592,000 2,701,000
Merchandise inventories................................. 49,881,000 53,617,000
Prepaid expenses and other assets....................... 3,138,000 2,155,000
-------------- ---------------
Total current assets................................. 58,185,000 77,192,000
-------------- ---------------
Excess Reorganization Value, net........................... 5,741,000 -
-------------- ---------------
Property and Equipment:
Land.................................................... 258,000 319,000
Building - distribution center and office facility...... 1,967,000 5,771,000
Furniture, fixtures and leasehold improvements.......... 16,262,000 40,745,000
------------- ---------------
Total................................................ 18,487,000 46,835,000
Less accumulated depreciation and amortization.......... (1,674,000) (32,742,000)
---------- --------------
Total property and equipment, net.................... 16,813,000 14,093,000
---------- --------------
$80,739,000 $ 91,285,000
=========== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
Current Liabilities:
Trade accounts payable.................................. $ 9,303,000 $ 9,673,000
Accrued expenses and other current liabilities.......... 7,633,000 9,096,000
Accrued reorganization expenses......................... - 2,382,000
Reserve for store closings.............................. - 1,313,000
------------- -------------
Total current liabilities............................ 16,936,000 22,464,000
------------- -------------
Other Liabilities.......................................... 834,000 450,000
Long-Term Debt............................................. 5,000,000 -
Liabilities Subject to Settlement Under Reorganization
Proceedings............................................. - 92,817,000
------------- -------------
Commitments and Contingencies (Notes 4, 9 and 11)
Stockholders' Equity (Deficiency):
Common stock:
Class A, voting, $100 par value; 10,000 shares issued
and outstanding................................... - 1,000,000
Class A, nonvoting, $100 par value; 90,000 shares
issued and outstanding............................ - 9,000,000
$.01 par value; 50,000,000 shares authorized;
19,000,000 shares issued and outstanding.......... 190,000 -
Additional paid-in capital.............................. 63,664,000 -
Retained deficit........................................ (5,885,000) (34,446,000)
------------- --------------
Total stockholders' equity (deficiency)........... 57,969,000 (24,446,000)
------------- --------------
$ 80,739,000 $ 91,285,000
============= ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
48
<PAGE>
WEINER'S STORES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Successor Company Predecessor Company
--------------------- -----------------------------------------------------------
Twenty-three Weeks Thirty Weeks Year Year
Ended Ended Ended Ended
January 31, 1998 August 25, 1997 January 25, 1997 January 27, 1996
--------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales.............................. $ 103,322,000 $ 160,315,000 $ 263,666,000 $ 260,712,000
Cost of goods sold..................... 72,308,000 106,350,000 179,164,000 179,934,000
--------------------- ------------------ ------------------ -----------------
Gross margin........................... 31,014,000 53,965,000 84,502,000 80,778,000
Selling, administrative and other operating
costs............................... 36,748,000 50,309,000 88,580,000 96,872,000
Reorganization expense................. - 2,406,000 10,742,000 9,753,000
Impairment of assets................... - - 3,044,000 -
--------------------- ------------------ ------------------ -----------------
Operating (loss) income................ (5,734,000) 1,250,000 (17,864,000) (25,847,000)
Interest (expense) income, net......... (151,000) 127,000 596,000 (58,000)
"Fresh start" adjustments.............. - (1,519,000) - -
--------------------- ------------------ ------------------ -----------------
Loss before income taxes and extraordinary
gain................................ (5,885,000) (142,000) (17,268,000) (25,905,000)
Deferred income tax benefit............ - - 48,000 300,000
--------------------- ------------------ ------------------ -----------------
Loss before extraordinary gain......... (5,885,000) (142,000) (17,220,000) (25,605,000)
Extraordinary gain..................... - 18,683,000 - -
--------------------- ------------------ ------------------ -----------------
Net (loss) income...................... $ (5,885,000) $ 18,541,000 $ (17,220,000) $ (25,605,000)
===================== ================== ================== ==================
Net (loss) income per common share..... $ (0.31) $ 185.41 $ (172.20) $ (256.05)
===================== ================== ================== ==================
Weighted average number of common
shares outstanding.................. 19,000,000 100,000 100,000 100,000
===================== ================== ================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
49
<PAGE>
WEINER'S STORES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
------------------ --------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Predecessor Company:
Balances at January 29, 1995......... $ 10,000,000 $ - $ 8,379,000 $ 18,379,000
Net loss.......................... - - (25,605,000) (25,605,000)
------------------- -------------------- ------------------- -------------------
Balances at January 27, 1996......... 10,000,000 - (17,226,000) (7,226,000)
Net loss.......................... - - (17,220,000) (17,220,000)
------------------- -------------------- ------------------- -------------------
Balances at January 25, 1997......... 10,000,000 - (34,446,000) (24,446,000)
Net income for the thirty weeks ended
August 25, 1997................ - - 18,541,000 18,541,000
Cancellation of stock of Predecessor
Company........................ (10,000,000) - 15,905,000 5,905,000
Issuance of Successor Company
common stock................... 190,000 63,664,000 - 63,854,000
------------------- -------------------- ------------------- ------------------
Successor Company:
Balances at August 26, 1997.......... 190,000 63,664,000 - 63,854,000
Net loss for the twenty-three weeks
ended January 31, 1998......... - - (5,885,000) (5,885,000)
------------------- -------------------- ------------------- -------------------
Balances at January 31, 1998......... $ 190,000 $ 63,664,000 $ (5,885,000) $ 57,969,000
=================== ==================== =================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
50
<PAGE>
WEINER'S STORES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Successor Company Predecessor Company
--------------------- -----------------------------------------------------------
Twenty-three Weeks Thirty Weeks Year Year
Ended Ended Ended Ended
January 31, 1998 August 25, 1997 January 25, 1997 January 27, 1996
--------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net (loss) income................... $ (5,885,000) $ 18,541,000 $ (17,220,000) $ (25,605,000)
Adjustments to reconcile net (loss)
income to net cash (used in) provided
by operating activities:
Depreciation and amortization.... 1,842,000 2,241,000 3,644,000 3,706,000
Reorganization expense........... - 2,406,000 10,742,000 9,753,000
"Fresh start" adjustments........ - 1,519,000 - -
Extraordinary gain............... - (18,683,000) - -
Impairment of assets............. - - 3,044,000 -
Loss on disposition of assets.... 35,000 - 329,000 916,000
Deferred income taxes............ - - (48,000) (300,000)
Working capital (increases) decreases:
Receivables.................... 2,851,000 (1,960,000) 1,728,000 (1,498,000)
Merchandise inventories........ 5,389,000 (2,453,000) (3,514,000) 9,992,000
Prepaid expenses and other
assets....................... (792,000) (241,000) 826,000 236,000
Refundable income taxes........ - - 412,000 2,485,000
Accounts payable, accrued
expenses and other
liabilities.................. (17,555,000) (664,000) (4,349,000) 23,912,000
--------------------- ------------------ ------------------- -----------------
Total adjustments............ (8,230,000) (17,835,000) 12,814,000 49,202,000
--------------------- ------------------ ------------------- -----------------
Net cash (used in) provided by
operating activities........... (14,115,000) 706,000 (4,406,000) 23,597,000
--------------------- ----------------- ------------------ -----------------
Cash Flows From Investing Activities:
Capital expenditures................ (3,010,000) (3,813,000) (3,957,000) (1,139,000)
Proceeds on disposition of assets... 26,000 61,000 8,000 182,000
-------------------- ----------------- ----------------- -----------------
Net cash used in investing activities (2,984,000) (3,752,000) (3,949,000) (957,000)
-------------------- ------------------ ------------------ -----------------
Cash Flows From Financing Activities:
Principal reduction in long-term debt - - - (26,000)
Net borrowings under revolving line of
credit........................... 5,000,000 - - 1,505,000
-------------------- ----------------- ----------------- -----------------
Net cash provided by financing
activities..................... 5,000,000 - - 1,479,000
-------------------- ----------------- ----------------- -----------------
Net (Decrease) Increase In Cash and Cash
Equivalents......................... (12,099,000) (3,046,000) (8,355,000) 24,119,000
Cash and Cash Equivalents, beginning of
period.............................. 15,673,000 18,719,000 27,074,000 2,955,000
--------------------- ----------------- ----------------- -----------------
Cash and Cash Equivalents, end of period $ 3,574,000 $ 15,673,000 $ 18,719,000 $ 27,074,000
==================== ================= ================= ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
51
<PAGE>
WEINER'S STORES, INC.
NOTES TO FINANCIAL STATEMENTS
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Weiner's Stores, Inc. ("WSI" or the "Company") operates, as of January
31, 1998, 128 family apparel stores in Texas and Louisiana. As more fully
described in Notes 6 and 7, the Company emerged from Chapter 11 bankruptcy on
August 26, 1997 and adopted the recommended "fresh start" reporting as set forth
in the American Institute of Certified Public Accountants Statement of Position
90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code" ("SOP 90-7").
Use of Estimates. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Fiscal Year. The Company's fiscal year ends on the Saturday nearest
January 31 of the following calendar year. Fiscal year 1997 contains 53 weeks,
while fiscal years 1996 and 1995 each contained 52 weeks.
Cash and Cash Equivalents. Cash and cash equivalents include temporary
investments in short-term securities with original maturities of three months or
less. These securities are primarily interest bearing government securities and
are subject to minimal risk.
Merchandise Inventory. Merchandise inventory is stated at the lower of
cost (applied on a first-in, first-out basis using the retail inventory method)
or market. Trade and purchase discounts are recorded as a reduction in inventory
cost in the period in which the merchandise is received. Certain general and
administrative costs associated with both the buying and the distribution of
merchandise from the distribution center to the stores are included in
inventory. These costs were approximately $2,396,000 and $2,043,000 at January
31, 1998 and January 25, 1997, respectively.
Property and Equipment. Depreciation is provided using the 150%
declining-balance method on the distribution center and office facility based on
an average life of 28 years. Equipment is depreciated using the straight-line
method based on an average useful life of ten years. Store fixtures and
leasehold improvements are amortized using the straight-line method over the
shorter of their estimated useful life of ten years or the term of the lease.
Expenditures for maintenance and repairs are charged to operations as incurred,
while renewals and betterments are capitalized. Long-lived assets are reviewed
for impairment upon occurrence of events or changes in circumstances that
indicate that the carrying value of these long-lived assets may not be
recoverable. Impaired assets are carried at the lesser of their carrying value
or fair value.
Pursuant to SOP 90-7, property and equipment were restated at
approximate fair market value at August 26, 1997. Additions subsequent to August
26, 1997 are recorded at cost.
Excess Reorganization Value. Excess reorganization value represents the
adjustment of the Company's balance sheet for reorganization value in excess of
amounts allocable to identifiable assets. Excess reorganization value is being
amortized over 15 years. The Company evaluates, at least annually, whether
events or circumstances have occurred that may impact the recoverability of
excess reorganization value. Upon the occurrence of any such event or
circumstance, the Company remeasures the realizable portion of excess
reorganization value. Accumulated amortization as of and for the twenty-three
weeks ended January 31, 1998 was $164,000.
52
<PAGE>
Income Taxes. Provision for income taxes is based on reported results
of operations before income taxes. Deferred income taxes reflect the future tax
consequences attributable to temporary differences between the Company's assets
and liabilities for financial reporting and income tax purposes, using income
tax rates in effect during the period presented. The effect of a change in
existing income tax rates is recognized in the income tax provision in the
period that includes the enactment date.
Earnings per Common Share. Earnings per common share is computed as net
(loss) income divided by the weighted average number of common shares
outstanding during the period. There is no difference between basic and diluted
earnings per common share, as the inclusion of options to purchase 898,500
shares of common stock at $1.15 per common share during the twenty-three weeks
ended January 31, 1998 would have an anti-dilutive effect. Earnings per share
for prior periods is based on the Predecessor Company shares then outstanding;
such information is not comparable due to the Company's reorganization.
Fair Value of Financial Instruments. The Company's financial
instruments include cash and cash equivalents, receivables, trade accounts
payable, accrued expenses and long-term debt. The fair values of cash and cash
equivalents, receivables, trade accounts payable and accrued expenses
approximate recorded amounts as a result of their short-term nature. The fair
value of long-term debt approximates its recorded amount due to the floating
interest rate.
Store Preopening Expenses. Costs associated with the opening of new
stores are expensed in the fiscal year that the store is opened.
Advertising. The Company expenses advertising costs when the event
advertised occurs. Advertising expense, included in selling, administrative and
other operating costs in the accompanying statements of operations, was
$7,166,000 for the thirty weeks ended August 25, 1997 (Predecessor Company),
$5,436,000 for the twenty-three weeks ended January 31, 1998 (Successor
Company), $12,702,000 in fiscal 1996 and $12,579,000 in fiscal 1995.
Revenue Recognition Policy. The Company recognizes revenues at the
point of sale.
Recent Accounting Pronouncements. In fiscal 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings per Share". For
fiscal 1997, there is no difference between basic and diluted earnings per
common share, as the inclusion of 898,500 options of common shares granted
pursuant to the Company's 1997 Stock Incentive Plan (the "Stock Plan") would
have an anti-dilutive effect.
The Financial Accounting Standards Board ("FASB") has issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income",
effective for fiscal years beginning after December 15, 1997. The Company
believes this statement will have no impact on its financial presentation.
Further, FASB has issued Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information", also
effective for fiscal years beginning after December 15, 1997. The Company does
not have industry segments and does not believe this pronouncement will impact
its financial presentation.
Reclassifications. Certain prior year balances have been reclassified
to conform to current year presentation.
53
<PAGE>
(2) ACCRUED EXPENSES
Accrued expenses consist of the following:
Successor Predecessor
Company Company
----------------- -------------------
January 31, January 25,
1998 1997
----------------- -------------------
Payroll and related benefits $ 1,661,000 $ 1,924,000
Taxes other than income taxes 1,613,000 2,857,000
Rent and other related costs 2,123,000 2,273,000
Other 2,236,000 2,042,000
---------------- -------------------
Total $ 7,633,000 $ 9,096,000
================ ===================
(3) LONG-TERM DEBT
On August 26, 1997, the Company entered into a revolving credit
agreement, which provides a working capital facility of $40,000,000 and is
secured by substantially all of the Company's assets. The agreement provides
further that proceeds may be used solely to fund working capital in the ordinary
course of business and for other general corporate purposes. The interest rates
for this credit agreement are the reference rate thereunder plus 0.375% or, at
the option of the Company, the Eurodollar rate thereunder plus 2.25%. The
interest rate at January 31, 1998 was 8.875%. The working capital facility may
also be used to fund letters of credit. During the Chapter 11 bankruptcy
proceedings, the Company had available a debtor-in-possession financing
agreement which provided a working capital facility of $30,000,000.
At January 31, 1998, WSI had approximately $18,100,000 available under
its working capital facility, after considering outstanding letters of credit of
approximately $4,800,000 and borrowings of $5,000,000. The Company's peak
borrowings under the working capital facility during fiscal year 1997, including
outstanding letters of credit, were $14,279,000 in December 1997. The Company
may prepay amounts outstanding under the working capital facility without
penalty.
The revolving credit agreement requires that the Company maintain
certain financial covenants and stipulates certain borrowing limitations based
on the Company's inventory levels. The revolving credit agreement also restricts
future liens and indebtedness, sales of assets, and dividend payments. Capital
expenditures are restricted to $7,000,000 in each of fiscal years 1997, 1998 and
1999 and to $5,000,000 for the period commencing January 30, 2000 and ending
August 31, 2000, the expiration date of the agreement. As of January 31, 1998
the Company was in compliance with all covenants in relation to its revolving
credit agreement.
Cash interest paid was approximately $33,000 during the thirty weeks
ended August 25, 1997 (Predecessor Company), $153,000 during the twenty-three
weeks ended January 31, 1998 (Successor Company), $44,000 during fiscal 1996 and
$828,000 during fiscal 1995.
(4) LEASES
The Company leases store locations under operating lease agreements,
which expire at varying dates through 2009. Most of the store leases include
renewal options for an additional 5 to 15 years, and require the company to pay
taxes, insurance and certain common area maintenance costs in addition to
specified minimum rents. Most of the store leases also require the payment of
contingent rent based upon a specified percentage of sales in excess of a base
amount.
54
<PAGE>
The Company paid $377,000 and $739,000 to related parties in minimum
and contingent rents during fiscal years 1996 and 1995, respectively.
Total rent expense for all operating leases was as follows:
<TABLE>
<CAPTION>
Successor Company Predecessor Company
---------------------- --------------------------------------------------------------------------
Twenty-three weeks Thirty weeks ended Year ended Year ended
ended January 31, 1998 August 25, 1997 January 25, 1997 January 27, 1996
---------------------- --------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
Minimum rentals $ 3,950,000 $ 5,426,000 $ 9,994,000 $ 12,284,000
Contingent rentals 67,000 419,000 492,000 373,000
----------------------- ----------------------- ----------------------- ----------------------
Total $ 4,017,000 $ 5,845,000 $ 10,486,000 $ 12,657,000
======================= ======================= ======================= ======================
</TABLE>
At January 31, 1998, future minimum rental payments under all
noncancelable operating leases with initial or remaining lease terms of one year
or more were as follows:
Fiscal Year
-----------
1998....................... $ 9,645,000
1999....................... 8,166,000
2000....................... 6,432,000
2001....................... 4,439,000
2002....................... 2,938,000
Thereafter................. 5,458,000
-----------------
Total............. $ 37,078,000
=================
(5) INCOME TAXES
A reconciliation of the Company's effective tax rate with the statutory
federal income tax rate is as follows:
<TABLE>
<CAPTION>
Successor Company Predecessor Company
----------------- --------------------------------------------------------------------
Twenty-
three weeks Thirty weeks
ended ended Year Ended Year Ended
January 31, August 25, January 25, January 27,
1998 1997 1997 1996
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Expense (benefit) at statutory rate (34.0)% 34.0% (34.0)% (34.0)%
Operating losses not providing
current benefit 34.0 - 33.7 32.8
Operating loss carryforwards - (34.0) - -
----------------
------------------ ------------------ -----------------
Effective rate - - (0.3)% (1.2)%
=============== ================== ================== =================
</TABLE>
55
<PAGE>
Deferred tax assets and liabilities and the related valuation allowance
were as follows:
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 25,
1998 1997
------------------ -----------------
<S> <C> <C>
Deferred tax liabilities - depreciation and other $ 450,000 $ 450,000
------------------ -----------------
Deferred tax assets:
Operating loss carryforwards........... 12,740,000 16,889,000
Targeted jobs credit carryforwards..... 779,000 779,000
Accrued expenses and other............. 863,000 1,274,000
----------------- -----------------
14,382,000 18,942,000
Valuation allowance....................... (14,382,000) (18,942,000)
------------------ -----------------
Deferred income taxes, net................ $ 450,000 $ 450,000
================= =================
</TABLE>
The valuation allowance reduces deferred tax assets to the amount that
the Company believes is most likely to be realized. At January 31, 1998, the
Company had federal income tax net operating loss ("NOL") carryforwards of
approximately $37,000,000. The NOL and targeted jobs credit carryforwards expire
in various years through 2013.
The amount of the NOL carryforwards and certain other tax attributes
available to the Company as of the Effective Date (Note 6) were reduced
substantially, to approximately $31,000,000 as a result of the discharge and
cancellation of various prepetition liabilities under the Plan. Tax attributes
remaining after the application of cancellation of indebtedness rules are
subject to limitation-on-utilization rules. The federal tax code imposes
limitations on the utilization of tax attributes, such as NOL carryovers, after
certain changes in the ownership of a loss company. The Company is a loss
company. The income tax benefit, if any, resulting from any future realization
of the NOL carryforwards will be credited to Excess Reorganization Value and
then to additional paid-in-capital.
(6) PLAN OF REORGANIZATION
On April 12, 1995 (the "Petition Date"), the Company filed a petition
for reorganization under Chapter 11 ("Chapter 11") of the Federal Bankruptcy
Code (the "Bankruptcy Code"). Subsequent to the Petition Date, the Company
operated as a debtor-in-possession under the supervision of the United States
Bankruptcy Court for the District of Delaware (the "Court"). As of the Petition
Date, actions to collect prepetition indebtedness were stayed and other
contractual obligations could not be enforced against the Company. In addition,
under the Bankruptcy Code, the Company could reject leases and executory
contracts. Parties affected by the rejections could file claims with the Court
in accordance with the reorganization process. Substantially all liabilities as
of the Petition Date were subject to settlement under a plan of reorganization
that was to be voted on by the creditors and approved by the Court.
As a result of extensive negotiations, the Company reached a compromise
agreement with representatives of all of its major creditor constituencies, as
well as the Predecessor Company's common stockholders. This compromise agreement
was then incorporated into and became the Plan dated June 24, 1997, as amended.
On August 13, 1997, the Court commenced a hearing that resulted in the entering
of a court order confirming the Plan. The Plan became effective August 26, 1997.
Pursuant to the Plan, on the Effective Date, all outstanding shares of
common stock and any options, warrants or other agreements requiring the
issuance of any such stock were extinguished. The Plan was designed to repay all
priority creditors in full on the Effective Date or thereafter as provided in
the Plan and to repay secured creditors in full over time with interest. Allowed
unsecured claims totaling approximately $85,200,000 were cancelled in exchange
for $5,000,000 of cash and 18,600,000 shares of newly issued common stock, par
value $.01 per common share, of the reorganized company. An additional 400,000
shares of the newly issued common stock were issued to senior management.
Consequently, a total of 19,000,000 shares of newly issued common stock of the
Successor Company were issued under the Plan. In addition, the Plan authorized
the
56
<PAGE>
issuance of options to purchase up to 1,000,000 shares of newly issued common
stock of the Successor Company for the purposes of providing incentives intended
to retain and motivate highly competent persons as key employees of the Company.
In connection with the Chapter 11 proceedings, the Company incurred
reorganization expenses as follows ($ in thousands):
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
---------------------------------------------------------------------
THIRTY WEEKS
ENDED YEAR ENDED YEAR ENDED
AUGUST 25, JANUARY 25, JANUARY 27,
1997 1997 1996
---------------------------------------------------------------------
<S> <C> <C> <C>
Professional fees $ 1,894 $ 3,258 $ 2,887
Store/warehouse closings 336 4,438 3,280
System and store reorganization
costs 468 1,289 1,507
Administrative reorganization costs 818 8 1,973
Adjustment of liabilities subject to
settlement (1,040) 1,500 -
Miscellaneous reorganization costs (70) 249 106
--------------- -------------- --------------
Total $ 2,406 $ 10,742 $ 9,753
=============== ============== ==============
</TABLE>
(7) "FRESH START" REPORTING
In accounting for the effects of the reorganization, the Company has
adopted the "fresh start" reporting provisions of Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7"), and reflected the effects of such adoption in the financial
statements for the twenty-three weeks from inception (August 26, 1997) to
January 31, 1998. SOP 90-7 is applicable because the pre- reorganization
shareholders received less than 50% of the Successor Company's newly issued
common stock and the enterprise value of the assets of the Successor Company is
less that the total of all prepetition liabilities.
In adopting "fresh start" reporting, the Company was required to
determine its enterprise value, which represents the fair value of the entity
before considering its liabilities. The Company's enterprise value was
determined with the assistance of its financial advisors to be within a range
that centered around a point estimate of $75,000,000. The enterprise value of
the Company was determined by consideration of several factors and reliance on
various valuation methods, including discounted future cash flows, market
comparables and price/earning ratios.
The adjustments to reflect the adoption of "fresh start" reporting,
including the adjustments to record assets and liabilities at their fair market
values, have been reflected in the accompanying financial statements as of
August 25, 1997 as "fresh start" adjustments. In addition, the Successor
Company's opening balance sheet was further adjusted to eliminate existing
equity and to reflect the aforementioned $75,000,000 enterprise value, which
includes the establishment of $5,905,000 of reorganization value in excess of
amounts allocable to identifiable assets ("Excess Reorganization Value"). The
Excess Reorganization Value is being amortized using the straight-line method
over a 15-year useful life which is based on the average remaining life of the
Company's operating leases.
57
<PAGE>
The effect of the Plan and "fresh start" reporting on the Successor
Company's balance sheet as of August 26, 1997 is as follows ($ in thousands):
<TABLE>
<CAPTION>
Pre "Fresh Start" Post "Fresh Start"
Balance Sheet Extraordinary "Fresh Start" Balance Sheet
August 25, 1997 Gain (a) Adjustments (b) Other (c) August 26, 1997
--------------- -------------- --------------- ------------- ---------------
ASSETS
Current Assets:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 15,673 $ - $ - $ - $ 15,673
Receivables 4,662 - (219) - 4,443
Merchandise inventories 56,069 - (800) - 55,269
Prepaid expenses and other assets 2,396 - (50) - 2,346
-------------- -------------- --------------- ------------- --------------
Total current assets 78,800 - (1,069) 77,731
Excess Reorganization Value - - - 5,905 5,905
Property and Equipment, net 15,605 - - - 15,605
-------------- ------------- -------------- ------------ --------------
$ 94,405 $ - $ (1,069) $ 5,905 $ 99,241
============== ============= =============== ============ ==============
LIABILITIES AND STOCKHOLDERS'
(DEFICIENCY) EQUITY
Current Liabilities:
Accounts payable $ 10,633 $ - $ 150 $ - $ 10,783
Accrued expenses and other current
liabilities 12,068 11,146 300 - 23,514
Accrued reorganization expenses 2,640 (2,640) - - -
-------------- -------------- -------------- ------------ --------------
Total current liabilities 25,341 8,506 450 34,297
Other Liabilities 450 640 - - 1,090
Liabilities Subject to Settlement Under
Reorganization Proceedings 91,683 (91,683) - - -
-------------- -------------- -------------- ------------ --------------
Stockholders' (Deficiency) Equity:
Common stock:
Class A, voting, $100 par value 1,000 - - (1,000) -
Class A, non-voting, $100 par
value 9,000 - - (9,000) -
$.01 par value, voting - 190 - - 190
Additional paid-in capital - 63,664 - - 63,664
Retained (deficit) earnings (33,069) 18,683 (1,519) 15,905 -
--------------- ------------- --------------- ------------ --------------
Total stockholders' (deficiency)
equity (23,069) 82,537 (1,519) 5,905 63,854
--------------- -------------- --------------- ------------ --------------
$ 94,405 $ - $ (1,069) $ 5,905 $ 99,241
=============== ============== =============== ============ ==============
</TABLE>
(a) To record the settlement of liabilities subject to settlement under the Plan
of Reorganization (Note 6).
(b) To record the adjustments to state assets and liabilities at fair value as
of August 25, 1997.
(c) To record the adjustments to cancel old stock, to eliminate the cumulative
deficit and to adjust assets to reflect the $75,000,000 enterprise value.
The following unaudited pro forma statements of operations reflect the
financial results of the Company for the years ended January 31, 1998 and
January 25, 1997 as if the Plan had been effective as of the beginning of the
periods presented ($ in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1998
--------------------------------------------------------------------------
Historical(a) Adjustments Pro Forma
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net sales $ 263,637 $ - $ 263,637
Cost of goods sold 178,658 - 178,658
--------------- ---------------- ---------------
Gross margin 84,979 - 84,979
Selling, administrative and other costs 87,057 230 (b) 87,287
Reorganization expense 2,406 (2,406) (c)
---------------- -----------------
Operating loss (4,484) 2,176 (2,308)
Interest income (expense), net (24) - (24)
"Fresh start" adjustments (1,519) 1,519 (c) -
---------------- ---------------- ---------------
Loss before extraordinary gain (6,027) 3,695 (2,332)
Extraordinary gain 18,683 (18,683) (c) -
--------------- ----------------- ---------------
Net income (loss) $ 12,656 $ (14,988) $ (2,332)
=============== ================= ================
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 25, 1997
----------------------------
Historical Adjustments Pro Forma
--------------- ---------------- ---------------
<S> <C> <C> <C>
Net sales $ 263,666 $ - $ 263,666
Cost of goods sold 179,164 - 179,164
--------------- ---------------- ---------------
Gross margin 84,502 - 84,502
Selling, administrative and other costs 88,580 394 (b) 88,974
Reorganization expense 10,742 (10,742) (c) -
Impairment of assets 3,044 - 3,044
--------------- ---------------- ---------------
Operating loss (17,864) 10,348 (7,516)
Interest income (expense), net 596 - 596
--------------- ---------------- ---------------
Loss before income taxes (17,268) 10,348 (6,920)
Income tax benefit 48 - 48
--------------- ---------------- ---------------
Net (loss) income $ (17,220) $ 10,348 $ (6,872)
================ ================ ================
</TABLE>
(a) Includes operating results for the twenty-three weeks from inception
(August 26, 1997) to January 31, 1998 for the Successor Company and for the
thirty weeks ended August 25, 1997 for the Predecessor Company.
(b) To record amortization of the Excess Reorganization Value.
(c) To eliminate the "fresh start" adjustments and reorganization expenses.
(8) EXTRAORDINARY GAIN
The Plan resulted in the discharge of an estimated $85,500,000 in
prepetition claims against the Company through the distribution of $5,000,000 in
cash and the issuance of 18,600,000 shares of common stock. The value of the
cash and securities was less than the claims, resulting in an extraordinary gain
of $18,683,000.
(9) EMPLOYEE BENEFIT PLANS
The Company sponsors the Weiner's Stores, Inc. 401(k) Plan. This is a
defined contribution plan that covers all salaried employees and allows them to
defer up to 15% of their income. Company contributions are at the discretion of
the Board of Directors. No contributions were made by the Company in the fiscal
years currently being reported.
The Company also sponsors the Weiner's Stores, Inc. Employees' Profit
Sharing Plan. Contributions to the profit sharing plan are at the discretion of
the Board of Directors and are limited to the amount deductible under the
current applicable tax codes. The Company contributed $5,000 per year for each
of the three fiscal years ended January 31, 1998.
The Company's 1997 Stock Incentive Plan (the "Stock Plan") is accounted
for using the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25 "Accounting for Stock Issued to Employees", and related
interpretations, under which no compensation cost has been recognized. In fiscal
1997, 900,000 stock options were granted. There were no option grants prior to
fiscal 1997. Had compensation cost for this plan been determined consistent with
the provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation", there would have been no change to
the Company's reported net loss per common share of $0.31. The weighted average
fair value of options granted in fiscal 1997 was estimated to be zero on the
date of grant using the Black-Scholes option pricing model with the assumptions
that the risk-free interest rate was 4.5%, price volatility was 0.001%, the
expected term of the options was 2.5 years and no dividends were expected.
The effect on fiscal 1997 pro forma net income and net income per
common share of expensing the estimated fair value of stock options is not
necessarily representative of the effect on reported earnings in future years
due to the vesting period for stock options and the potential for issuance of
additional stock options in future years.
Under the Stock Plan, a committee of the Board of Directors may grant
options to key employees to purchase common stock at not less than the fair
market value at the date of the grant. These options shall be exercisable at
such time or times and subject to such terms and conditions as shall be
determined by the Board of Directors, provided that no stock option shall be
exercisable later than 10 years after the date it is granted.
59
<PAGE>
Further, the Stock Plan allows that the Board of Directors may grant stock
awards consisting of common stock issued or transferred to participants as
additional compensation with or without other payments to the Company. On the
Effective Date pursuant to the Plan, 400,000 stock awards were granted. The
Stock Plan allows the Board of Directors to grant options and awards up to the
plan limit of 1,400,000 shares.
A summary of options granted under the Stock Plan at January 31, 1998
is presented below:
Weighted Average
Option Shares Exercise Price
---------------------- ------------------
Outstanding, January 25, 1997 - $ -
Granted 900,000 1.15
Forfeited (1,500) 1.15
---------------------- -----
Outstanding, January 31, 1998 898,500 $1.15
====================== =====
Exercisable, January 31, 1998 83,333 $1.15
====================== =====
The Company has employment agreements with each of its three most
senior officers, which prescribe a minimum base salary and severance payments if
the executives are terminated for any reason other than cause. Further, the
Company has entered into agreements with key employees in an effort to retain
continuity for a meaningful period of time. In addition the Company, with
respect to certain of its officers and key employees and without altering their
employment at will status, has provided for a separation payment equal to six to
twelve months base salary in the event of termination for any reason other than
cause. If all officers and key employees, including the three most senior
officers, were terminated, the Company's estimated aggregate severance payment
obligations would be approximately $1,750,000.
(10) IMPAIRMENT OF ASSETS
At the beginning of fiscal 1996, the Company implemented the provisions
of Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of".
This statement requires that long-lived assets be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. As a result of management's decision to replace
their store point-of-sale equipment with more advanced equipment in the future,
an impairment expense of $3,044,000 was recorded in fiscal 1996. This charge
reduces the carrying value of such equipment to a minimal amount based on
management's opinion that the fair value of the equipment at the time of its
disposal will be minimal. In assessing impairment, the Company compares the
undiscounted cash flow, excluding interest, to the carrying value of the related
assets.
(11) COMMITMENTS AND CONTINGENCIES
There are various suits and claims against the Company that have arisen
in the normal course of business, none of which, in the opinion of management,
will have a material effect on the Company.
On February 11, 1998, the Company entered into an agreement with a
Houston, Texas based transportation service to provide delivery of all
merchandise received at the Company's central distribution center to its stores.
The three year agreement is effective April 6, 1998 and expires May 1, 2001. As
part of the agreement, the transportation service will acquire all of the trucks
and trailers owned by the Company. There should be no significant impact to the
Company's financial statements by changing to an outside service to provide its
transportation needs.
60
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned thereunto duly
authorized.
WEINER'S STORES, INC.
Date: May 18, 1998 BY:/S/ RAYMOND J. MILLER
------------------------
RAYMOND J. MILLER
VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
61
<PAGE>
EXHIBIT INDEX
Exhibit
No. Description
------- -------------------------------------------
2.1* Weiner's Stores, Inc.'s Amended Plan of
Reorganization Under Chapter 11 of the Bankruptcy
Code, dated June 24, 1997
2.2* Modification of the Weiner's Stores, Inc.'s
Amended Plan of Reorganization Under Chapter
11 of the Bankruptcy Code, made pursuant to
the order of the Bankruptcy Court confirming
the Plan pursuant to section 1129 of the
Bankruptcy Code, dated August 13, 1997
3.1* Restated Certificate of Incorporation of the
Company
3.2* Restated Bylaws of the Company
4.1* Registration Rights Agreement between the Company
and Texas Commerce Bank N.A., dated August 26, 1997
4.2* Form of Specimen Common Stock Certificate
10.1* Weiner's Stores, Inc. 1997 Stock Incentive Plan
10.2* Form of Incentive Stock Option Agreement
between the Company and each of the eligible
employees pursuant to Schedule A of the
Stock Plan
10.3* Form of Nonqualified Stock Option Agreement
between the Company and each of the eligible
employees pursuant to Schedule A of the
Stock Plan
10.4* Form of Restricted Stock Agreement between
the Company and each of the named executive
officers named on Schedule B to the Stock
Plan
10.5* Employment Agreement between the Company and
Herbert R. Douglas dated December 5, 1995
10.6* Amendment, dated May 1, 1997, to Employment
Agreement between the Company and Herbert R.
Douglas
10.7* Employment Agreement between the Company and
Raymond J. Miller dated February 24, 1995
10.8* Amendment, dated April 7, 1995, to Employment
Agreement between the Company and Raymond J. Miller
10.9* Amendment, dated May 1, 1997, to Employment
Agreement between the Company and Raymond J. Miller
10.10* Employment Agreement between the Company and Jerome
L. Feller dated December 14, 1995
62
<PAGE>
10.11* Amendment, dated May 1, 1997, to Employment
Agreement between the Company and Jerome L. Feller
10.12* Severance Agreement between the Company and James
L. Berens dated January 29, 1996, conformed as
amended May 1, 1997 and November 10, 1997
10.13* Severance Agreement between the Company and Joseph
J. Kassa dated February 5, 1996, conformed as
amended May 1, 1997 and November 10, 1997
10.14* Revolving Credit Agreement among the
Company, various Lending Institutions and
The CIT Group/Business Credit, Inc., as
Agent, dated August 26, 1997
10.15* First Amendment, dated as of September 30, 1997, to
the Revolving Credit Agreement
10.16* Transportation Agreement between the Company and
Roadrunner Moving & Storage, Inc., dated February
11, 1998
21.1* Subsidiaries of the Company
27.1** Financial Data Schedule
- ------------------------
* Previously Filed
** Filed Herewith
63
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements of Weiner's Stores, Inc. contained in the accompanying
Registration Statement on Form 10 and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> OTHER OTHER YEAR
<FISCAL-YEAR-END> JAN-31-1998 JAN-31-1998 JAN-31-1998
<PERIOD-END> AUG-25-1997 JAN-31-1998 JAN-31-1998
<CASH> 0 0 3,574
<SECURITIES> 0 0 0
<RECEIVABLES> 0 0 1,592
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 49,881
<CURRENT-ASSETS> 0 0 58,185
<PP&E> 0 0 18,487
<DEPRECIATION> 0 0 1,674
<TOTAL-ASSETS> 0 0 80,739
<CURRENT-LIABILITIES> 0 0 16,936
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 0 0 190
<OTHER-SE> 0 0 57,779
<TOTAL-LIABILITY-AND-EQUITY> 0 0 80,739
<SALES> 160,315 103,322 263,637
<TOTAL-REVENUES> 160,315 103,322 263,637
<CGS> 106,350 72,308 178,658
<TOTAL-COSTS> 106,350 72,308 178,658
<OTHER-EXPENSES> 54,234 36,748 90,982
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> (127) 151 24
<INCOME-PRETAX> (142) (5,885) (6,027)
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> (142) (5,885) (6,027)
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 18,683 0 18,683
<CHANGES> 0 0 0
<NET-INCOME> 18,541 (5,885) 12,656
<EPS-PRIMARY> 185.41 (.31) 0
<EPS-DILUTED> 185.41 (.31) 0
</TABLE>
