<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) February 17, 1994
-----------------
HANOVER DIRECT, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
1-12082
-----------------------
(Commission File Number)
Delaware 13-0853260
------------------------------- -----------
(State or other jurisdiction (I.R.S. Employer
of incorporation) identification number)
1500 Harbor Boulevard,
Weehawken, New Jersey 07087
----------------------- --------------------------
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code (201) 865-3800
--------------
------------------------------------------------------------
(Former name or former address, if changed since last report)
<PAGE> 2
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired:
(i) Audited consolidated balance sheets of Gump's, Inc. for the years
ended February 27, 1993, February 29, 1992 and February 23,
1991, and the related consolidated statements of operations,
stockholder's deficit and cash flows.
(ii) Unaudited consolidated balance sheet of Gump's, Inc. as of May 29,
1993 and the related consolidated statements of operations and
cash flows for the three month periods ended May 30, 1992 and May
29, 1993.
(iii) Audited consolidated balance sheets of Company Store Holdings,
Inc. and Subsidiaries (Debtors-in-Possession) as of August 1,
1992 and July 27, 1991, and the related consolidated statements of
operations, shareholders' investment (deficit), and cash flows for
each of the three years in the period ended August 1, 1992.
(iv) Unaudited consolidated balance sheet of Company Store Holdings,
Inc. and Subsidiaries (Debtors-in-Possession) as of July 3,
1993, and the related consolidated statements of operations and
cash flows for the eleven months ended June 27, 1992 and July 3,
1993.
(v) Audited balance sheets of Tweeds, Inc. as of January 31, 1993,
February 2, 1992, June 30, 1991 and July 1, 1990, and the
related statements of operations, stockholders' equity (deficit)
and cash flows.
(vi) Unaudited consolidated balance sheet of Tweeds, Inc. as of
September 26, 1993, and the unaudited consolidated statements of
operations and cash flows for the eight month periods ended
September 27, 1992 and September 26, 1993.
(b) Pro Forma Financial Information: Pro Forma Unaudited Consolidated
Condensed Financial Information of the Registrant.
- Unaudited Condensed Pro Forma Balance Sheet as of September 25,
1993.
- Unaudited Condensed Pro Forma Income Statement for the Twelve
Months Ended December 26, 1992.
- Unaudited Condensed Pro Forma Income Statement for the Nine Months
Ended September 25, 1993.
-2-
<PAGE> 3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HANOVER DIRECT, INC.
---------------------
(Registrant)
February 17, 1994 /s/ Wayne P. Garten
-------------------------------------
Name: Wayne P. Garten
Title: Executive Vice President &
Chief Financial Officer
-3-
<PAGE> 4
Item 7(a)(i)
Consolidated Financial Statements
Gump's, Inc.
Years ended February 27, 1993
and February 29, 1992
with Report of Independent Auditors
<PAGE> 5
Gump's, Inc.
Consolidated Financial Statements
Years ended February 27, 1993 and February 29, 1992
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . 1
Audited Consolidated Financial Statements
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Stockholder's Deficit . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 8
</TABLE>
<PAGE> 6
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Gump's, Inc.
We have audited the accompanying consolidated balance sheets of Gump's, Inc. as
of February 27, 1993 and February 29, 1992, and the related consolidated
statements of operations, stockholder's deficit, and cash flows for the years
then ended. 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Gump's, Inc. at
February 27, 1993 and February 29, 1992, and the consolidated results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that Gump's,
Inc. will continue as a going concern. As more fully described in Note 1, the
Company has incurred recurring operating losses, has a working capital
deficiency, and has generated negative cash flows from operating activities.
The Company has agreed to sell substantially all of the assets and certain
liabilities to a third party. The amounts which may be realized from disposal
of the remaining assets and the amounts required to settle the remaining
liabilities are not presently determinable. The operations, current financial
condition, and the asset purchase agreement of Gump's, Inc. raise substantial
doubt about the Company's ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
ERNST & YOUNG
San Francisco, California
June 11, 1993,
except for Note 1 as to which the date is
July 15, 1993
<PAGE> 7
Gump's, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
February 27, February 29,
1993 1992
--------------------- --------------------
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,638 $ 2,897
Accounts receivable, less allowance
of $107 in 1993 and $142 in 1992 2,475 3,232
Inventories 10,310 12,310
Prepaid expenses 1,241 1,222
Other receivables and other assets 855 1,045
------------- --------------
Total current assets 16,519 20,706
Property and equipment:
Leasehold improvements 5,710 5,801
Equipment under capital lease 1,041 1,047
Furniture and fixtures 869 889
Computer system 497 253
Construction in progress - 78
Automobiles 33 33
------------- --------------
8,150 8,101
Accumulated depreciation and
amortization 2,883 1,939
------------- --------------
5,267 6,162
Goodwill 1,650 1,650
------------- --------------
1,650 1,650
------------- --------------
Total assets $ 23,436 $ 28,518
============= ==============
</TABLE>
-2-
<PAGE> 8
(in Thousands)
<TABLE>
<CAPTION>
February 27, February 29,
1993 1992
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Notes payable to bank, in default $27,000 $27,000
Trade accounts payable 2,011 2,011
Accrued expenses 2,142 2,605
Accrued interest 3,342 883
Outstanding gift certificates and customer deposits 795 837
Accrued payroll and compensation 744 956
Current portion of capital lease obligations 200 180
Subordinated debt due to stockholder $ 7,935 $7,852
------- ------
Total current liabilities 44,169 42,314
Capital lease obligations, less current portion 532 737
Long-term deferred rent 4,388 3,570
Other liabilities 2,078 939
Redeemable, convertible Preferred Stock, $100 par value 12,000 12,000
(120,000 shares authorized and issued)
Stockholder's deficit:
CommonStock, $.01 par value:
Authorized shares--200,000; issued and outstanding shares--
75,714 in 1993 and 78,214 in 1992 1 1
Additional paid-in capital 11,635 11,675
Retained-earnings deficit (51,367) (42,718)
------- ------
Total stockholder's deficit (39,731) (31,042)
------- -------
Total liabilities and stockholder's deficit $23,436 $28,518
======= =======
</TABLE>
See accompanying notes.
-3-
<PAGE> 9
Gump's, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 29,
1993 1992
----------------- -----------------
(In Thousands)
<S> <C> <C>
Net sales $ 45,361 $ 53,715
Cost of sales 24,313 28,998
----------- -----------
Gross margin 21,048 24,717
Direct selling expenses 21,783 24,651
----------- -----------
(735) 66
General and administrative
expenses 5,263 8,174
Interest expense 2,651 2,836
----------- -----------
Loss before special items (8,649) (10,944)
Special items:
Writeoff of goodwill and
deferred loan fees -- (20,245)
Gain on sale of trademark and
product development division -- 2,734
------------- ------------
Net loss $(8,649) $(28,455)
============= ===========
</TABLE>
See accompanying notes.
-4-
<PAGE> 10
Gump's, Inc.
Consolidated Statements of Stockholder's Deficit
(In Thousands)
<TABLE>
<CAPTION>
Additional Retained-
Common Paid-in Earnings
Stock Capital Deficit Total
------- ---------- --------- -----
<S> <C> <C> <C> <C>
Balance at February 23, 1991 $ 1 $11,675 $(14,263) $(2,587)
Net loss -- -- (28,455) (28,455)
-------------------------------------------------------------------
Balance at February 29, 1992 1 11,675 (42,718) (31,042)
Repurchase of management shares -- (40) -- (40)
Net loss -- -- (8,649) (8,649)
-------------------------------------------------------------------
Balance at February 27, 1993 $ 1 $11,635 $(51,367) $(39,731)
===================================================================
</TABLE>
See accompanying notes.
-5-
<PAGE> 11
Gump's, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
February 27, February 29,
1993 1992
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (8,649) $ (28,455)
Adjustments to reconcile net loss to net cash
used by operating activities
Depreciation 944 1,532
Provision for bad debts (34) 139
Intangible assets -- 20,164
Reimbursement of product development
expenses -- (356)
Gain on sale of trademark and product
development -- (2,734)
Changes in operating assets and
liabilities:
Accounts receivable 792 668
Inventories 2,001 7,682
Prepaid expenses, other receivables
and other assets 170 191
Trade accounts payable 10 (2,593)
Accrued expenses and other
liabilities 3,780 (5,533)
Other -- (4)
----------- ----------
Net cash flows used by operating activities (986) (9,299)
INVESTING ACTIVITIES
Purchases of property and equipment (628) (3,801)
Proceeds from disposal of property and
equipment 579 1,020
Proceeds from sale of trademark and product
development -- 3,688
----------- -----------
Net cash flows used by investing activities (49) 907
FINANCING ACTIVITIES
Proceeds from notes payable to bank -- 12,993
Principal payments on notes payable to bank -- (8,400)
Proceeds from subordinated debt due to
stockholder -- 2,250
Principal payments on capital leases (184) (130)
Proceeds from capital leases -- 1,047
Proceeds from landlord for tenant improvements -- 3,500
Redemption of Common Stock (40) --
----------- -----------
</TABLE>
-6-
<PAGE> 12
<TABLE>
<CAPTION>
FEBRUARY 27, FEBRUARY 29,
1993 1992
----------------- -----------------
(In Thousands)
<S> <C> <C>
Net cash flows provided by financing (224) 11,260
activities
Net (decrease)/increase in cash and
cash equivalents (1,259) 2,868
Cash and cash equivalents at beginning of year 2,897 29
----------- -----------
Cash and cash equivalents at end of year $ 1,638 $ 2,897
=========== ===========
Supplemental disclosure of cash paid
during the year for interest $ 170 $ 2,080
=========== ===========
</TABLE>
See accompanying notes.
-7-
<PAGE> 13
Gump's, Inc.
Notes to Consolidated Financial Statements
FEBRUARY 27, 1993
ACCOUNTING POLICIES
1. BASIS OF PRESENTATION
On July 10, 1989, GMP Acquisition Corp. ("Company") acquired all of the
outstanding stock of Gump's, Inc., a California corporation and Gump's, Inc., a
Texas corporation for approximately $32.75 million. The transaction was
accounted for by the purchase method and the consolidated assets and
liabilities were recorded at fair values at July 10, 1989.
Since acquisition, the Company has incurred substantial operating losses, has a
working capital deficiency, and has generated negative cash flow. During
fiscal 1993, the Company, its sole shareholder and its senior lender initiated
negotiations with third party investors to pursue alternative financing
arrangements which would retire all or a portion of the outstanding debt. In
May 1993, a third party investor agreed to purchase substantially all of the
Company's assets and to assume certain liabilities at their net asset value as
defined in the agreement and to pay $1.75 million for goodwill and certain
intangibles. The liabilities assumed in the purchase agreement do not include
the amounts of principal and interest due to the bank and the sole stockholder.
While the amount of the proceeds from the sale of certain net assets to Horn &
Hardart and the amount realizable from disposal of the remaining assets are not
presently determinable, nor is it determinable the amounts that the creditors
will agree to accept in settlement of the obligations due to them, it is
reasonable to assume that such proceeds will not be sufficient to repay the
principal and interest. No adjustments have been made in the financial
statements to reflect the realizable value of the remaining assets or
liabilities after the sale of the business to Horn & Hardart. Such amounts may
differ materially from the amounts shown in the accompanying financial
statements.
The Company utilizes the 52-53 week fiscal year convention with its fiscal year
ending on a Saturday near the end of February. The accounts included in this
report reflect activity for the 52-week period ended February 27, 1993 and for
the 53-week period ended February 29, 1992.
-8-
<PAGE> 14
Gump's, Inc.
Notes to Consolidated Financial Statements (continued)
ACCOUNTING POLICIES (CONTINUED)
1. BASIS OF PRESENTATION (CONTINUED)
All significant intercompany accounts and transactions have been eliminated in
consolidation.
ACCOUNTS RECEIVABLE
Trade accounts receivable include installment accounts receivable maturing more
than twelve months from the balance sheet date in accordance with usual
industry practice. It is the Company's policy to write off receivables having
amounts over 120 days past due.
INVENTORIES
The Company uses the retail inventory method, which approximates the lower of
cost or market, to value inventory.
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation and
amortization are computed by the straight-line method using a five-year life
for furniture and fixtures, a three-year life for automobiles and the remaining
lease term for leasehold improvements and equipment under capital leases.
INTANGIBLE ASSETS
Since the acquisition in 1989, the Company has incurred substantial operating
losses and generated negative cash flow. At February 27, 1993, substantially
all of the Company's debt was in default and, while the Company recognized that
the value of goodwill recorded pursuant to the acquisition was impaired, the
amount of the write down could not be determined. Accordingly, the 1992
financial statements were not finalized or separately issued until the
resolution of certain issues as described below.
In May 1993, the Company agreed to sell substantially all of the assets,
certain liabilities and the business of Gump's, Inc. to subsidiaries of the
Horn & Hardart Company ("Horn & Hardart") for the net book value of these
specified assets and liabilities at
-9-
<PAGE> 15
Gump's, Inc.
Notes to Consolidated Financial Statements (continued)
ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS (CONTINUED)
July 12, 1993 plus $1,750,001 for the business and all related intangibles.
Because the 1993 sale of substantially all of the
business provided evidence of the amount of the impairment of goodwill at
February 29, 1992, the write-down of goodwill has been recorded in the 1992
financial statements. No amortization was recognized in the year ended
February 27, 1993, as goodwill was written down to its net realizable value.
SOFTWARE COSTS
The Company expenses all costs associated with developing and implementing
software for internal use.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
2. DEBT IN DEFAULT
The Company has three notes due to its senior bank lender aggregating $27
million. The loan agreement requires the Company to comply with certain
financial covenants. The Company has not complied with these covenants during
the two years ended February 27, 1993. The bank has not waived compliance with
these covenants and the entire long-term note payable has been classified as
current in the financial statements.
Two of these bank loans totaling $25 million are secured by a pledge of all
assets of the Company and bear interest at the bank's prime rate plus .75% or
LIBOR plus 1.75% at the Company's option. The third note payable in the amount
of $2 million accrues interest at the Fed Funds rate plus 1.75%.
The Company has a standby letter of credit for $1.7 million expiring on
September 9, 1994 which has been established in favor of the lessor of a store
and provides for an annual fee rate of 1%.
-10-
<PAGE> 16
Gump's, Inc.
Notes to Consolidated Financial Statements (continued)
2. DEBT IN DEFAULT (CONTINUED)
At February 27, 1993, the Company had not made scheduled principal payments of
$3.4 million on the debt and had not made scheduled
interest payments on the debt or standby letter of credit of $2.6 million.
At February 27, 1993 and February 29, 1992, the Company had three subordinated
notes payable to the sole stockholder totalling $7,152,000. The notes were all
due in 1992 and accrue interest at prime plus .5% or 7.5%. No interest was
paid during 1993 or 1992 and the Company signed additional notes, representing
accrued interest, totaling $782,280 and $709,366 at February 27, 1993 and
February 29, 1992, respectively. These notes are due December 31, 1998 and
accrue interest at 10%.
3. INCOME TAXES
The Company has net operating loss carryforwards of approximately $30 million
and $31 million for financial reporting purposes and federal income tax
purposes, respectively. The net operating loss for federal tax purposes
expires primarily in 2004. The utilization of the net operating losses may be
limited under Section 352 of the Internal Revenue Code. The principal
differences between the book and tax net operating losses relate to timing
differences in the recognition of certain expenses for book and tax purposes.
The Company has adopted Financial Accounting Standard No. 96 for financial
reporting purposes. In February 1992, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes". Companies are required to adopt this new method of accounting
for income taxes no later than fiscal years beginning after December 15, 1992.
The Company does not expect the adoption of this statement to have a material
effect on the Company's financial position.
4. EMPLOYEE BENEFIT PLANS
The Company has a defined benefit pension plan (Plan) that covers all hourly
employees of the Company who are members of Department Store Employees' Union,
Local 1100, who joined the Company on or
-11-
<PAGE> 17
Gump's, Inc.
Notes to Consolidated Financial Statements (continued)
4. EMPLOYEE BENEFIT PLANS (CONTINUED)
before their sixtieth birthday and who do not participate in any other
retirement plan to which the Company makes contributions. It is subject to the
provisions of the Employee Retirement Income Security Act of 1974 (ERISA).
Upon normal retirement at age 65, participants are entitled to monthly benefits
for life based on credited years of service as determined under the Plan.
Participants are fully vested in these benefits after five years of service.
The Company's current funding policy is to make annual contributions to the
Plan based on the actuarial determined amount necessary to fund current service
costs and to amortize the past service liability over a 30-year period. The
minimum funding requirements as established by ERISA have been met by the Plan.
The Plan invests primarily in money market and bond and stock funds. The money
market fund consists primarily of investments made by the trustee, Wells Fargo
Bank, in variable demand notes, commercial paper, treasury bills, and
certificates of deposit. Cost approximates market on these investments. All
other investments are accounted for at fair values as measured by market prices
determined by Wells Fargo Bank.
The following table sets forth the funded status and amounts recognized in the
financial statements:
<TABLE>
<CAPTION>
1993 1992
<S> <C> <C>
Accumulated benefit obligation $ (787,479) $ (712,454)
=========== ===========
Projected benefit obligation for service rendered to date $ (787,479) $ (712,454)
Plan assets at fair value, primarily listed stocks and U.S. bonds 1,150,061 1,109,585
--------- ---------
Plan assets in excess of projected benefit obligation 362,582 397,131
Unrecognized net (gain) loss from past experience different from that
assumed and effects of changes in assumptions 67,236 3,779
Prior service cost not yet recognized in net periodic pension cost 35,299 39,538
Unrecognized net obligation (asset) (221,695) (243,864)
--------- ---------
Prepaid pension cost included in other assets $243,422 $ 196,584
======== ==========
</TABLE>
-12-
<PAGE> 18
Gump's, Inc.
Notes to Consolidated Financial Statements (continued)
4. EMPLOYEE BENEFIT PLANS (CONTINUED)
Net periodic pension cost (income) included the following components:
<TABLE>
<CAPTION>
1993 1992
---- ----
<S> <C> <C>
Service cost--benefits earned during the period $ 18,504 $ 17,763
Interest cost on projected benefit obligation 61,729 62,628
Actual return on plan assets (102,077) (109,299)
Net amortization and deferral (17,930) (17,930)
-------- --------
Net periodic pension cost (income) $(39,774) $(46,838)
========= =========
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation for both years presented was 8%. The
expected long-term rate of return on plan assets for both years presented was
9%. This plan will be terminated effective July 12, 1993.
Effective June 1, 1991, the Company terminated its defined contribution profit
sharing plan for executive employees of the Company which covered all salaried
employees of the Company who had a job classification of assistant department
manager or above, who had completed one year of service and who were not
members of a collective bargaining unit. No contributions were made to the
plan during fiscal years ended 1993 and 1992.
5. SALE OF TRADEMARK AND PRODUCT DEVELOPMENT DIVISION
During fiscal year 1992, the Company sold its product development division to
its sole stockholder, including the related assets of the division, for
$688,140. In addition, the Company sold the right to exclusive use of the
"Gump's" trademark in the Greater Asian Territory for $3,000,000. The gain
recognized from these transactions was $2,734,000.
6. REDEEMABLE, CONVERTIBLE PREFERRED STOCK
The Preferred Stock has a 10% dividend rate which will accumulate and not be
payable until a future date to be determined by the stockholder. The Preferred
Stock is redeemable at any time at the option of the Board of Directors with
mandatory redemption on December 31, 1998. The redemption price equals $100
per share plus accrued dividends. The Preferred Stock is also convertible into
Common Stock at any time at the option of the holders of Preferred Stock. The
conversion factor is based on a Common Stock value of $169.70 per share
adjusted for future issues or sales of Common Stock.
-13-
<PAGE> 19
Gump's, Inc.
Notes to Consolidated Financial Statements (continued)
7. STORE CLOSURE
During fiscal year 1992, the Company closed its two retail stores located in
Dallas and Houston, Texas. The closures had been anticipated at the
acquisition date in July 1989 and appropriate reserves provided. The Company
secured releases for all obligations under its real estate leases for the two
properties from its landlords.
During fiscal year 1993, the Company closed its retail store located in Beverly
Hills, California. The Company was unable to secure a release for all
obligations under its real estate leases from its landlord. The Company is
negotiating with its landlord and has established an accrual for estimated
rental and common area maintenance expenses.
8. LEASE COMMITMENTS
The Company leases computer equipment and an automobile under capital leases.
In addition, the Company leases its store and other facilities under separate
operating lease agreements. All store lease agreements require the payment of
contingent rentals based upon sales of the specific store in addition to
minimum rentals. The Company also has operating leases for equipment. The
minimum payments, under capital leases and noncancelable operating lease
obligations with initial or remaining terms of one year or more, some of which
contain renewal options and escalation clauses, consist of the following:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
-------------------------------------------------
(In Thousands)
<S> <C> <C>
1994 $ 2,826,368 271,976
1995 1,772,931 271,976
1996 1,588,058 271,976
1997 1,588,397 55,616
1998 1,758,868
Thereafter 13,252,855
----------- ------------
Total minimum lease payments 22,787,477 871,544
Amounts representing interest - 139,092
----------- -----------
Present value of net minimum lease payments $ 22,787,477 $ 732,452
=============================================
</TABLE>
The operating lease commitments include annual rental commitments related to
the Beverly Hills store which the Company has vacated.
-14-
<PAGE> 20
Gump's, Inc.
Notes to Consolidated Financial Statements (continued)
8. LEASE COMMITMENTS (CONTINUED)
Rent expense consisted of the following:
<TABLE>
<CAPTION>
1993 1992
---------------------------------------------
(In Thousands)
<S> <C> <C>
Minimum rentals under operating leases $ 2,748 $ 2,509
Contingent Rentals 392 908
---------------------------------------------
$ 3,140 $ 3,417
=============================================
</TABLE>
Amortization of assets held under capital leases is included in depreciation
and amortization expense.
9. CONTINGENCIES
The Company is defending various claims and legal actions arising in its normal
operations. In the opinion of management, the ultimate resolution of these
actions individually or in the aggregate, will not have a material effect on
the Company's financial position.
-15-
<PAGE> 21
Consolidated Financial Statements
Gump's, Inc.
Year ended February 23, 1991
with Report of Independent Auditors
-16-
<PAGE> 22
Gump's, Inc.
Consolidated Financial Statements
Year ended February 23, 1991
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Audited Consolidated Financial Statements
Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statement of Stockholders' Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
</TABLE>
<PAGE> 23
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Gump's, Inc.
We have audited the accompanying consolidated balance sheet of Gump's, Inc. as
of February 23, 1991 and the related consolidated statement of operations,
stockholders' equity, and cash flows for the year ended February 23, 1991.
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 audit.
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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Gump's, Inc. at
February 23, 1991 and the consolidated results of their operations and their
cash flows for the year ended February 23, 1991 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that Gump's,
Inc. will continue as a going concern. As more fully described in Note 9, the
Company has incurred recurring operating losses and negative cash flows from
operating activities and is currently negotiating with one of its principal
shareholders and senior lenders to change the capitalization of the Company.
The operations and current financial condition of Gump's, Inc. raise
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
ERNST & YOUNG
San Francisco, California
June 17, 1991,
except for Note B as to which the date is
August 7, 1991
<PAGE> 24
Gump's, Inc.
Consolidated Balance Sheet
February 23, 1991
(In Thousands, except for share amounts)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash $ 29
Trade accounts receivable, less allowance for
doubtful accounts of $365 and $197, respectively 4,039
Inventories 19,992
Prepaid expenses 1,399
Other receivables and other assets 1,059
------------
Total current assets 26,518
Property and equipment:
Leasehold improvements 3,594
Furniture and fixtures 976
Automobiles 51
Computer system 1,124
------------
5,745
Less accumulated depreciation and amortization (1,294)
------------
4,451
Intangible assets:
Goodwill, less accumulated amortization of $953
and $249, respectively 21,741
Deferred loan fees and organization costs, less accumulated
amortization of $162 and $55, respectively 702
------------
22,443
------------
Total assets $ 53,412
============
</TABLE>
-2-
<PAGE> 25
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Trade accounts payable $ 4,594
Accrued expenses 7,428
Accrued interest 245
Outstanding gift certificates and customer deposits 1,231
Accrued payroll and compensation 1,205
Revolving line of credit with bank 7,050
------------
Total current liabilities 21,753
Long-term debt:
Note payable to bank 17,250
Subordinated debt due to stockholders 3,644
------------
20,894
Other liabilities 1,352
Redeemable, convertible Preferred Stock, $100 par value
(120,000 shares authorized and issued) 12,000
Stockholders' deficit:
Common Stock, $.01 par value (authorized: 1991-200,000
shares; issued and outstanding: 1991-78,214 shares) 1
Additional paid-in capital 11,675
Retained-earnings deficit (14,263)
------------
(2,587)
------------
Total liabilities and stockholders' deficit $ 53,412
============
</TABLE>
See accompanying notes.
-3-
<PAGE> 26
Gump's, Inc.
Consolidated Statements of Operations
Year ended February 23, 1991
(In Thousands)
<TABLE>
<S> <C>
Net sales $ 62,138
Cost of sales 31,694
--------------
Gross margin 30,444
Direct selling expenses 26,794
--------------
3,650
General and administrative expenses 10,070
--------------
Loss before interest expense (6,420)
Interest expense 3,231
--------------
Net loss $ (9,651)
==============
</TABLE>
See accompanying notes.
-4-
<PAGE> 27
Gump's, Inc.
Consolidated Statement of Stockholders' Deficit
<TABLE>
<CAPTION>
Additional Retained-
Common Paid-in Earnings
Stock Capital Deficit Total
------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Balance at February 24, 1990 $ 393 $ 6,675,482 $ (4,611,619) $ 2,064,256
Common Stock issued 389 4,999,746 $ - 5,000,135
Net loss - - $ (9,650,902) (9,650,902)
------- ------------- -------------- ------------
Balance at February 23, 1991 $ 782 $ 11,675,228 $ (14,262,521) $ (2,586,511)
======= ============= ============== ============
</TABLE>
See accompanying notes.
-5-
<PAGE> 28
Gump's, Inc.
Consolidated Statement of Cash Flows
Year ended February 23, 1991
(In Thousands)
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net loss $ (9,651)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,818
Provision for bad debts 281
Changes in operating assets and liabilities:
Trade accounts receivable 744
Inventories (712)
Prepaid expenses, other assets and other receivables 3,303
Intangibles (4,491)
Trade accounts payable 646
Accrued expenses and other current liabilities 2,052
----------
Net cash used in operating activities 6,010
INVESTING ACTIVITIES
Purchases of property and equipment (2,024)
Writeoff of leasehold improvements 278
----------
Net cash used in investing activities (1,746)
FINANCING ACTIVITIES
Proceeds from revolving line of credit 22,600
Principal payments on revolving line of credit (19,100)
Proceeds from subordinated debt due to stockholder 3,000
Principal payments on note payable to bank (3,750)
Proceeds from issuance of Common Stock 5,000
----------
Net cash provided by financing activities 7,750
----------
Net decrease in cash (6)
Cash at beginning of year 35
----------
Cash at end of year $ 29
==========
SUPPLEMENTAL DISCLOSURE OF CASH PAID DURING THE YEAR FOR INTEREST $ 3,084
==========
</TABLE>
See accompanying notes.
-6-
<PAGE> 29
Gump's, Inc.
Notes to Consolidated Financial Statements
FEBRUARY 23, 1991
1. ACCOUNTING POLICIES
BASIS OF PRESENTATION
On July 10, 1989, GMP Acquisition Corp. (referred to herein as Gump's, Inc. or
the Company) acquired all of the outstanding stock of Gump's, Inc., a
California corporation and Gump's, Inc., a Texas corporation for approximately
$32.75 million. The transaction was accounted for by the purchase method and
the consolidated assets and liabilities were recorded at fair values at July
10, 1989.
The Company utilizes the 52-53 week fiscal year convention with its fiscal year
ending on a Saturday near the end of February. The accounts included in this
report reflect activity for the 52-week period ended February 23, 1991.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable include installment accounts receivable maturing more
than twelve months from the balance sheet date in accordance with usual
industry practice. It is the Company's policy to write off receivables having
amounts over 120 days past due.
INVENTORIES
The Company uses the retail inventory method, which approximates the lower of
cost or market, to value inventory.
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation and
amortization are computed by the straight-line method which assigns a five-year
life to furniture and fixtures, a three-year life for automobiles and uses the
remaining lease term for leasehold improvements.
-7-
<PAGE> 30
Gump's, Inc.
Notes to Consolidated Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Goodwill is the excess of the acquisition costs over the fair value of the net
assets acquired. Goodwill is being amortized on a straight-line basis over 40
years. The deferred loan fees are being amortized over the life of the related
loans. Organization costs are being amortized over 5 years.
SOFTWARE COSTS
The Company expenses all costs associated with developing and implementing
software for internal use.
2. DEBT FINANCING
The Company has a $25 million loan agreement with a bank which provides a
short-term revolving line of credit of up to $7.75 million and a long-term note
payable of $17.25 million. The bank loans are secured by a pledge of all
assets of the Company and bear interest at the bank's prime rate plus .75% or
LIBOR plus 1.75%, at the Company's option. The loan agreement requires the
Company to maintain certain financial covenants, some of which the Company was
not in compliance with at February 23, 1991. In August 1991, the bank waived
compliance with these covenants through the year ending February 1992. The
maturities of long-term debt for fiscal years subsequent to February 23, 1991
are:
<TABLE>
<S> <C>
1993 $ 1,400,000
1994 2,300,000
1995 2,300,000
1996 2,300,000
1997 2,700,000
Thereafter 6,250,000
----------
$17,250,000
===========
</TABLE>
-8-
<PAGE> 31
Gump's, Inc.
Notes to Consolidated Financial Statements (continued)
3. INCOME TAXES
The Company has net operating loss carryforwards of $20 million and $14 million
for financial reporting purposes and federal income tax purposes, respectively.
The net operating loss for federal tax purposes expires in 2002. The principal
differences between the book and tax net operating losses relate to the
recognition for tax purposes of certain expenses at the time paid.
4. EMPLOYEE BENEFIT PLANS
The Company has a defined benefit pension plan (Plan) that covers all hourly
employees of the Company who are members of Department Store Employees' Union,
Local 1100, who joined the Company on or before their sixtieth birthday and who
do not participate in any other retirement plan to which the Company makes
contributions. It is subject to the provisions of the Employee Retirement
Income Security Act of 1974 (ERISA).
Upon normal retirement at age 65, participants are entitled to monthly benefits
for life based on credited years of service as determined under the Plan.
Participants are fully vested in these benefits after five years of service.
The Company's current funding policy is to make annual contributions to the
Plan based on the actuarial determined amount necessary to fund current service
costs and to amortize the past service liability over a 30-year period. The
minimum funding requirements as established by ERISA have been met by the Plan.
The Plan invests primarily in money market and bond and stock funds. The money
market fund consists primarily of investments made by the trustee, Wells Fargo
Bank, in variable demand notes, commercial paper, treasury bills, and
certificates of deposit. Cost approximates market on these investments. All
other investments are accounted for at fair values as measured by market prices
determined by Wells Fargo Bank.
-9-
<PAGE> 32
Gump's, Inc.
Notes to Consolidated Financial Statements (continued)
4. EMPLOYEE BENEFIT PLANS (CONTINUED)
The following table sets forth the funded status and amounts recognized in the
financial statements:
<TABLE>
<CAPTION>
1991
-----------
<S> <C>
Accumulated benefit obligation $ (694,339)
===========
Projected benefit obligation for service rendered to date $ (694,339)
Plan assets at fair value, primarily listed stocks and U.S. bonds 1,031,044
-----------
Plan assets in excess of projected benefit obligation 336,665
Unrecognized net (gain) loss from past experience different from that assumed
and effects of changes in assumptions 41,289
Prior service cost not yet recognized in net periodic pension cost 43,777
Unrecognized net obligation at year end (245,590)
-----------
Prepaid pension cost included in other assets $ 176,141
===========
Net periodic pension cost (income) included the following components:
Service cost--benefits earned during the period $ 17,493
Interest cost on projected benefit obligation 61,042
Actual return on plan assets (101,491)
Net amortization and deferral (17,930)
-----------
Net periodic pension income $ (40,886)
===========
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 9%. The expected long-term rate
of return on plan assets was 10%.
The Company also maintains a defined contribution profit-sharing plan for
executive employees of Gump's, Inc. which covers all salaried employees of the
Company who have a job classification of assistant department manager or above,
who have completed one year of service and who are not members of a collective
bargaining unit. No contribution was made to the plan for the current year.
Subsequent to February 23, 1991, the Company's Board of Directors adopted a
resolution to terminate this plan effective June 1, 1991.
-10-
<PAGE> 33
Gump's, Inc.
Notes to Consolidated Financial Statements (continued)
5. RELATED PARTY TRANSACTIONS
At February 23, 1991, the Company had a subordinated note payable to one of its
principal stockholders. At February 23, 1991, this note had an outstanding
principal balance of $3,000,000. This note accrues interest at prime rate plus
.5% and is due July 13, 1992. The remaining note, representing accrued
interest, has a principal balance of $643,416 at February 23, 1991. This note
is due December 31, 1998 and accrues interest at 10%.
A Company executive has options, which expire in July 1994, to purchase
additional shares of Common Stock at $169.70 per share to bring his ownership
interest up to 10 percent of the then outstanding Common Stock.
During the year ended February 23, 1991, the Company's stockholders exercised
warrants to purchase 36,964 shares of Common Stock.
6. LEASE COMMITMENTS
The Company leases all of its stores and other facilities under separate lease
agreements. All store lease agreements require the payment of contingent
rentals based upon sales of the specific store in addition to minimum rentals.
The Company also has operating leases for equipment, furniture and fixtures.
The minimum payments, by year and in the aggregate, under leases obligations
with initial or remaining terms of one year or more, some of which contain
renewal options, consist of the following:
<TABLE>
<CAPTION>
Equipment
and
Buildings Furniture Total
--------------------------------------------------
<S> <C> <C> <C>
1992 $1,856,327 $165,629 $2,021,956
1993 2,399,705 155,647 2,555,352
1994 2,887,569 73,869 2,961,438
1995 2,296,863 14,666 2,311,529
1996 2,122,841 5,246 2,128,087
Thereafter 16,344,884 - 16,344,884
--------------------------------------------------
$27,908,189 $415,057 $28,323,246
==================================================
</TABLE>
Total rent expense for the period ended February 23, 1991 amounted to
$3,292,826 of which $968,246 was contingent rent.
-11-
<PAGE> 34
Gump's, Inc.
Notes to Consolidated Financial Statements (continued)
7. STORE CLOSURE COSTS
Subsequent to February 23, 1991, the Company closed the two retail stores
located in Dallas and Houston, Texas. The closures had been anticipated at the
acquisition date in July 1989. The Company secured releases for all
obligations under its real estate leases for the two properties (from its
landlords). During 1991, the Company revised its estimate of the reserve for
store closure costs and increased goodwill by $3,638,000. The reserves were
established to provide for markdowns to dispose of the inventories at the two
locations, severance costs and costs relating to the termination of real estate
leases.
8. RECAPITALIZATION OF STOCKHOLDERS' EQUITY
In July 1990, $12,000,000 of subordinated notes payable held by the principal
stockholders were exchanged for 120,000 shares of $100 par value Preferred
Stock. The Preferred Stock has a 10% dividend rate which will accumulate and
not be payable until a future date to be determined by the stockholders. The
Preferred Stock is redeemable at any time at the option of the Board of
Directors with mandatory redemption on December 31, 1998. The redemption price
equals $100 per share plus accrued dividends. The Preferred Stock is also
convertible into Common Stock at any time at the option of the holders of
Preferred Stock. The conversion factor is based on a Common Stock value of
$169.70 per share adjusted for future issue or sales of Common Stock.
One principal stockholder also purchased an additional 29,664 shares of Common
Stock for $5,000,000 and advanced the Company $3,000,000 in exchange for a
subordinated promissory note.
9. PROPOSED FINANCIAL RESTRUCTURING
Since its inception in July 1989, the Company has incurred substantial
operating losses and negative cash flow. The July 1990 recapitalization
discussed in Note 8 was the first of the steps taken by management to
recapitalize the Company and to provide the Company with a solid financial
structure. Management is negotiating with its senior lender and one of its
principal stockholders to convert some of the existing debt to equity and to
provide additional financing through an equity infusion, a larger revolving
line of credit, and restructuring interest and principal repayment schedules
and various restrictive covenants in the existing senior loan agreement.
Management believes that the resulting financial structure will significantly
strengthen the Company.
-12-
<PAGE> 35
GUMP'S, INC. ITEM 7(A)(II)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
AS OF MAY 29, 1993
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,677
Accounts receivable, net 4,244
Inventories, net 8,357
Other current assets 1,348
---------
Total Current Assets 16,626
---------
Net Property 4,946
Other Assets 1,650
---------
Total Assets $ 23,222
=========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Current portion of long term debt and capital leases $ 18,303
Accrued liabilities 11,337
---------
Total Current Liabilities 29,640
---------
Noncurrent liabilities:
Long-term debt 16,632
Other 5,788
---------
Total Noncurrent Liabilities 22,420
---------
Total Liabilities 52,060
---------
Common and Other Shareholder's Equity (Deficit)
Preferred Stock 12,000
Common Stock 1
Capital in excess of par 11,635
Accumulated deficit (52,474)
---------
Common and Other Shareholder's Equity (Deficit) (28,838)
---------
Total Liabilities and Shareholder's Equity (Deficit) $ 23,222
=========
</TABLE>
-1-
<PAGE> 36
GUMP'S, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
--------------------------
May 30, May 29,
1992 1993
--------- ---------
<S> <C> <C>
Net sales $ 12,139 $ 12,254
Operating costs and expenses:
Costs of sales and operating expenses 6,576 6,509
Selling expenses 1,371 1,273
General and administrative expenses 6,333 4,872
-------- --------
Income (loss) from operations (2,141) (400)
Interest and other income (expenses): (561) ($707)
Net (loss) $(2,702) $(1,107)
======== ========
</TABLE>
-2-
<PAGE> 37
GUMP'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
--------------------------
MAY 30, MAY 29,
1992 1993
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ($2,702) ($1,107)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 466 484
Changes in operating assets and liabilities:
Accounts receivable (892) ( 1,658)
Inventories 2,352 2,035
Prepaid expenses and other 170 638
Accounts payable (632) (80)
Accrued expenses 723 545
Other 706 182
-------- --------
Net cash provided (used) by operating activities 191 1,039
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property (342) -
Other (1) -
-------- ---------
Net cash provided (used) by investing activities (343) -
-------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (152) 1,039
CASH AND CASH EQUIVALENTS AT THE BEGINNING
OF THE PERIOD 3,916 1,638
-------- --------
CASH AND CASH EQUIVALENTS AT THE END OF
THE PERIOD $3,764 $2,677
======== ========
</TABLE>
-3-
<PAGE> 38
GUMP'S, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements.
1. Basis of presentation - In the opinion of management, the accompanying
unaudited interim financial statements contain all material adjustments,
consisting of normal recurring accruals, necessary to present fairly the
financial condition as of May 29, 1993 and the results of operations for the
three month periods ended May 30, 1992 and May 29, 1993 of Gump's, Inc. and its
consolidated subsidiaries for the interim periods. Operating results for
interim periods are not necessarily indicative of the results that may be
expected for the entire year.
2. Subsequent event - On May 21, 1993, Hanover Direct, Inc. and GSF Acquisition
Corp. ("GSF"), a wholly owned indirect subsidiary of Hanover Direct, Inc.,
entered into an asset purchase agreement with Gump's, Inc., pursuant to which
GSF agreed to acquire certain of the retail assets of Gump's, Inc., Hanover
Direct, Inc. and Gump's by Mail, Inc. ("Gump's by Mail"), a wholly owned
indirect subsidiary of Hanover Direct, Inc., also entered into an asset
purchase agreement with Gump's pursuant to which Gump's by Mail agreed to
acquire substantially all of the mail order assets of Gump's, Inc. The
aggregate purchase price for the retail assets and the mail order assets was
$1,750,001 plus an amount equal to the net asset value of cash, inventories,
accounts receivable and certain prepaid items as of July 12, 1993, the closing
date of the transactions. The purchase price was payable $1,500,001 plus
one-half of Gump's net asset value in cash, with the balance in shares of
Hanover Direct, Inc.'s Common Stock. Hanover Direct, Inc. paid Gump's $6.9
million in cash and issued 1,327,330 shares of Common Stock valued at $4.78 per
share.
-4-
<PAGE> 39
Item 7(a)(iii)
COMPANY STORE HOLDINGS, INC.
AND SUBSIDIARIES
(Debtors-in-Possession)
Consolidated Financial Statements
as of August 1, 1992 and July 27, 1991
Together With Report of
Independent Public Accountants
<PAGE> 40
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Shareholders and Directors of
Company Store Holdings, Inc. (Debtor-in-Possession):
We have audited the accompanying consolidated balance sheets of Company Store
Holdings, Inc. (a Delaware corporation) and Subsidiaries
(Debtors-in-Possession) as of August 1, 1992 and July 27, 1991 and the related
consolidated statements of operations, shareholders' investment (deficit), and
cash flows for each of the three years in the period ended August 1, 1992.
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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Company Store Holdings, Inc.
and Subsidiaries as of August 1, 1992 and July 27, 1991, and the results of
their operations and their cash flows for each of the three years in the period
ended August 1, 1992, in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the consolidated financial statements, Company Store
Holdings, Inc., together with all of its subsidiaries, filed voluntary
petitions for relief under Chapter 11 of the United States Bankruptcy Code in
the United States Bankruptcy Court on May 22, 1992. Although the Company and
its subsidiaries are currently operating their businesses as
debtors-in-possession under the jurisdiction of the Bankruptcy Court, the
continuation of their businesses as going concerns is contingent upon, among
other things, the ability to formulate a Plan of Reorganization which will gain
approval of the creditors and confirmation by the Bankruptcy Court, and the
ability to generate sufficient cash from operations and financing sources to
meet obligations as they become due. In addition, as discussed in Note 4, the
Company is not in compliance with certain covenants of the post-petition
financing agreement. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying consolidated
financial statements have been prepared assuming the Company and its
subsidiaries will continue as going concerns and do not include any adjustments
relating to the recoverability and classification of reported asset
-1-
<PAGE> 41
amounts or the amount and classification of liabilities that might be necessary
should the Company or its subsidiaries be unable to continue as going concerns.
The consolidated financial statements also do not include any adjustments
relating to the recoverability and classification of reported asset amounts or
adjustments to the establishment, settlement and classification of liabilities
that may be required in connection with restructuring the Company and its
subsidiaries as they reorganize under Chapter 11 of the United States
Bankruptcy Code.
ARTHUR ANDERSEN & CO.
Minneapolis, Minnesota,
September 30, 1992
<PAGE> 42
COMPANY STORE HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Consolidated Balance Sheets
As of August 1, 1992 and July 27, 1991
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
1992 1991
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS: $ 401 $ 637
Cash 1,296 1,479
Receivables, net 17,612 21,365
Inventories 2,993 2,787
-------- -------
Prepaid expenses 22,302 26,268
-------- -------
Total current assets
PROPERTY AND EQUIPMENT, at cost:
Land and buildings 5,272 5,149
Machinery, equipment and furniture 9,426 8,985
Less - Accumulated depreciation (6,865) (4,489)
------- ------
Net property and equipment 7,833 9,645
-------- -------
OTHER ASSETS, net (Note 3) 21,114 21,474
-------- -------
$ 51,249 $57,387
======== =======
LIABILITIES AND SHAREHOLDERS' INVESTMENT (DEFICIT)
LIABILITIES NOT SUBJECT TO COMPROMISE:
Current liabilities -
Short-term borrowings $ 14,348 $15,956
Accounts payable 1,409 7,490
Accrued liabilities 1,079 2,603
Current portion of long-term debt 603 2,717
-------- -------
Total current liabilities not subject to compromise 17,439 28,766
Long-term debt - 23,320
Other long-term liabilities - 4,382
-------- -------
Total liabilities not subject to compromise 17,439 56,468
LIABILITIES SUBJECT TO COMPROMISE 39,439 -
COMMITMENTS AND CONTINGENCIES (Notes 2, 9, 13 and 14)
SHAREHOLDERS' INVESTMENT (DEFICIT):
Series A Convertible Preferred Stock, par value $.01 1,000 1,000
Common stock and paid-in capital, par value $.01 9,294 9,294
Accumulated deficit (15,923) (9,375)
------- ------
Total shareholders' investment (deficit) (5,629) 919
------- -------
$ 51,249 $57,387
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
-3-
<PAGE> 43
COMPANY STORE HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Consolidated Statements of Operations
For the Fiscal Years Ended August 1, 1992, July 27, 1991 and July 28, 1990
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
1992 1991 1990
------------ ----------- ------------
<S> <C> <C> <C>
NET SALES $ 83,713 $ 85,421 $ 67,277
COST OF SALES 46,321 47,126 36,981
------ ---------- -------------
Gross profit 37,392 38,295 30,296
SELLING AND ADMINISTRATIVE EXPENSES 38,030 37,537 29,890
------------ ---------- -------------
Income (loss) from operations (638) 758 406
OTHER EXPENSE:
Interest expense, net 4,347 4,064 3,335
Amortization of intangible assets 657 672 1,956
Other, net 204 282 230
------------ ---------- -------------
NET LOSS BEFORE REORGANIZATION ITEMS (5,846) (4,260) (5,115)
REORGANIZATION ITEMS (702) - -
------------ ---------- -------------
NET LOSS $(6,548) $ (4,260) $ (5,115)
======== ========== ============
NET LOSS PER SHARE $ (2,326.11) $(1,721.91) $ (2,130.36)
============ =========== ==============
WEIGHTED AVERAGE SHARES 2,815 2,474 2,401
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-4-
<PAGE> 44
COMPANY STORE HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Consolidated Statements of Shareholders' Investment (Deficit)
For the Fiscal Years Ended August 1, 1992, July 27, 1991 and July 28, 1990
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
Series A Common Stock
Convertible and Paid-In
Preferred Stock Capital (10,000
(5,000 Shares Shares
Authorized) Authorized)
------------------------ ----------------------- Accumulated
Shares Amount Shares Amount Deficit Total
---------- ---------- --------- --------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, August 11, 1989 - $ - 2,400 $ 8,042 $ - $ 8,042
Shares issued - - 12 37 - 37
Net loss - - - - (5,115) (5,115)
---------- ---------- --------- ----------- ---------- -----------
BALANCE, July 28, 1990 - - 2,412 8,079 (5,115) 2,964
Shares issued 1,000 1,000 403 1,215 - 2,215
Net loss - - - - (4,260) (4,260)
---------- ---------- --------- ----------- ---------- -----------
BALANCE, July 27, 1991 1,000 1,000 2,815 9,294 (9,375) 919
Net loss - - - - (6,548) (6,548)
---------- ---------- --------- ----------- ---------- -----------
BALANCE, August 1, 1992 1,000 $ 1,000 2,815 $ 9,294 $ (15,923) $ (5,629)
========== ========== ========= =========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-5-
<PAGE> 45
COMPANY STORE HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Consolidated Statements of Cash Flows
For the Fiscal Years Ended August 1, 1992, July 27, 1991 and July 28, 1990
(In Thousands)
<TABLE>
<CAPTION>
1992 1991 1990
-------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,548) $(4,260) $(5,115)
Adjustments to reconcile net loss to net cash used in
operating activities before reorganization items -
Depreciation and amortization 3,041 2,969 4,226
Noncash interest 1,678 2,584 2,288
Reorganization items 702 - -
Changes in operating items:
Receivables 183 (332) (66)
Inventories 3,753 (5,266) (1,637)
Prepaid expenses (206) (1,682) (66)
Accounts payable and accrued liabilities 4,024 (742) (918)
Other long-term liabilities (129) (191) (1,553)
Liabilities subject to compromise (3,803) - -
------- -------- -------
Net cash provided by (used in) operating
activities before reorganization items 2,695 (6,920) (2,841)
Operating cash flows from reorganization items -
Professional fees paid for services rendered in
connection with the Chapter 11 proceeding (598) - -
------ -------- --------
Net cash provided by (used in) operating
activities 2,097 (6,920) (2,841)
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (572) (517) (306)
Acquisition, net of cash acquired - (662) -
Other - (42) 20
--------- -------- --------
Net cash used in investing activities (572) (1,221) (286)
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving credit
agreements (1,608) 7,272 3,379
Repayment of long-term debt (153) - -
Sale of common stock - 1,215 37
--------- ------ -------
Net cash provided by (used in) financing
activities (1,761) 8,487 3,416
--------- ------ -------
Net increase (decrease) in cash (236) 346 289
CASH:
Beginning of year 637 291 2
--------- ------- -------
End of year $ 401 $ 637 $ 291
========= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-6-
<PAGE> 46
COMPANY STORE HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
Notes to Consolidated Financial Statements
August 1, 1992 and July 27, 1991
1. ORGANIZATION AND NATURE OF BUSINESS:
In August 1989, an investor group formed Company Store Holdings, Inc. (the
"Company") which acquired all of the outstanding common stock of Company Store,
Inc. ("The Company Store") on August 11, 1989. In June 1991, a wholly owned
subsidiary of the Company acquired all of the assets and assumed certain
liabilities of Scandia Down Corporation ("Scandia"). Consideration for the
acquisition of Scandia was $25,000 in cash and 1,000 shares of the Company's
Series A Convertible Preferred Stock. In connection with the acquisition of
Scandia, the Company issued shares of its common stock to certain existing
shareholders for total proceeds of approximately $1,200,000.
The acquisitions described above have been accounted for using the purchase
method whereby assets and liabilities are stated at their fair market values at
the date of acquisition and operations of the acquired companies are included
in the consolidated results from the date of acquisition. The excess purchase
price over the net assets acquired is included in other assets.
The Company Store and Scandia market down and natural fiber home furnishing
products and outerwear nationally through direct mail catalogs, national
advertising and retail stores. Substantially all of the home furnishings
products are designed and manufactured by The Company Store. Other products
are designed by The Company Store and manufactured by domestic and
international suppliers for exclusive resale.
2. PETITION FOR RELIEF UNDER CHAPTER 11:
On May 22, 1992 (the petition date), the Company and all of its subsidiaries
(the "Debtors") filed petitions for relief under Chapter 11 of the United
States Bankruptcy Code ("Chapter 11") in the United States Bankruptcy Court for
the Western District of Wisconsin (the "Bankruptcy Court") and are currently
operating their respective businesses as debtors-in-possession, subject to the
supervision of the Bankruptcy Court. The Chapter 11 filing was the result of a
sales and cash shortfall and failed negotiations with the Company's lenders.
As of the petition date, prepetition indebtedness and other contractual
obligations may not be enforced against the Debtors and litigation is stayed.
In addition, prepetition executory contracts and lease obligations may be
rejected and parties affected by these rejections may file claims with the
Bankruptcy Court. Substantially all claims against the Debtors which existed
at the petition date are reflected in the August 1, 1992 consolidated balance
sheet as
-7-
<PAGE> 47
liabilities subject to compromise. It is expected that all claims against the
Debtors as of the petition date will be dealt with in accordance with a plan of
reorganization to be voted upon by all classes of creditors and subject to
approval by the Bankruptcy Court. Management expects to file a proposed
reorganization plan by December 15, 1992. There can be no assurances the plan
will be approved by the creditors or the Bankruptcy Court.
A creditors' committee has been established by the Bankruptcy Court which has
the right to review transactions that are not in the ordinary course of
business. This committee will also participate in the formulation of any plan
or plans of reorganization.
The accompanying consolidated financial statements have been prepared on a
going-concern basis, which contemplates continuity of operations, realization
of assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the Chapter 11 filings, such realization of assets and
liquidation of liabilities are subject to uncertainty. While under the
protection of Chapter 11, in the normal course of business, the Company may
sell or otherwise dispose of assets and liquidate or settle liabilities for
amounts other than those reflected in the consolidated financial statements.
The plan of reorganization could materially change the amounts and
classifications reported in the historical consolidated financial statements,
which do not give effect to any adjustments to the carrying value of assets or
amounts of liabilities that might be necessary as a consequence of a plan of
reorganization. The appropriateness of using the going-concern basis is
dependent upon, among other things, confirmation of a plan of reorganization,
and the debtors' ability to comply with the debtors-in- possession and other
financing agreements.
As discussed in Notes 4 and 5, the Company is not in compliance with certain
covenants of its post-petition financing agreement and long-term debt
agreements. In addition, unaudited interim financial statements indicate that
the Company continues to incur net losses.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
FISCAL YEAR
The fiscal year is the 52/53-week period ending on the Saturday closest to July
31. Fiscal year 1992 represents a 53-week period. Fiscal year 1991 represents
a 52-week period. Fiscal year 1990 represents the 50-week period from
acquisition (August 11, 1989) through July 28, 1990.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
-8-
<PAGE> 48
REVENUE RECOGNITION
Revenue is recognized at the time of shipment. Liabilities have been
established for unfilled cash orders, and the estimated gross profit
attributable to returns under the Company's "unconditional satisfaction
guarantee" policy.
RECEIVABLES
Receivables are net of allowances for doubtful accounts of $341,000 at August
1, 1992 and $138,000 at July 27, 1991.
INVENTORIES
Inventories are stated at the lower of first-in, first-out (FIFO) cost or
market, and include material, labor and overhead for manufactured products.
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
1992 1991
----------- -----------
<S> <C> <C>
Raw materials $ 5,330 $ 7,877
Work in process 264 578
Finished goods 12,018 12,910
----------- -----------
$ 17,612 $ 21,365
=========== ===========
</TABLE>
ADVERTISING EXPENSES
Direct mail catalog costs are deferred and amortized over the estimated periods
that the related revenues are expected to be generated. These deferred costs
of $2,490,000 at August 1, 1992 and $2,623,000 at July 27, 1991 are included in
prepaid expenses in the accompanying consolidated balance sheets. All other
advertising costs are charged to expense as incurred.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Betterment and renewals that extend
the life of an asset are capitalized. Repairs and maintenance are charged to
expense as incurred.
Depreciation and amortization are provided using the straight-line method over
the following estimated useful lives:
Buildings and improvements 5-31 years
Machines, equipment and furniture 3-10 years
-9-
<PAGE> 49
OTHER ASSETS
Other assets consist primarily of goodwill and franchise rights, recorded in
connection with the acquisitions described in Note 1, amortized over 25 to 40
years. Accumulated amortization of other assets was $ 2,948,000 at August 1,
1992 and $2,450,000 at July 27, 1991.
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid was $2,350,000 in 1992, $1,341,000 in 1991 and $1,323,000 in
1990. There were no income taxes paid in 1992, 1991 or 1990.
EARNINGS PER SHARE
Net loss per share has been computed based on the weighted average number of
common shares outstanding during each year. The impact of outstanding stock
options and warrants is not included as there is no dilutive effect in 1992,
1991 or 1990.
RECLASSIFICATIONS
Certain amounts previously reported in the 1991 and 1990 consolidated financial
statements have been reclassified to conform to the 1992 presentation. These
reclassifications had no effect on previously reported net loss or
shareholders' investment.
4. FINANCING ARRANGEMENTS:
SHORT-TERM BORROWINGS AND DEBTORS-IN-POSSESSION FINANCING
Prior to the petition date, The Company Store had a loan agreement with a
commercial lender which provided for a revolving credit facility (the
pre-petition revolving credit agreement) with borrowings and international
letters of credit of up to $20,000,000 based upon qualified inventory and
receivable balances. Interest was payable monthly at prime plus 2 1/2%. The
revolving credit facility was to expire in August 1992 with automatic renewals
for successive one-year periods unless terminated by The Company Store or the
lender. The loan agreement also provided for a working capital loan which was
to expire in August 1992. Under the terms of the working capital loan, The
Company Store was eligible to borrow up to specified amounts throughout the
term of the agreement. Interest on the working capital loan was payable
monthly at rates ranging from prime plus 3% to prime plus 4%, based upon the
amounts outstanding. Borrowings under the revolving credit facility and
working capital loan were collateralized by a first security interest in all
inventories and receivables and a second security interest in substantially all
other assets. The loan agreement contained restrictive covenants which
required, among other matters that The Company Store maintain minimum working
capital and financial ratios. In addition, the agreement also imposed
limitations on additional indebtedness, sale of its authorized but unissued
shares of stock and creation of liens.
-10-
<PAGE> 50
As a result of the Chapter 11 filing discussed in Note 2, advances and
repayments under the above agreement ceased as of the petition date. At that
time, the Bankruptcy Court approved an interim debtors-in-possession financing
agreement between the Company and certain of its shareholders to provide the
Debtors with $1,500,000 of borrowings bearing interest at prime plus 2 1/2% to
allow the Debtors to continue to operate their businesses. On July 8, 1992,
the Bankruptcy Court approved the repayment of all borrowings under the interim
debtors-in-possession financing agreement. In addition, the Bankruptcy Court
approved an increase in the amount of available borrowings under The Company
Store's pre-petition revolving credit agreement to $25,000,000. The terms of
this agreement (the post-petition financing agreement) are substantially the
same as the pre- petition revolving credit agreement, with the exception of
certain covenants related to cumulative gross sales demand; earnings before
interest, taxes, amortization and depreciation; working capital; current ratios
and levels of slow-moving inventory. The post-petition financing agreement is
to expire on March 31, 1994 and has been approved by the Bankruptcy Court
through March 31, 1993. In addition, post-petition borrowings under this
agreement were granted a priority security interest over all claims against the
Debtors, with the exception of certain professional fees. The Bankruptcy Court
approved the application of funds received from the sale of inventory or
collection of accounts receivable against the pre-petition balance outstanding
under the revolving credit agreement. Short-term borrowings in the
accompanying 1992 consolidated balance sheet include $8,509,000 of pre-petition
borrowings. Subsequent to August 1, 1992, all pre-petition obligations under
the revolving credit agreement were repaid; therefore, the balance at August 1,
1992 is presented as a current liability not subject to compromise in the
accompanying consolidated balance sheet.
In connection with the post-petition financing agreement, the Debtors agreed to
make payments aggregating $660,000 through January 1993 to the holders of the
secured and mortgage notes payable (see Note 5). As of August 1, 1992, $57,000
had been paid on this obligation and has been reflected as a reduction in the
balances outstanding under these notes.
Subsequent to August 1, 1992, The Company Store was not in compliance with
certain covenants of the post-petition financing agreement as a result of a
shortfall in sales. Accordingly, the lender under this agreement has the right
to lift the automatic stay imposed by the Bankruptcy Court and may exercise its
security interest in the post-petition financing agreement's collateral. As of
September 30, 1992, the lender has not exercised its right to lift the
automatic stay.
Information related to short-term borrowings under the above credit agreements
as of August 1, 1992 and July 27, 1991 is as follows (in thousands):
-11-
<PAGE> 51
<TABLE>
<CAPTION>
1992 1991
------------ -----------
<S> <C> <C>
Balance outstanding at end of year $ 14,348 $ 15,956
============ ===========
Weighted average balance
outstanding during the year $ 16,039 $ 11,196
============ ===========
Maximum balance outstanding $ 19,964 $ 16,018
============ ===========
Weighted average interest rate 10.1% 12.3%
============ ===========
</TABLE>
5. LONG-TERM DEBT:
Long-term debt consisted of the following at July 27, 1991 (in thousands):
<TABLE>
<S> <C>
Collateralized note payable with interest at 11.5%, due in
annual installments from July 1992 through March 1996 $13,037
Collateralized note payable with interest at 11.25%, due in
quarterly installments from September 1991 through
June 1998 6,904
Mortgage note payable with interest at 10.7% , due in
quarterly installments from September 1991 through
September 2002 6,096
-------
26,037
Less - Current portion 2,717
-------
$23,320
=======
</TABLE>
As a result of the Chapter 11 filing discussed in Note 2, the ultimate payments
to settle the above obligations may be different than the balances reflected in
the accompanying 1992 consolidated balance sheet. Therefore, the amounts
outstanding under the above notes as of August 1, 1992 are reflected as
liabilities subject to compromise on the accompanying 1992 consolidated balance
sheet.
Interest on all long-term debt was payable during fiscal 1992 and 1991 only if
cash flow, as defined, exceeded certain minimum levels as provided in the loan
agreements. As a result of not meeting these cash flow requirements, as
defined, no interest was due for fiscal 1992 or 1991. Accordingly, 1991
interest accrued of $2,584,000 was included in 1991 balances shown above.
Interest of $1,678,000 for the year ended August 1, 1992 is included in
liabilities subject to compromise in the accompanying consolidated balance
sheet. Contractual interest of $585,000 incurred subsequent to the petition
date has not been recognized by the Company.
-12-
<PAGE> 52
The collateralized and mortgage notes payable have first security interests in
all land, buildings, machinery, equipment and intangible assets and a second
security interest in the Company's inventories and receivables.
The collateralized and mortgages notes payable debt agreements contained
certain restrictive covenants. The Company was not in compliance with the
terms of these loan agreements as of August 1, 1992.
6. LIABILITIES SUBJECT TO COMPROMISE:
Under Chapter 11 of the Bankruptcy Code, certain claims against the Debtors in
existence prior to the petition date were stayed while the Debtors continued
conducting business as debtors-in-possession. These claims are reflected in
the August 31, 1992 consolidated balance sheet as liabilities subject to
compromise.
Liabilities subject to compromise consisted of the following at August 1, 1992
(in thousands):
<TABLE>
<S> <C>
Collateralized note payable, 11.5%, due 1996 $ 12,950
Collateralized note payable, 11.25%, due 1998 5,814
Mortgage note payable, 10.7%, due 2002 6,517
Trade accounts payable 8,035
Other accrued liabilities 3,745
Interest 1,678
Other 700
---------
Liabilities subject to compromise $ 39,439
=========
</TABLE>
7. REORGANIZATION ITEMS:
Reorganization items are incremental expenses and/or losses that have been
realized or incurred by the Debtors as a result of the reorganization process.
Such items consisted of the following at August 1, 1992 (in thousands):
<TABLE>
<S> <C>
Legal fees $ 314
Professional fees 284
Provision for rejected executory contracts 104
---------
$ 702
=========
</TABLE>
8. INCOME TAXES:
The Company accounts for income taxes under the liability method, as prescribed
by Statement of Financial Accounting Standards No. 109, whereby deferred income
tax assets and liabilities arise from differences between the tax basis of an
asset or liability and the amount reported in the consolidated financial
statements. Deferred tax balances are determined by using the tax rate
expected to be in effect when the taxes will actually be paid
-13-
<PAGE> 53
or refunds received. As of August 1, 1992, the Company had a net operating
loss carryforward of approximately $21.5 million which expires from 2005
through 2007. The Company has provided a valuation allowance for the net
benefit of these carryforwards as their realization is not assured.
9. EMPLOYEE BENEFIT PLANS:
UNION RETIREMENT FUND AND PROFIT SHARING
Under the terms of The Company Store union agreement, The Company Store is
required to contribute 9.0% of all union employee wages to a union-sponsored
multiemployer retirement plan. Contributions to this retirement plan were
$316,000, $347,000 and $300,000 in fiscal 1992, 1991 and 1990, respectively.
The Company Store is also required to pay up to 5% of the union employee wages
as profit sharing based on net income, as defined. No payments to the profit
sharing plan were required for 1992 and 1991.
RETIREMENT AND SAVINGS PLAN
The Company has a retirement and savings plan that covers all nonunion
employees. The Company matches a portion of the participants' contributions to
the plan. Matching contributions under the plan were $65,000, $56,000 and
$18,000 in 1992, 1991 and 1990, respectively.
POSTRETIREMENT BENEFITS
In December 1990, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 106 (SFAS No. 106), "Employers' Accounting
for Postretirement Benefits Other Than Pensions," which requires companies to
accrue for postretirement benefits such as health care and life insurance for
employees during the years the employee renders the necessary services to be
eligible to receive such benefits. The Company is required to adopt the
provisions of SFAS No. 106 not later than fiscal 1996. The Company anticipates
adopting SFAS No. 106 in the year it is required to do so. The Company has not
yet determined the impact of adopting SFAS No. 106 on future financial
statements; however, the impact is not expected to be material.
10. SHAREHOLDERS' INVESTMENT:
SERIES A CONVERTIBLE PREFERRED STOCK
The Company has issued 1,000 shares of its Series A Convertible Preferred Stock
(Preferred Stock). The Preferred Stock has preference as to dividends and
distributions upon liquidation. The holders can convert the Preferred Stock
into Common Stock of the Company at the rate of 5.4 shares of Preferred Stock
for every share of Common Stock to be issued. The conversion rate is subject
to adjustment if the Company declares any stock dividends, splits or
combinations, as defined.
-14-
<PAGE> 54
STOCK OPTIONS
The Company maintains an Incentive Stock Option Plan which provides for the
granting of stock options, at the discretion of the Board of Directors, to
certain key employees and officers to purchase shares of the Company's common
stock at the fair market value at the date of grant ($3,005-$3,125 per share
for all outstanding options). Stock option transactions were as follows for
the years ended August 1, 1992, July 27, 1991 and July 28, 1990:
<TABLE>
<CAPTION>
Shares
---------
<S> <C>
Outstanding at August 11, 1989 -
Granted 354
Exercised -
Expired (12)
---------
Outstanding at July 28, 1990 342
Granted 203
Exercised -
Expired (156)
---------
Outstanding at July 27, 1991 389
Granted 7
Exercised -
Expired -
---------
Outstanding at August 1, 1992 396
=========
</TABLE>
11. WARRANTS TO PURCHASE COMMON STOCK
On June 7, 1991, The Company Store issued warrants to its commercial lenders
enabling the lender to purchase up to 18 newly issued shares of The Company
Store's common stock, as defined, for $25 per share. These warrants replaced
warrants previously issued to the same lender. The newly issued warrants
expire in August 1999, and are exercisable at any time. In addition, the
holder of the warrants may require The Company Store to repurchase the warrants
beginning in August 1994. The repurchase price will be based upon the fair
market value of The Company Store, as defined, at the date of repurchase. The
Company Store may, at its option, retire the warrants anytime after August 1995
upon repayment in full of all amounts due the lender. The repurchase price
under this option is 110% of the fair market value of the common stock at the
date of repurchase.
12. RELATED-PARTY TRANSACTIONS:
The Company Store purchased approximately $10,515,000, $10,644,000 and
$10,150,000 of raw materials from a shareholder during 1992, 1991 and 1990,
respectively. Liabilities
-15-
<PAGE> 55
subject to compromise include approximately $791,000 of amounts due to this
vendor at August 1, 1992. Approximately $716,000 was due to this vendor at
July 27, 1991.
The Company Store had two employment agreements prior to the petition date.
Annual compensation under these agreements was approximately $144,000 for
fiscal 1992 and 1991 and $98,000 for fiscal 1990. The agreements were rejected
in conjunction with the Chapter 11 filing.
The resulting obligation of $382,000 is included in liabilities subject to
compromise in the accompanying 1992 consolidated balance sheet.
The Company Store paid $232,000 and $276,000 of consulting fees to shareholders
during 1991 and 1990. During 1992, the Company paid $98,000 of such fees and
accrued an additional $132,000 which is included within liabilities subject to
compromise.
13. NONCOMPETE AGREEMENT:
In July 1990, The Company Store filed a suit against its former principal
shareholder for breach of a noncompete and consultancy agreement. As a result,
in January 1991, The Company Store and its former principal shareholder agreed
to a revised noncompete agreement. Under the terms of the revised agreement,
the former principal shareholder was to receive annual compensation of
approximately $200,000 through June 1995 and agreed not to compete with The
Company Store through 1998. In addition, both parties agreed to dismiss all
lawsuits related to the alleged breach of the original agreement. This contract
has been rejected in conjunction with the Chapter 11 filing. Liabilities
subject to compromise in the accompanying 1992 consolidated balance sheet
include $617,000 related to this agreement.
14. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company is committed under operating leases for distribution and retail
store space, and various computer, production and office equipment. The retail
store leases provide for contingent rentals based on sales performance in
excess of specified minimums. In addition to rent, the Company is also
responsible for real estate taxes, insurance, maintenance and other operating
costs associated with the leased facilities. Total rental expense under all
operating leases was $2,136,000 in 1992, $2,331,000 in 1991 and $2,298,000 in
1990. In connection with the Chapter 11 filing, the Company rejected certain
of its lease agreements. The resulting obligation of $198,000 is included in
liabilities subject to compromise in the accompanying 1992 consolidated balance
sheet.
Future minimum lease payments under the Company's remaining leases with initial
or remaining terms of more than one year are as follows (in thousands):
-16-
<PAGE> 56
1993 $1,079
1994 621
1995 449
1996 336
1997 309
Thereafter 404
Total minimum lease payments $3,198
LETTERS OF CREDIT
The Company Store had approximately $528,000 in outstanding letters of credit
as of July 27, 1991 related to international purchases of merchandise and raw
material. There were no outstanding letters of credit as of August 1, 1992.
Subsequent to August 1, 1992, the Company entered into an agreement with a bank
allowing for the issuance of letters of credit up to a total of $3,000,000.
These letters of credit are to be fully secured by a cash collateral account
located at the bank at the time of the issuance of any letters of credit.
-17-
<PAGE> 57
Item 7(a)(iv)
COMPANY STORE HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
AS OF JULY 3, 1993
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 573
Accounts receivable, net 868
Inventories 7,392
Other current assets 924
---------
Total Current Assets 9,757
---------
Property and equipment, at cost 14,613
Less-accumulated depreciation 8,137
---------
Net property and equipment 6,476
Other Assets, net 20,557
---------
Total Assets $ 36,790
=========
LIABILITIES AND SHAREHOLDERS' INVESTMENT (DEFICIT)
Current Liabilities:
Notes payable 7,603
Accounts payable and accrued liabilities 659
---------
Total Current Liabilities 8,262
Noncurrent liabilities:
Liabilities subject to compromise 38,773
---------
Total Liabilities 47,035
---------
Shareholders' Investment (Deficit):
Series A convertible preferred stock
par value $0.01 1,000
Common stock and paid-in capital, par
value $0.01 9,294
Accumulated deficit (20,539)
---------
Total Shareholders' Investment (Deficit) (10,245)
=========
Total Liabilities and Shareholders' Investment (Deficit) $ 36,790
=========
</TABLE>
-1-
<PAGE> 58
COMPANY STORE HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE ELEVEN MONTHS ENDED
---------------------------
JUNE 27, JULY 3,
1992 1993
--------- ---------
<S> <C> <C>
Net Sales $ 79,235 $ 68,086
Operating costs and expenses:
Costs of sales and operating expenses 43,293 41,611
Selling expenses 29,551 23,177
General and administrative expenses 6,970 6,682
--------- ----------
Loss from operations (579) (3,384)
--------- ----------
Interest and other income (expense):
Interest expense (4,260) (1,171)
Other, net (183) (60)
--------- ----------
(4,443) (1,231)
--------- ----------
Net (loss) $ (5,022) $ (4,615)
========= ==========
</TABLE>
-2-
<PAGE> 59
COMPANY STORE HOLDINGS, INC. AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE ELEVEN MONTHS ENDED
---------------------------
JUNE 27, JULY 3,
1992 1993
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) ($5,022) ($4,615)
Adjustments to reconcile net (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 2,743 1,829
Changes in operating assets and liabilities:
Accounts receivable (204) 429
Inventories 4,125 10,220
Prepaid expenses and other (372) 2,067
Accounts payable and accrued expenses 2,215 ( 1,829)
Other (222) -
-------- --------
Net cash provided by operating activities 3,263 8,101
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property (561) 85
Other 54 (666)
-------- --------
Net cash provided (used) by investing activities (507) (581)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit facilities (1,891) (6,745)
Payments of long term debt (63) (603)
-------- --------
Net cash provided (used) by financing activities (1,954) (7,348)
-------- --------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 802 172
CASH AND CASH EQUIVALENTS AT THE BEGINNING
OF THE PERIOD 637 401
-------- --------
CASH AND CASH EQUIVALENTS AT THE END OF
THE PERIOD $1,439 $573
====== ========
</TABLE>
-3-
<PAGE> 60
COMPANY STORE HOLDINGS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements:
1. Basis of presentation - In the opinion of management, the accompanying
unaudited interim financial statements contain all material adjustments,
consisting of normal recurring accruals, necessary to present fairly the
financial condition as of July 3, 1993 and the results of operations for the
eleven month periods ended June 27, 1992 and July 3, 1993 of Company Store
Holdings, Inc. and subsidiaries. Operating results for interim periods are
not necessarily indicative of the results that may be expected for the entire
year.
2. Subsequent event - On August 25, 1993, Hanover Direct, Inc. acquired certain
assets of Company Store Holdings, Inc. ("CSH"), The Company Store, Inc.,
Scandia Down Corporation and Southern California Comfort Corporations
(collectively, "The Company Store"), pursuant to the Order Confirming Sale
entered by the United States Bankruptcy Court on August 20, 1993. Hanover
Direct, Inc. purchased substantially all of the Company Store's assets,
including accounts receivable, inventories, equipment, real estate consisting
of an office building and a manufacturing complex, including an interest in
certain adjacent land, and all intangibles, trademarks, tradenames, licenses
and mailing lists, and all other assets of CSH, and its subsidiaries, other
than cash used in the normal course of its business. Hanover Direct, Inc. also
extended through April 1994 substantially all of the franchise agreements of
which Scandia Down Corporation was the franchisor.
-4-
<PAGE> 61
Item 7(a)(v)
Independent Auditors' Report
Board of Directors
Tweeds, Inc. :
We have audited the accompanying balance sheets of Tweeds, Inc. as of January
31, 1993 and February 2, 1992, and the related statements of operations,
stockholders' equity and cash flows for the year ended January 31, 1993, and
the period from July 1, 1991 to February 2, 1992. 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 audits 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tweeds, Inc. as of January 31,
1993 and February 2, 1992, and the results of its operations and its cash flows
for the year ended January 31, 1993, and the period from July 1, 1991 to
February 2, 1992, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK
Roanoke, Virginia
March 12, 1993
<PAGE> 62
TWEEDS, INC.
Financial Statements
January 31, 1993
<PAGE> 63
TWEEDS, INC.
Balance Sheet
January 31, 1993
<TABLE>
<S> <C>
Assets
- ------
Current assets (note 5):
Cash $ 5,562
Accounts receivable 349,391
Inventories (note 4) 2,977,701
Prepaid catalog costs 1,417,113
Prepaid expenses and other current assets 449,537
-----------
Total current assets 5,199,304
-----------
Property, plant and equipment, at cost (notes 5 and 10):
Furniture, fixtures and equipment 3,605,759
Leasehold improvements 595,345
Equipment under capital lease 942,502
Land 61,719
----------
5,205,325
Less accumulated depreciation and amortization 2,142,244
---------
Property, plant and equipment, net 3,063,081
---------
Deferred financing costs, less accumulated amortization
of $103,158 374,383
-----------
$ 8,636,768
===========
</TABLE>
See accompanying notes to financial statements.
-2-
<PAGE> 64
<TABLE>
<S> <C>
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Note payable to bank (note 5) $ 1,608,824
Current installments of long-term debt (note 5) 1,271,169
Current installments of obligation under capital lease (note 10) 121,028
Accounts payable 2,142,632
Accrued expenses 1,213,863
------------
Total current liabilities 6,357,516
------------
Long-term debt, excluding current installments (note 5) 1,710,121
Obligation under capital lease, excluding current installments (note 10) 109,949
------------
Total liabilities 8,177,586
------------
Stockholders' equity (notes 6 and 9):
Cumulative, nonvoting preferred stock, $.01 par value;
2,004,479 shares authorized, issued and outstanding 20,045
Common stock, $.01 par value; authorized 6,000,000
shares; issued and outstanding 4,986,368 shares 49,864
Additional paid-in capital 26,744,455
Accumulated deficit (26,355,182)
------------
Total stockholders' equity 459,182
------------
Commitments (notes 9, 10 and 11)
---------------
---------------
$ 8,636,768
===============
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE> 65
TWEEDS, INC.
Statement of Operations
Year Ended January 31, 1993
<TABLE>
<S> <C>
Net sales $ 34,563,529
Cost of sales 18,504,955
------------
Gross profit 16,058,574
------------
Operating expenses (income):
Selling 8,489,924
Fulfillment operations 5,050,535
General and administrative 2,630,845
Customer list rental income (507,401)
------------
Total operating expenses, net 15,663,903
------------
Income from operations 394,671
------------
Other income (expense):
Interest income 13,613
Interest expense (1,397,673)
Amortization of deferred financing costs (103,158)
Gain on conversion of capital lease to operating lease (note 10) 355,445
Other, net (52,643)
------------
Other expense, net (1,184,416)
------------
Net loss $ (789,745)
============
</TABLE>
See accompanying notes to financial statements.
-4-
<PAGE> 66
TWEEDS, INC.
Statement of Stockholders' Equity
Year Ended January 31, 1993
<TABLE>
<CAPTION>
Series "A" Series "B" Cumulative,
Redeemable Redeemable Nonvoting
Preferred Stock Preferred Stock Preferred Stock
----------------------- --------------------- ------------------
Shares Amount Shares Amount Shares Amount
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, February 2, 1992 119,048 $ 9,794,332 857,144 $ 14,947,508 - $ -
Conversion of preferred stock
and reverse split of common
stock (note 6) (119,048) (9,794,332) (857,144) (14,947,508) - -
Issuance of common stock
(note 6) - - - - - -
Conversion of investors' notes
payable to preferred stock - - - - 2,004,479 20,045
Net loss - - - - - -
--------- ------------ -----------------------------------------------
Balance, January 31, 1993 - $ - - $ - 2,004,479 $20,045
========= =========== ========================= ====================
</TABLE>
<TABLE>
<CAPTION>
Common Stock Additional Total
-------------------- Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, February 2, 1992 1,818,149 $ 18,181 $ - $(25,565,437) (805,416)
Conversion of preferred stock
and reverse split of common
stock (note 6) (1,818,149) (18,181) 24,760,021 - -
Issuance of common stock
(note 6) 4,986,368 49,864 - - 49,864
Conversion of investors' notes
payable to preferred stock - - 1,984,434 - 2,004,479
Net loss - - - (789,745) (789,745)
-----------------------------------------------------------------
Balance, January 31, 1993 4,986,368 $ 49,864 $ 26,744,455 $ (26,355,182) $ 459,182
=================================================================
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE> 67
TWEEDS, INC.
Statement of Cash Flows
Year Ended January 31, 1993
<TABLE>
<S> <C>
Cash flows from operating activities:
Cash received from customers $ 34,835,566
Cash paid to suppliers and employees (37,339,028)
Interest received 13,613
Interest paid (1,354,682)
-------------
Net cash used in operating activities (3,844,531)
-------------
Cash flows from investing activities:
Purchases of property, plant and equipment (67,148)
Proceeds from sale of property, plant and equipment 2,651
Increase in deferred financing costs (477,541)
-------------
Net cash used in investing activities (542,038)
-------------
Cash flows from financing activities:
Increase in notes payable to bank, net 1,444,533
Payments on capitalized lease obligations and
long-term debt (751,230)
Proceeds from issuance of notes payable to investors
(subsequently converted to preferred stock) 1,961,488
Proceeds from issuance of common stock 49,864
-------------
Net cash provided by financing activities 2,704,655
-------------
Net decrease in cash and cash equivalents (1,681,914)
Cash and cash equivalents, beginning of year 1,687,476
-------------
Cash, end of year $ 5,562
=============
</TABLE>
(Continued)
-6-
<PAGE> 68
TWEEDS, INC.
Statement of Cash Flows
(Continued)
<TABLE>
<S> <C>
Reconciliation of net loss to net cash used in operating
activities:
Net loss $ (789,745)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,036,150
Gain on conversion of capital lease to operating lease (355,445)
Loss on sale of assets 494
Accrued interest payable converted to preferred stock 42,991
Decrease in accounts receivable 336,037
Decrease in inventories 1,844,785
Increase in prepaid catalog costs (628,334)
Decrease in prepaid expenses and other current assets 559,996
Decrease in accounts payable (4,388,444)
Decrease in accrued expenses (1,503,016)
-------------
Net cash used in operating activities $ (3,844,531)
================
</TABLE>
Noncash Investing and Financing Activitie
Building under capital lease in the net amount of $6,204,735, and the related
obligation under capital lease, in the amount of $6,560,180, were eliminated
during the year ended January 31, 1993 when the lease was renegotiated. The
new lease agreement is accounted for as an operating lease. (See note 10).
Computer equipment under capital lease and the related obligation under capital
lease were increased by $38,570 during the year ended January 31, 1993, upon
the renegotiation of the lease. (See note 10).
Notes payable to investors in the amount of $2,004,479, including accrued
interest of $42,991, were converted to cumulative, nonvoting preferred stock
during the year ended January 31, 1993. (See note 6).
See accompanying notes to financial statements.
-7-
<PAGE> 69
TWEEDS, INC.
Notes to Financial Statements
January 31, 1993
(1) Description of Company
Tweeds, Inc. (the "Company") is a "private label" men's and women's
apparel direct mail catalog business. The Company, through its Tweeds
catalog, offers distinct lines of clothing to customers throughout the
United States. The Company's fiscal year ends on the Sunday nearest to
January 31.
(2) Significant Accounting Policies
(a) Inventories
Inventories are valued at the lower of cost (first-in, first-out
method) or market. To the extent market is less then cost, valuation
reserves are established to reduce inventories to their estimated
market value.
(b) Prepaid Catalog Costs
The cost of catalogs is deferred and recorded as prepaid expense.
These costs are amortized based on the estimated future net revenues
over the catalog's estimated useful life averaging approximately
seven months.
(c) Property, Plant and Equipment
Property, plant and equipment is recorded at cost, or in the case of
assets under capital leases, the lower of fair market value or the
present value of minimum lease payments at the inception of the
lease. Depreciation of property, plant and equipment is computed
using the straight-line method over the estimated useful lives of the
assets. Property, plant and equipment held under capital leases and
leasehold improvements are amortized straight- line over the shorter
of the lease term or estimated life of the asset.
(d) Deferred Financing Costs
The cost of financing is deferred and recorded as a noncurrent asset.
These costs are amortized straight-line over the life of the related
loan.
-8-
<PAGE> 70
(e) Revenue Recognition
Catalog merchandise sales are recognized when the merchandise is
prepared for shipment, generally the same day shipment occurs.
Advance payments from customers received with orders are classified
as customer deposits and are included in accrued expenses.
Sales returns and customer refunds are included in accrued expenses.
(f) Income Taxes
Deferred income taxes are recognized for income and expense items
that are reported in different years for financial reporting purposes
and income tax purposes. These deferred income taxes originate
principally from differences in the recognition of depreciation of
property, plant and equipment and inventories valuation.
(g) Statement of Cash Flows
For the purposes of the statement of cash flows, cash and cash
equivalents include cash on deposit and highly liquid financial
instruments with original maturities of three months or less.
(3) Management Plans and Intentions
The Company has incurred operating losses since its inception which have
led to a working capital deficiency. During the current year, management
of the Company implemented a business plan which reduced losses, improved
operating cash flow and is intended to direct the Company toward
profitable operations. This plan included a substantial reduction in the
number of employees and management overhead as well as a reduction of
catalog mailings.
During 1992, the Company obtained a $6,500,000 asset-based line of credit
to finance its working capital needs (see note 5), amended the lease on
its fulfillment center (see note 10) and reestablished trade credit with
major vendors. Also during 1992, the principal investors contributed an
additional $2,000,000 of equity and provided a $2,500,000 collateralized
guarantee of the line of credit (see note 5).
The Company has prepared operating and cash flow projections for 1993 and
1994 which indicate the Company has adequate working capital facilities
to meet its current operating and cash flow requirements while beginning
to profitably grow the business without additional equity contributions
or new credit sources.
-9-
<PAGE> 71
TWEEDS, INC.
Notes to Financial Statements
(4) Inventories
Inventories consist of the following at January 31, 1993:
<TABLE>
<S> <C>
Merchandise $ 3,653,324
Piece goods 116,280
Supplies 181,315
------------
Total inventories, at cost 3,950,919
Valuation reserves 973,218
------------
Total inventories, at lower
of cost or market $ 2,977,701
============
</TABLE>
(5) Note Payable to Bank and Long-term Debt
During 1992, the Company obtained a $6,500,000 asset-based, revolving
line of credit to finance its purchases of inventories. The line of
credit, which expires in May 1995, bears interest at the lender's prime
rate plus 3 percent (9 percent at January 31, 1993) and is secured by
virtually all of the Company's assets and a $2,500,000 collateralized
guarantee of the stockholders. Availability of funds under the line is
calculated at 35 percent to 50 percent of eligible inventory, depending
on product classification, plus $2,000,000. The line of credit contains
various covenants pertaining to maintenance of working capital and equity
and limitations on the acquisition of property, plant and equipment,
issuance of additional debt, and dividend distributions. All available
cash of the Company is applied daily to the line of credit to reduce the
outstanding balance. The principal outstanding under the line of credit
at January 31, 1993 was $1,608,824.
During 1992, the Company agreed with its catalog printer to convert
$3,581,756 of accounts payable to a term loan. Monthly payments ranging
from $50,000 to $138,557 began in March 1992 and continue through
February 15,1995. The loan includes interest at a rate of prime (as
determined by First National Bank of Chicago) plus 3 percent (9 percent
at January 31, 1993). The loan is secured by a second position lien on
all of the Company's assets. The outstanding balance of the loan at
January 31, 1993 was $2,981,290.
-10-
<PAGE> 72
TWEEDS, INC.
Notes to Financial Statements
The aggregate maturities under this term loan for each year subsequent to
January 31, 1993 are $1,271,169 in 1994, $1,572,595 in 1995 and $137,526
in 1996.
(6) Stockholder's Equity
Effective May 29, 1992, all shares of outstanding Series A Preferred
Stock and Series B Preferred Stock were converted to common stock by the
preferred stockholders and all accumulated but unpaid dividends were
waived by the preferred stockholders at the time of conversion. The
Company then effected a reverse common stock split resulting in only
fractional shares. As the Corporation's by-laws prohibit fractional
shares, the recorded amount of the common and preferred stock was
transferred to additional paid-in capital.
Subsequent to the conversion and reverse split described above, 4,986,368
shares of new common stock were issued at a par value of $.01 per share.
Effective January 31, 1993, notes payable issued to investors during 1992
in the amount of $2,004,479, including accrued interest of $42,991, were
converted to 2,004,479 shares of cumulative, nonvoting preferred stock
with a par value of $.01 per share. The holder of each share of the
preferred stock is entitled to receive dividends at a rate of $.10 per
share per year. The dividends are cumulative from the effective date of
January 31,1993 and are payable when and if declared by the Board of
Directors of the Company. The Company has the option to redeem, at any
date, all or part of the preferred stock for the redemption price of
$1.00 per share plus an amount per share equal to any accrued but unpaid
dividends.
The Company has an agreement with its Chief Executive Officer wherein a
certain number of shares of common stock held by him are subject to
repurchase by the Company in the event of his termination. The number of
shares subject to repurchase, at a price of $.01 per share, declines
monthly over a twenty-three month period which began on April 1, 1992.
At January 31, 1993, there were 227,461 shares of common stock subject to
repurchase.
(7) Income Taxes
At January 31, 1993, the Company had available, to offset future taxable
income, net operating loss carryforwards of approximately $26,300,000 for
book
-11-
<PAGE> 73
TWEEDS, INC.
Notes to Financial Statements
purposes and $25,865,000 for tax purposes. The carryforwards for tax
purposes are scheduled to expire as follows:
<TABLE>
<CAPTION>
Tax Years Ending
----------------
<S> <C>
2002 $ 613,000
2003 3,610,000
2004 1,392,000
2005 720,000
2006 11,023,000
2007 7,990,000
2008 517,000
------------
$ 25,865,000
============
</TABLE>
The principal differences between book and tax net operating loss
carryforwards resulted from the acceleration of depreciation on equipment
and amortization of capital leases, and capitalization of certain costs
in inventory for tax purposes.
Statement of Financial Accounting Standards No. 109, Accounting for
Income Taxes, was issued by the Financial Accounting Standards Board in
February 1992. Statement 109 requires a change from the deferred method
under APB Opinion 11 to the asset and liability method of accounting for
income taxes. Under the asset and liability method of Statement 109,
deferred income taxes are recognized for the future tax consequences
attributable to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.
Statement 109 must be adopted in fiscal year beginning February 1, 1993.
Upon adoption, the provisions of the Statement may be applied without
restating prior years' financial statements or may be applied
retroactively by restating any number of consecutive prior years'
financial statements.
Upon adoption in fiscal year beginning February 1, 1993, the Company
plans to apply the provisions of the Statement without restating prior
years' financial
-12-
<PAGE> 74
TWEEDS, INC.
Notes to Financial Statements
statements. It is anticipated the effect of adopting Statement 109 will
not be significant.
(8) Employee Benefit Plan
Prior to July 31, 1992, the Company sponsored a 401(k) Salary Deferral
Plan. The Company elected to match 25 percent of the first 5 percent of
qualified compensation contributed by participants. Company
contributions to the Plan for the year ended January 31, 1993 were
$2,032. Effective July 31, 1992, the Board of Directors terminated the
Plan.
(9) Stock Options
The Company has an Incentive Stock Option Plan (the Plan) under which
options are granted to key employees to purchase shares of common stock
at a price not less than the fair market value at the date of grant. The
options granted vest over a four-year period in increments of 25 percent
per year. Options granted under the Plan prior to May 1992 were
terminated in May 1992 concurrent with the recapitalization. (See note
6). At January 31, 1993, there are no outstanding options under the
Plan, however, the Company has reserved 262,349 shares of common stock
under the Plan.
Options to purchase 75,000 shares of common stock at $1.00 per share have
been issued to a former board member. These options expire in 1995.
During December 1992, options to purchase 13,384 shares of common stock
at $.01 per share were issued to a board member. The options vest over a
two-year period in increments of 50 percent per year. These options
expire in 2002.
Warrants to purchase common stock were issued in connection with certain
loans from stockholders in fiscal 1990. The warrants were terminated in
May 1992 concurrent with the recapitalization. (See note 6).
(10) Leases
In December 1989, the Company entered into a capital lease agreement to
lease computer equipment for a 60-month period. During the year ended
January 31, 1993, the monthly payments under the terms of the lease were
amended. The amended lease requires monthly payments of $11,507 through
December 1995.
-13-
<PAGE> 75
TWEEDS, INC.
Notes to Financial Statements
In October 1989, the Company entered into in agreement to lease a
fulfillment center in Virginia. The original agreement included a lease
term of 25 years from January 1, 1991, and a base rent of $920,688 per
annum. During the year ended January 31, 1993, the lease was
renegotiated. Effective January 1, 1993, the lease term was reduced to a
seven-year period beginning January 1, 1991. The base rent under the
amended lease is $600,000 per annum. On January 1, 1994, and on each
January 1 thereafter during the term of the lease, rent per annum is
subject to an increase of the greater of (a) the rent then in effect
multiplied by 110 percent, or (b) $600,000 plus 1-1/2 percent of the
excess of net sales for the fiscal year which ends in the year for which
the new rent becomes effective over $32,700,000. The original agreement
was accounted for as a capital lease. As a result of the modification of
the terms of the lease, the new agreement is accounted for as an
operating lease. The change in the accounting for the lease from capital
to operating resulted in a gain of $355,445.
In addition, the Company leases offices, operating facilities and
machinery under various operating leases.
The future minimum annual rent required for each of the next five years
and thereafter under the above agreements are as follows:
<TABLE>
<CAPTION>
Capital Operating
Fiscal Year Lease Leases
----------- --------------------------
<S> <C> <C>
1993 $ 138,749 1,165,662
1994 115,074 1,176,967
1995 - 1,198,933
1996 - 1,214,176
1997 - 1,209,837
After 1997 - 692,664
---------- ----------
Total minimum lease payments 253,823 $ 6,658,239
=========
Less amounts representing interest
(at a rate of 10%) 22,846
--------
Present value of future minimum
payments on capital lease 230,977
</TABLE>
-14-
<PAGE> 76
TWEEDS, INC.
Notes to Financial Statements
Less current installments 121,028
------------
Obligation under capital lease,
excluding current installments $ 109,949
============
Rent expense under operating leases was $576,333 for the year ended
January 31, 1993. Amortization of the capital leases was $433,587 for
the year ended January 31, 1993. Accumulated amortization was $566,557
at January 31, 1993.
(11) Commitments
At January 31, 1993, outstanding letters of credit related to purchases
of inventories amounted to $241,494.
-15-
<PAGE> 77
TWEEDS, INC.
Financial Statements
February 2, 1992
<PAGE> 78
TWEEDS, INC.
Balance Sheet
February 2, 1992
<TABLE>
<S> <C>
Assets
- ------
Current assets (note 5):
Cash (including overnight repurchase agreements of
$234,000) (note 12) $ 1,687,476
Accounts receivable 685,428
Inventories (note 4) 4,822,486
Prepaid expenses and other current assets 1,798,312
-----------
Total current assets 8,993,702
-----------
Property, plant and equipment, at cost (notes 5, 10 and 11):
Building under capital lease 6,745,250
Furniture, fixtures and equipment 3,063,086
Leasehold improvements 1,077,514
Equipment under capital lease 903,752
Land 61,519
-----------
11,851,121
Less accumulated depreciation and amortization 1,752,886
-----------
Property, plant and equipment, net 10,098,235
-----------
$ 19,091,937
================
</TABLE>
See accompanying notes to financial statements.
-2-
<PAGE> 79
<TABLE>
<S> <C>
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Note payable to bank (note 5) $ 164,291
Current installments of long-term debt (note 5) 1,210,000
Current installments of obligation under capital
lease (note 10) 318,031
Account payable 6,531,076
Accrued expenses 2,716,879
------------
Total current liabilities 10,940,277
------------
Long-term debt, excluding current installments (note 5) 2,357,337
Obligation under capital lease, excluding current
installments (note 10) 6,599,739
------------
Total liabilities 19,897,353
------------
Stockholders' deficit (notes 6 and 9):
Series A redeemable preferred stock, $.01 par
value; 119,048 shares authorized, issued and
outstanding (redemption value $84 per share) 9,794,332
Series B redeemable preferred stock, $.01 par
value; 857,144 shares, authorized, issued and
outstanding (redemption value $17.50 per share) 14,947,508
Common stock, $.01 par value; authorized 3,500,000
shares; issued and outstanding 1,818,149 shares 18,181
Accumulated deficit (25,565,437)
------------
Total stockholders' deficit (805,416)
------------
Commitments (notes 6,8,9, 10 and 12)
---------------
---------------
$ 19,091,937
=================
</TABLE>
See accompanying notes to financial statements.
-3-
<PAGE> 80
TWEEDS, INC.
Statement of Operations
Period from July 1, 1991 to February 2, 1992
<TABLE>
<S> <C>
Net sales $ 34,416,477
Cost of sales 20,383,347
------------
Gross profit 14,033,130
------------
Operating expenses (income):
Selling 12,939,979
Fulfillment operations 5,036,088
General and administrative 3,424,839
Customer list rental income (508,768)
------------
Total operating expenses, net 20,892,138
------------
Loss from operations (6,859,008)
------------
Other income (expense):
Interest income 45,391
Interest expense (779,890)
Other, net 9,078
------------
Other income (expense), net (725,421)
------------
Net loss $ (7,584,429)
==============
</TABLE>
See accompanying notes to financial statements.
-4-
<PAGE> 81
TWEEDS, INC.
Statement of Stockholders' Deficit
Period From July 1, 1991 to February 2, 1992
<TABLE>
<CAPTION>
Series "A" Series "B"
Redeemable Redeemable
Preferred Stock Preferred Stock Common Stock
-----------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1991 119,048 $ 9,794,332 857,144 14,947,508 1,816,913 18,169
Stock options exercised
(note 9) - - - - 1,236 12
Net Loss - - - - - -
-------------------------------------------------------------------------------
Balance, February 2, 1992 119,048 $ 9,794,332 857,144 14,947,508 1,818,149 18,181
======= ================================================================
</TABLE>
<TABLE>
<CAPTION>
Total
Accumulated Stockholders'
Deficit Deficit
--------------------------------
<S> <C> <C>
Balance, July 1, 1991 (17,981,008) 6,779,001
Stock options exercised
(note 9) - 12
Net Loss (7,584,429) (7,584,429)
-----------------------------
Balance, February 2, 1992 (25,565,437) (805,416)
==============================
</TABLE>
See accompanying notes to financial statements.
-5-
<PAGE> 82
TWEEDS, INC.
Statement of Cash Flows
Period From July 1, 1991 to February 2, 1992
<TABLE>
<S> <C>
Cash flows from operating activities:
Cash received from customers $ 28,069,647
Cash paid to suppliers and employers (27,867,561)
Interest received 45,391
Interest paid (779,890)
------------
Net cash used in operating activities (532,413)
------------
Cash flows from investing activities (note 11):
Purchases of property, plant and equipment (90,506)
Proceeds from sale of property, plant and equipment 6,461
Net cash used in investing activities (84,045)
-----------
Cash flows from financing activities (note 11):
Proceeds from issuance of long-term debt 3,567,337
Payments on note payable to bank (1,835,709)
Payments on capitalized lease obligations and
long-term debt (679,685)
Proceeds from issuance of common stock 12
------------
Net cash provided by financing activities 1,051,955
------------
Net increase in cash 435,497
Cash and cash equivalents, beginning of period 1,251,979
------------
Cash and cash equivalents, end of period $ 1,687,476
============
Reconciliation of net loss to net cash used in operating activities:
Net loss $ (7,584,429)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 563,353
Increase in accounts receivable (66,644)
Decrease in inventories 3,023,648
Decrease in prepaid expenses and other current assets 150,335
Increase in accounts payable 1,986,365
Increase in accrued expenses 1,394,959
------------
Net cash used in operating activities $ (532,413)
============
</TABLE>
See accompanying notes to financial statements.
-6-
<PAGE> 83
TWEEDS, INC.
Notes to Financial Statements
February 2, 1992
(1) Description of Company
Tweeds, Inc. (the "Company") is a "private label" men's and women's
apparel direct mail catalog business. The Company, through its
Tweeds and Smythe catalogs, offers distinct lines of clothing to
customers throughout the United States. Previously, the Company's
fiscal year ended on the Sunday nearest to June 30. Effective in
1992, the Company's fiscal year ends on the Sunday nearest to
January 31. As a result of the change in the Company's year end,
the accompanying financial statements include the period from July
1, 1991 to February 2, 1992.
(2) Significant Accounting Policies
(a) Inventory
Inventories are valued at the lower of cost (first-in,
first-out method) or market. To the extent market is less than
cost, valuation reserves are established to reduced inventories
to their estimated net realizable value.
(b) Catalog Costs
The cost of catalogs is deferred and recorded as prepaid
expense. These costs are amortized based on the estimated
future gross revenues over the catalog's estimated useful life
averaging approximately seven months.
(c) Property, Plant and Equipment
Property, plant and equipment is recorded at cost, or in the
case of assets under capital leases, the lower of fair market
value or the present value of minimum lease payments at the
inception of the lease. Depreciation of property, plant and
equipment is computed using the straight-line method over the
estimated useful lives of the assets. Property, plant and
equipment held under capital leases and leasehold improvements
are amortized straight-line over the shorter of the lease term
or estimated life of the asset.
-7-
<PAGE> 84
TWEEDS, INC.
Notes to Financial Statements
(d) Revenue Recognition
Catalog merchandise sales are recognized when the merchandise
is prepared for shipment, generally the same day shipment
occurs. Advance payments from customers received with orders
are classified as customer deposits and are included in accrued
expenses.
Sales returns and customer refunds are generally processed upon
receipt of the returned merchandise. At February 2, 1992,
refunds to customers awaiting final processing were delayed due
to deteriorating cash flow. The total refunds due amounted to
$1,246,000 (approximately 12 days) and are included in accrued
expenses.
(e) Income Taxes
Deferred income taxes are recognized for income and expense
items that are reported in different years for financial
reporting purposes and income tax purposes. These deferred
income taxes originate principally from differences in the
recognition of depreciation of property, plant and equipment
and inventories valuation.
(f) Statement of Cash Flows
For the purposes of the statement of cash flows, cash and cash
equivalents include cash on deposit and overnight repurchase
agreements.
-8-
<PAGE> 85
TWEEDS, INC.
Notes to Financial Statements
(3) Management Plans and Intentions and Subsequent Events
The Company has a working capital deficiency and has incurred
significant operating losses since its inception. During the period
ended February 2, 1992, the Company was in violation of various debt
covenants under its loan agreements including the primary line of
credit and term loan agreement. Management of the Company was able to
negotiate new agreements with the creditors and was able to comply with
the new agreements (see note 5).
Management of the Company has implemented a business plan to reduce the
losses which have occurred and direct the Company to profitable
operations. This plan includes a reduction of the number of catalog
mailings by 30 percent and a reduction in sales volume by 50 percent
for the spring and fall seasons. The Company has also substantially
reduced the number of employees and management overhead. In addition,
the Company is pursuing a sublease or assumption of the leases for a
portion of its distribution facility and corporate offices.
On May 27, 1992, the Company obtained a $6,500,000 asset-based line of
credit to finance its purchases of inventories. The line of credit is
secured by inventories and a $2,500,000 collateralized guarantee of the
stockholders.
Management believes the newly obtained working capital financing and
the recently implemented business plan provide the basis for improved
operational performance.
(4) Inventories
Inventories consist of the following at February 2, 1992:
<TABLE>
<S> <C>
Merchandise $ 7,430,774
Piece goods 357,155
Supplies 222,065
-----------
Total inventories, at cost 8,009,994
Valuation Reserves (3,187,508)
-----------
Total inventories, at lower
of cost or market $ 4,822,486
===========
</TABLE>
-9-
<PAGE> 86
TWEEDS, INC.
Notes to Financial Statements
(5) Note Payable to Bank and Long-term Debt
The Company previously had available a line of credit in the amount of
$2,000,000, bearing interest at 3/4 percent above the prime rate. On
September 23, 1991, the lender initiated a declaration of the event of
default on the line of credit. The Company subsequently entered into a
Forbearance Agreement on October 29, 1991 to repay amounts totaling
$2,441,000 under the line of credit and term loans. Subsequently, on
December 2, 1991, the Company entered into a second Forbearance
Agreement. This agreement required the repayment of the unpaid balance
of $1,328,000 in weekly installments of $100,000 through December 30,
1991 and the assignment of monthly customer list rental income. At
February 2, 1992, the remaining outstanding principal under the line of
credit and term loan amounted to $164,291. Final payment of this
amount was subsequently made in March 1992.
The Company has agreed in principal with its catalog printer to convert
$3,567,337 of accounts payable to term loan with an initial principal
payment of $60,000 due on March 15, 1992, and continuing with monthly
principal payments of $115,000 with the remaining unpaid principal
balance due on July 1, 1993. The loan will accrue interest at a rate
of prime (as determined by First National Bank of Chicago) plus 3
percent (9.5 percent at February 2, 1992). All accrued interest will
be payable with the final principal payment on July 1, 1993. The loan
will be secured by a second position lien on all of the Company's
assets.
The aggregate maturities under this term loan for each year subsequent
to February 2, 1992 are $1,210,000 in 1993 and $2,357,337 in 1994.
As previously stated in note 3, the Company obtained a $6,500,000
asset-based, revolving line of credit on May 27, 1992 to finance its
purchases of inventories. The line of credit bears interest at the
lender's prime rate plus 3 percent and contains various covenants
pertaining to maintenance of working capital and equity and limitations
on the acquisition of property, plant and equipment. All available
cash of the Company will be applied daily to the line of credit to
reduce the outstanding balance.
(6) Stockholders' Deficit
The Company is obligated to redeem one-third of the Series A and B
preferred stock and unpaid cumulative dividends in September of 1994,
1995 and 1996, or 50 percent of the Series A Preferred Stock on the
consummation of a public offering. The Series
-10-
<PAGE> 87
TWEEDS, INC.
Notes to Financial Statements
A Preferred Stock is redeemable at $84.00 per share plus unpaid
cumulative dividends of $10.08 per annum through September 9, 1989 and
$5.04 per share per annum after September 9, 1989. The Series B
Preferred Stock is redeemable at $17.50 per share plus unpaid
cumulative dividends of $1.05 per annum. The Series B Preferred Stock
is convertible to common stock at the option of the stockholder on a
one-for-one basis and carries voting rights equal to the number of
shares of common stock into which it is convertible.
Accumulated and undeclared dividends on the redeemable preferred stock
was approximately $5,425,000 at February 2, 1992.
(7) Income Taxes
At February 2, 1992, the Company had available, to offset future
taxable income, net operating loss carryforwards of approximately
$25,500,000 for book purposes and $25,150,000 for tax purposes. The
carryforwards for tax purposes are scheduled to expire as follows:
<TABLE>
<CAPTION>
Tax Years Ending
----------------
<S> <C>
2002 $ 613,000
2003 3,610,000
2004 1,392,000
2005 720,000
2006 10,800,000
2007 8,015,000
-----------
$ 25,150,000
==========
</TABLE>
The principal differences between book and tax net operating loss
carryforwards resulted from the acceleration of depreciation on
equipment and amortization of capital leases, and capitalization of
certain costs in inventory for tax purposes.
(8) Employee Benefit Plan
The Company sponsors a 401(k) Salary Deferral Plan. The Company has
elected to match 25 percent of the first 5 percent of qualified
compensation contributed by participants. Company contributions to the
Plan for the period from July 1, 1991 to February 2, 1992 were $4,916.
-11-
<PAGE> 88
TWEEDS, INC.
Notes to Financial Statements
(9) Stock Options and Warrants
The Company has an Incentive Stock Option Plan (the "Plan") under which
options are granted to key employees to purchase shares of common stock
at a price not less than the fair market value at the date of grant.
The options granted vest over a four-year period in increments of 25
percent per year. The Company reserved 200,000 shares of common stock
under this Plan. These options were subsequently terminated in May
1992 as a stipulation for obtaining the $6,500,000 line of credit (see
notes 3 and 5).
Warrants to purchase common stock were issued in connection with
certain loans from stockholders in fiscal 1990. The warrants were
subsequently terminated in May 1992 as a stipulation for obtaining the
$6,500,000 line of credit (see notes 3 and 5).
Prior to July 1, 1991, a board member was granted options to purchase
75,000 shares of common stock at $1 per share. These options expire in
1995.
A summary of the options and warrants to purchase the Company's common
stock follows:
<TABLE>
<CAPTION>
Options Under
Incentive Stock Other
Option Plan Warrants Options
--------------- -------- -------
<S> <C> <C> <C>
Balance, July 1, 1991: 93,893 9,779 75,000
Exercised (1,236) - -
-------------------------------------------
Balance, February 2, 1992 92,657 9,779 75,000
====== ===== ======
Exercise price per share $.01-$1.00 $.01 $1.00
========== ====== =====
</TABLE>
(10) Leases
In October 1989, the Company entered into an agreement to lease a
fulfillment center in Virginia. The lease term is 25 years from
January 1, 1991. The base rent of $920,688 per annum is based on
development cost of $6,635,602. The annual base rent will be adjusted
every five years based on the change in the consumer price index. The
lease contains an option for the Company to purchase the building after
year five through year nine at 110 percent of the actual original
development cost subject to certain increases in the consumer price
index.
-12-
<PAGE> 89
TWEEDS, INC.
Notes to Financial Statements
In December 1989, the Company entered into an agreement to lease
computer equipment for a 60-month period. The lease payments included
below in other capital leases are $28,878 for the first 36 months and
$2,125 per month thereafter. The Company may purchase the equipment at
the fair market value as determined in the lease agreement.
The Company leases offices, operating facilities and machinery under
various capital and operating leases.
The future minimum annual rent required for each of the next five years
and thereafter under the above agreements are as follows:
<TABLE>
<CAPTION>
Building Other
Capital Capital Operating
Lease Leases Leases
-------- -------- ----------
<S> <C> <C> <C>
1993 $ 920,688 $ 295,009 $ 582,938
1994 920,688 26,154 558,563
1995 920,688 21,246 509,369
1996 920,688 - 466,008
1997 920,688 - 408,921
After 1997 17,416,348 - 1,097,246
---------- ---------- ----------
Total minimum lease payments 22,019,788 342,409 $ 3,623,045
==========
Less amounts representing interest
(at rates ranging from 10% to 22%) 15,422,544 21,883
------------------------
Present value of future minimum
payments on capital leases 6,597,244 320,526
Less current installments 40,664 277,367
-----------------------
Obligations under capital leases,
excluding current installments $ 6,556,580 $ 43,159
=======================
</TABLE>
-13-
<PAGE> 90
TWEEDS, INC.
Notes to Financial Statements
Rent expense under operating leases was $368,876 for the period from July 1,
1991 to February 2, 1992. Amortization of the capital leases was $262,049 for
the period from July 1, 1991 to February 2, 1992. Accumulated amortization was
$663,255 at February 2, 1992.
(11) Noncash Investing and Financing Activities
Building under capital lease and the related obligation under capital
lease were each reduced by $164,398 during the period ended February 2,
1992 when construction costs of the building were finalized at an
amount less than originally recorded.
(12) Commitment
At February 2, 1992, cash in the amount of $916,473 is pledged as
collateral against outstanding letters of credit.
-14-
<PAGE> 91
TWEEDS, INC.
Financial Statements for the
Years Ended June 30, 1991 and July 1990
and Independent Auditors' Report
-1-
<PAGE> 92
INDEPENDENT AUDITORS' REPOR
Board of Directors
Tweeds, Inc.
Edgewater, New Jersey
We have audited the accompanying balance sheets of Tweeds, Inc. as of June 30,
1991 and July 1, 1990, and the related statements of operations, stockholders'
equity and cash flows for the years then ended. 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tweeds, Inc. as of June 30,
1991 and July 1, 1990, and the results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that Tweeds,
Inc. will continue as a going concern. As discussed in Note 3 to the financial
statements, the Company has suffered recurring losses from operations since its
inception and is in violation of certain debt covenants at June 30, 1991 that
raise substantial doubt about the entity's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 3. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Deloitte & Touche
Parsippany, New Jersey
September 12, 1991, except for
Note 3, as to which the date is
December 11, 1991
-2-
<PAGE> 93
TWEEDS, INC
BALANCE SHEETS
JUNE 30, 1991 AND JULY 1, 1990
<TABLE>
<CAPTION>
June 30, July 1,
1991 1990
-------- --------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash (including certificates of deposit
of $562,000 (1991) and $377,000 (1990)
(Note 10) $ 1,251,979 $ 1,899,850
Accounts receivable 618,784 993,317
Inventories (Note 4) 7,846,134 17,580,332
Prepaid expenses and other assets 1,948,647 3,506,007
--------------------- ---------------------
Total current assets 11,665,544 23,979,506
--------------------- ---------------------
PROPERTY, PLANT AND EQUIPMENT, AT COST
(Notes 5 and 10):
Building under capital lease 6,909,648 6,899,022
Furniture, fixtures and equipment 2,986,411 2,461,960
Leasehold improvements 1,077,284 387,002
Equipment under capital lease 903,752 1,203,975
Land 61,519 61,519
--------------------- ---------------------
11,938,614 11,013,478
Less accumulated depreciation and amortization (1,196,673) (878,828)
-------------------- --------------------
10,741,941 10,134,650
--------------------- ---------------------
$ 22,407,485 $ 34,114,156
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUIT
- -----------------------------------
CURRENT LIABILITIES:
Notes payable - bank (Note 5) $ 2,000,000 $ -
Accounts payable 4,544,711 8,205,121
Accrued expenses 1,321,920 1,008,396
Long-term debt in default (Note 5) 320,000 -
Current portion of long-term debt and obligations
under capital leases (Notes 5 and 10) 508,425 557,094
--------------------- ---------------------
Total current liabilities 8,695,056 9,770,611
--------------------- ---------------------
LONG-TERM DEBT (Note 5) - 480,000
--------------------- ---------------------
OBLIGATIONS UNDER CAPITAL LEASE (Note 10) 6,933,428 7,363,880
--------------------- ---------------------
STOCKHOLDERS' EQUITY (Note 6):
Series A redeemable preferred stock, $.01 par
value; 119,048 shares authorized, issued and
outstanding (redemption value $84 per share) 9,794,332 9,794,332
Series B redeemable preferred stock, $.01 par
value; 857,144 shares, authorized,
issued and outstanding (redemption value
$17.50 per share) 14,947,508 14,947,508
Common stock, $.01 par value; authorized:
3,500,000 shares; issued and outstanding:
(1991) 1,816,913 shares, (1990) 1,879,232
shares 18,169 18,792
Accumulated deficit (17,981,008) (8,243,050)
Notes receivable for stock - (17,917)
--------------------- --------------------
TOTAL STOCKHOLDERS' EQUITY 6,779,001 16,449,665
--------------------- ---------------------
$ 22,407,485 $ 34,114,156
===================== =====================
</TABLE>
See notes to financial statements
-3-
<PAGE> 94
TWEEDS, INC
STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, 1991 AND JULY 1, 1990
<TABLE>
<CAPTION>
June 30, July 1,
1991 1990
-------- -------
<S> <C> <C>
NET SALES $68,395,660 $66,091,773
COST OF SALES 35,386,483 31,824,148
----------- -----------
33,009,177 34,267,625
------------ -----------
OPERATING EXPENSES (INCOME):
Selling 22,211,064 18,468,113
Fulfillment operations 13,983,969 12,360,116
General and administrative 6,585,781 6,230,010
Customer list rental income (666,333) (594,704)
----------- ---------
42,114,481 36,463,535
------------ -----------
LOSS BEFORE DISPOSAL OF EQUIPMENT AND
TERMINATION OF LEASE (9,105,304) (2,195,910)
LOSS FROM DISPOSAL OF EQUIPMENT AND
TERMINATION OF LEASE (Note 10) - (333,763)
----------- -----------
LOSS FROM OPERATIONS (9,105,304) (2,529,673)
----------- -----------
INTEREST INCOME (EXPENSE):
Interest expense (862,048) (249,313)
Interest income 229,394 434,215
----------- ----------
(632,654) 184,902
---------- ----------
NET LOSS $(9,737,958) $(2,344,771)
============ ============
</TABLE>
See notes to financial statements.
-4-
<PAGE> 95
TWEEDS, INC
STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1991 AND JULY 1, 1990
- ------------------------------------------------------
<TABLE>
<CAPTION>
Series "A" Series "B"
Redeemable Stock Redeemable Stock Common Stock
------------------------ ------------------------ --------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 2, 1989 119,048 $9,794,332 - $ - 1,643,727 $16,438
Preferred stock sold for cash
and cancellation notes and
accrued interest in
September 1989, net of
$52,492 representing cost
of issuance (Note 6) - - 857,144 14,947,508 - -
Stock options exercised in - - - - 11,920 119
August and September 1989
Stock warrants exercised in - - - - 88,025 880
September 1989
Common stock issued for cash - - - - 135,560 1,355
in August and September 1989
Cash received on notes - - - - - -
Net loss - - - - - -
-------- --------- ------- ---------- --------- --------
BALANCE, JULY 1, 1990 119,048 9,794,332 857,144 14,947,508 1,879,232 18,792
Common stock repurchased in
February/May 1991 - - - - (62,518) (625)
Stock options exercised in
August and September 1990
and May 1991 - - - - 199 2
Cash received on notes - - - - - -
Net loss - - - - - -
------- ---------- ------- ----------- --------- ----------
BALANCE, JUNE 30, 1991 119,048 $9,794,332 857,144 $14,947,508 1,816,913 $18,169
======= ========== ======= =========== ========= =======
</TABLE>
<TABLE>
<CAPTION>
Notes Total Stock-
Deficit Receivable holders'
Accumulated for Stock Equity
----------- --------- --------
<S> <C> <C> <C>
BALANCE, JULY 2, 1989 $ (5,898,279) $ (35,834) $ 3,876,657
Preferred stock sold for cash
and cancellation notes and
accrued interest in
September 1989, net of
$52,492 representing cost
of issuance (Note 6) - - 14,947,508
Stock options exercised in - - 119
August and September 1989
Stock warrants exercised in - - 880
September 1989
Common stock issued for cash - - 1,355
in August and September 1989
Cash received on notes - 17,917 17,917
Net loss (2,344,771) - (2,344,771)
----------- --------- -----------
BALANCE, JULY 1, 1990 (8,243,050) (17,917) 16,499,665
Common stock repurchased in
February/May 1991 - - (625)
Stock options exercised in
August and September 1990
and May 1991 - - (2)
Cash received on notes - 17,917 17,917
Net loss (9,737,958) - (9,737,958)
------------- ----------- ----------
BALANCE, JUNE 30, 1991 $(17,981,008) $ - $ 6,779,001
============= ========== =========
</TABLE>
See notes to financial statements.
<PAGE> 96
TWEEDS, INC
STATEMENTS OF CASH FLOW
YEARS ENDED JUNE 30, 1991 AND JULY 1, 1990
<TABLE>
<CAPTION>
June 30, July 1,
1991 1990
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(9,737,958) $(2,344,771)
----------- -----------
Adjustments to reconcile net loss to cash
used in operating activities:
Depreciation and amortization 777,966 525,124
Loss on disposal of equipment 106,514 288,027
Changes in assets and liabilities:
Decrease (increase) in accounts receivable 374,533 (111,508)
Decrease (increase) in inventories 9,734,198 (7,336,403)
Decrease (increase) in prepaid expenses 1,557,360 (2,618,433)
Decrease in other assets - 67,405
(Decrease) increase in accounts payable (3,660,410) 3,504,869
Increase in accrued expenses 313,524 73,652
----------- -----------
Total adjustments 9,203,685 (5,607,267)
----------- -----------
Net cash used in operating activities (534,273) (7,952,038)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchase of equipment and leasehold
improvements (1,666,771) (1,247,291)
Proceeds from sale of equipment and leasehold
improvements 175,000 -
------------ ------------
Net cash used in investing activities (1,491,771) (1,247,291)
----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common and preferred
stock, net or cost of issuance - 10,690,813
Payments on capitalized lease obligations and
long-term debt (639,121) (197,551)
Proceeds from notes receivable from stock 17,917 17,917
Proceeds from bank line of credit 2,000,000 -
Repurchase of common stock (623) -
----------- ----------
Net cash provided by financing
activities 1,378,173 10,511,179
----------- ------------
NET INCREASE (DECREASE) IN CASH (647,871) 1,311,850
CASH, BEGINNING OF YEAR 1,899,850 588,000
----------- -----------
CASH, END OF YEAR $ 1,251,979 $ 1,899,850
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 846,631 $ 166,464
----------- -----------
</TABLE>
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Capital lease obligations of $7,792,997 were incurred in the year ended July 1,
1990, when the company entered into leases for a building and equipment. Notes
and accrued interest payable to stockholders of $4,259,049 were converted to
preferred stock during the year ended July 1, 1990.
See notes to financial statements.
-6-
<PAGE> 97
TWEEDS, INC
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1991 AND JULY 1, 1990
1. DESCRIPTION OF COMPANY
Tweeds, Inc. (the "Company") is a "private label" men's and women's
apparel direct mail catalog business. The Company, through its Tweeds and
Smythe catalogues, offers distinct lines of clothing to customers
throughout the United States. The Company's fiscal year ends on the
Saturday nearest to June 30.
2. SIGNIFICANT ACCOUNTING POLICIES
a. Property, Plant and Equipment - Property, plant and equipment is
recorded at a cost, or in the case of assets under capital leases (Note
10) the lower of fair market value or the present value of future lease
payments. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the related
assets or the lives of the leases, whichever is less.
b. Inventory - Inventories are valued at the lower of cost (first-in,
first-out method) or market.
c. Catalog Costs - The cost of catalogs is deferred and recorded as
prepaid expense. These costs are amortized based on the estimated
future gross revenues over the catalogue's estimated useful life
averaging approximately seven months.
d. Statement of Cash Flows - For the purposes of the statement of cash
flows, cash includes cash on deposit and certificates of deposit, with
an original maturity of three months or less.
3. MANAGEMENT PLANS AND INTENTION AND SUBSEQUENT EVENTS
The Company has incurred significant operating losses from operations
since its inception and was in violation of various debt covenants under
its line of credit and term loan agreement. This resulted in the
notification on September 23, 1991 from the Company's primary lender of
the non-renewal of the line of credit (see Note 5) and an available letter
of credit of $4 million (see Note 10b) at their maturity date of October
31, 1991, and the demand for repayment of the term loan (see Note 5) on
October 31, 1991. In addition, on October 28, 1991, a secondary lender
notified the Company that the available letter of credit line of $5
million (see Note 10b) was terminated and the lender demanded cash
collateral for all outstanding letters of credit. These conditions give
rise to substantial doubt about the Company's ability to continue as a
going concern.
The Company entered into a Forbearance Agreement with its primary lender
on October 29, 1991 to repay amounts totaling $2,441,000 under the line of
credit and term loans. Subsequently, on December 2, 1991, the Company
entered into a second Forbearance Agreement. This agreement requires the
repayment of the unpaid balance of $1,328,000 in weekly installments of
$100,000 through December 30, 1991, the assignment of monthly list rental
income, and the balance to be paid on January 10, 1992. Amounts due bear
interest at the bank's prime rate plus 3%.
On November 13, 1991, the secondary lender filed proceedings against the
Company requiring the Company to post 100% cash collateral for outstanding
letters of credit or sought for the appointment for a statutory receiver
to liquidate the assets of the Company and wind up its affairs. This
lender also froze bank accounts totaling $96,000 of the Company located at
this lender's bank. On December 9, 1991, the Company settled this action
and entered into a Security Agreement which required the Company to pay
down and/or cancel letters of credit to the amount of collateral of
$916,000, and grant a first party lien on merchandise purchased with said
letters of credit by December 16, 1991.
Management of the Company anticipates that they will be able to comply
with all of the above agreements.
Management of the Company has also adopted a preliminary reorganization
plan to reduce the losses which have occurred and direct the Company to
profitable operations. These plans include a reduction of
-7-
<PAGE> 98
the number of catalog mailings by 30% and a reduction in the volume of
business by 50% for the Spring catalog season. The Company will also
substantially reduce the number of employees and management by early
January 1992. In addition, the Company is pursuing a sublease or
assumption of the leases of its distribution facility and corporate
offices.
The Company has agreed in principal with its catalog printer to convert
approximately $3.4 million of accounts payable at December 11, 1991 to a
30-month term loan with a balloon payment in 18 months. The loan will
bear interest at the prime rate plus 3%. In addition, the Company is
negotiating with this printer and other suppliers for a minimum 5%
reduction in the cost of goods and services the Company plans to purchase
for the Spring catalog season.
The Company is actively pursuing alternative sources of financing and
anticipates that it will be able to obtain an asset-based line of credit
to finance its working capital needs and an available letter of credit to
finance its purchase of inventory. Management believes that the
operations will require a $2 million line of credit and a $2 million
letter of credit line plus an equity infusion of $1,000,000.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, July 1,
1991 1990
------- -------
<S> <C> <C>
Merchandise $ 7,588,868 $ 16,981,759
Piece goods 152,899 414,289
Supplies 104,367 184,284
---------- ----------
$ 7,846,134 $ 17,580,332
--------- ----------
</TABLE>
5. NOTES PAYABLE - BANK AND LONG-TERM DEBT
The Company has available a line of credit in the amount of $2,000,000
which bears interest at 3/4% above the prime rate through October 30,
1991. Related debt outstanding at the close of business on June 30, 1991
and July 1, 1990 was $2,000,000 and $-0-, respectively. The Company must
meet certain covenants including a minimum current ratio, debt to adjusted
funds ratio and borrowings cannot exceed 50% of the inventory on hand at
any time.
The Company's long-term debt consists of a term loan payable with interest
at 10.8%. Repayment is due in monthly installments of $13,333 plus
interest which began in July 1989 and continues through June 1993 with a
balloon payment of $173,333 at June 1993.
These loans are secured by receivables, inventory, mailing lists,
furniture, fixtures and equipment. The line of credit and term loan
agreement contain cross-default provisions.
At June 30, 1991, the Company was in default of the debt to adjusted funds
ratio and the current ratio covenants of the loan agreement. A
declaration of the event of default was initiated by the lender on
September 23, 1991. Accordingly, the long-term portion of the term loan
has been classified as long-term debt in default at June 30, 1991.
6. STOCKHOLDER'S EQUITY
The Company is obligated to redeem one-third of the preferred stock and
accumulated dividends on each September of 1994, 1995 and 1996, or 50% of
the Series A Preferred Stock on the consummation of a public offering.
The Series A Preferred Stock is redeemable at $84.00 per share plus unpaid
cumulative dividends of $10.08 per annum through September 9, 1989 and
$5.04 per share per annum after September 9, 1989. The Series B Preferred
Stock is redeemable at $17.50 per share plus cumulative dividends of $1.05
per annum. The Series B Preferred Stock is convertible to common stock at
the option of the stockholder on a one-for-one basis and carries voting
rights equal to the number of shares of common stock into which it is
convertible.
-8-
<PAGE> 99
Accumulated and undeclared dividends on the redeemable preferred stock was
approximately $4,550,000 at June 30, 1991 and $3,050,000 at July 1, 1990.
During the year ended July 1, 1990, the Company issued 135,560 shares of
restricted common stock at $.01 per share to certain individuals. The
Compensation Committee of the Board of Directors determined the fair value
of stock and options granted during the year ended June 30, 1991 to be
$1.00 and during the year ended July 1, 1990 to be $.01 per share. The
stock vests based on the individual's length of service and/or a formula
based on the Company's performance. In 1991, the Company repurchased
62,518 shares of restricted common stock which was not earned by the
individual receiving the stock in accordance with the vesting
requirements.
7. INCOME TAXES
At July 1, 1990, the Company had available, to offset future taxable
income, net operating loss carryforwards of approximately $17,900,000 for
book purposes and $17,285,000 for tax purposes. The carryforwards for tax
purposes are scheduled to expire as follows:
<TABLE>
<CAPTION>
Year Ending
June 30,
-----------
<S> <C>
2002 $ 613,000
2003 3,610,000
2004 1,392,000
2005 720,000
2006 10,950,000
----------
$17,285,000
===========
</TABLE>
The principal differences between book and tax net operating loss
carryforwards resulted from the acceleration of depreciation on equipment
and amortization of capital leases, and capitalization of certain costs in
inventory for tax purposes.
8. BENEFIT PLAN
The Company sponsors a 401(k) Salary Deferral Plan. The Company has
elected to match 25% of the first 5% of qualified compensation contributed
by participants for plan years ended December 31, 1991 and 1990. Company
contributions to the Plan for the years ended June 30, 1991 and July 1,
1990 were $31,755 and $64,113, respectively.
9. STOCK OPTIONS AND WARRANTS
The Company has an Incentive Stock Option Plan (the "Plan") under which
options are granted are granted to key employees to purchase shares of
common stock at a price not less than the fair market value at the date of
grant. The options granted vest over a four-year period in increments of
25% per year. The Company reserved 200,000 shares of common stock under
this Plan.
Warrants to purchase common stock were issued in connection with certain
loans from stockholders in fiscal 1990.
During 1991, certain board members were granted options to purchase 87,000
shares of common stock at $1 per share. These options expire in 1994.
A summary of the options to purchase the Company's common stock follows:
-9-
<PAGE> 100
<TABLE>
<CAPTION>
Options under
Incentive Stock Other
Option Plan Warrants Options
---------------- -------- -------
<S> <C> <C> <C>
Balance, July 2, 1989 3,095 - -
Granted 18,062 167,672 -
Exercised - (88,025) -
Canceled, expired or not vested (2,647) (69,868) -
------- -------- -------
Balance, July 1, 1990 18,510 9,779 -
Granted 84,263 - 87,000
Exercised (199) - -
Canceled, expired or not vested (8,681) - -
------- -------- -------
Balance, June 30, 1991 93,893 9,779 87,000
------- -------- -------
Exercise price per share $.01 - $1.00 $.01 $1.00
------------ ---- -----
Options expire in 1999 1994 1994
---- ---- ----
</TABLE>
10. COMMITMENTS
a. Lease Commitments - In October 1989, the Company entered into an
agreement to lease a fulfillment center in Virginia. The lease term is
25 years from January 1, 1991. The base rent of $943,500 per annum is
based on an estimated development cost of $6,800,000 and is subject to
adjustment based on the developers' final cost. The annual base rent
will be adjusted every five years based on the change in the consumer
price index. The lease contains an option for Tweeds to purchase the
building after year five through year nine at 110% of the actual
original development cost subject to certain increases in the consumer
price index.
In 1989, the Company entered into an agreement to lease computer
equipment for a 60-month period. The lease payments included below in
other capital leases are $28,878 for the first 36 months and $2,125 per
month thereafter. The Company may purchase the equipment at the fair
market value as determined in the lease agreement.
Computer equipment, under a capital lease, which is no longer utilized
by the Company resulted in a loss of $288,027 in 1990. The Company
also terminated an office lease in 1990 which resulted in a loss of
$45,736.
The Company leases offices, operating facilities and machinery under
various capital and operating leases.
-10-
<PAGE> 101
The future minimum annual rent required for each of the next five years
and thereafter under the above agreements are as follows:
<TABLE>
<CAPTION>
Building Other
Capital Capital Operating
Lease Leases Leases
--------- ------- ---------
<S> <C> <C> <C>
1992 $ 943,500 $ 349,024 $ 591,043
1993 943,500 161,076 571,529
1994 943,500 25,495 527,511
1995 943,500 10,623 490,286
1996 943,500 - 442,375
After 1996 18,398,250 - 1,335,520
---------- ---------- ----------
Total minimum payments 23,115,750 546,218 $3,958,264
==========
Less imputed interest 16,333,191 46,923
---------- ----------
Present value of future
minimum payments on capital leases 6,782,559 499,295
Less current portion (38,562) (309,864)
-------- -----------
Long-term obligation under capital leases $ 6,743,997 $ 189,431
============ ==========
</TABLE>
Rent expense under operating leases is $1,051,952 and $819,792 in 1991
and 1990, respectively. Amortization of the capital leases is $210,781
in 1991 and $138,816 in 1990. Accumulated amortization is $272,096 at
June 30, 1991 and $169,816 at July 1, 1990.
b. Letters of Credit - The Company has outstanding approximately
$5,030,670 in letters of credit at June 30, 1991, which are
collateralized in part by certificates of deposits.
* * * * * *
-11-
<PAGE> 102
Item 7(a)(vi)
TWEEDS, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
AS OF SEPTEMBER 26, 1993
(IN THOUSANDS)
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 239
Accounts receivable, net 743
Inventories 2,795
Other current assets 2,024
---------
Total Current Assets 5,801
---------
Property and equipment 5,267
Accumulated depreciation (2,641)
--------
Net Property 2,626
---------
Other assets 267
---------
Total Assets $ 8,694
=========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Current portion of long term debt $ 4,514
Accounts payable & accrued liabilities 4,047
---------
Total Current Liabilities 8,561
Noncurrent liabilities:
Long-term debt 700
---------
Total Liabilities 9,261
---------
Shareholders' Equity (Deficit):
Preferred stock, cumulative, nonvoting, $.01
par value; 2,004,479 shares authorized,
issued and outstanding 20
Common stock, $.01 par value, authorized
6,000,000 shares; issued and outstanding
4,986,368 shares 50
Additional paid-in capital 26,724
Accumulated deficit (27,361)
--------
Total Shareholders' Equity (Deficit) (567)
--------
Total Liabilities and Shareholders' Equity (Deficit) $ 8,694
=========
</TABLE>
-1-
<PAGE> 103
TWEEDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE EIGHT MONTHS ENDED
--------------------------
September 27, September 26,
1992 1993
----------- ------------
<S> <C> <C>
Revenues $ 20,976 $ 22,743
Operating costs and expenses:
Costs of sales and operating expenses 14,227 14,015
Selling expenses 5,351 6,690
General and administrative expenses 2,033 2,554
--------- ----------
Loss from operations (635) (516)
--------- ----------
Interest and other income (expense):
Interest expense (654) (362)
Other expense (61) (128)
--------- ----------
(715) (490)
--------- ----------
Net loss $ (1,350) $ (1,006)
========= ==========
</TABLE>
-2-
<PAGE> 104
TWEEDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION> FOR THE EIGHT MONTHS ENDED
--------------------------
SEPTEMBER 27, SEPTEMBER 26,
1992 1993
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (loss) ($1,350) ($1,006)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization 632 499
Inventory reserves (1,097) (446)
Changes in operating assets and liabilities:
Accounts receivable 171 (323)
Inventories 1,557 441
Prepaid expenses and other (117) (41)
Accounts payable (5,013) 972
Accrued expenses 571 (281)
Other - 107
-------- --------
Net cash provided (used) by operating activities (4,646) (78)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property (55) (61)
-------- --------
Net cash provided (used) by investing activities (55) (61)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving credit facilities 2,937 1,513
Payments of long term debt (486) (1,121)
Proceeds from stock issuance, net 25 (20)
-------- --------
Net cash provided (used) by financing activities 2,476 372
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (2,225) 233
CASH AND CASH EQUIVALENTS AT THE BEGINNING
OF THE PERIOD 1,688 6
-------- --------
CASH AND CASH EQUIVALENTS AT THE END OF
THE PERIOD ($537) $239
======== ========
</TABLE>
-3-
<PAGE> 105
TWEEDS, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements:
1. Basis of presentation - In the opinion of management, the accompanying
unaudited interim financial statements contain all material adjustments,
consisting of normal recurring accruals, necessary to present fairly the
financial condition as of September 26, 1993 and the results of operations for
the eight month periods ended September 27, 1992 and September 26, 1993 of
Tweeds, Inc. and its consolidated subsidiaries for the interim periods.
Operating results for interim periods are not necessarily indicative of the
results that may be expected for the entire year.
2. Subsequent event - On September 30, 1993, TW Acquisitions, Inc.
("TWA"), a wholly-owned subsidiary of Hanover Direct, Inc., acquired all of the
issued and outstanding shares of preferred stock of Tweeds, Inc. The purchase
price was $3.7 million and was paid as follows: (i) $.1 million in cash; and
(ii) 771,774 shares of Hanover Direct, Inc.'s common stock, valued at $4.06 per
share, or $3.6 million.
-4-
<PAGE> 106
Item 7(b)
PRO FORMA UNAUDITED CONSOLIDATED CONDENSED FINANCIAL
INFORMATION OF THE COMPANY
The following Pro Forma Unaudited Consolidated Condensed Financial Information
of the Company represents the historical and consolidated condensed balance
sheet of the Company at September 25, 1993, and consolidated condensed
statements of operations of the Company for the year ended December 26, 1992,
and for the nine months ended September 25, 1993;
(1) as adjusted to reflect the acquisition of the retail and
mail-order assets of Gump's, Inc. which was consummated on July 12, 1993, and
(2) as adjusted to reflect the acquisition of Company Store
Holdings, Inc., which was consummated on August 25, 1993, and
(3) as adjusted to reflect the acquisition of Tweeds, Inc., which
was consummated on September 30, 1993.
The adjustments to the consolidated condensed statement of operations of the
Company for the year ended December 26, 1992, reflects the impact of Gump's,
Inc., Company Store Holdings, Inc. and the Tweeds, Inc. acquisitions as of the
beginning of the fiscal year ended December 26, 1992. The adjustments to the
consolidated condensed statement of operations of the Company for the nine
months ended September 25, 1993, reflects the impact of such acquisitions as of
the beginning of such nine month period. The unaudited consolidated statement
of operations of Hanover Direct, Inc. for the nine months ended September 25,
1993, includes the results of operations of Gump's, Inc. and Company Store
Holdings, Inc. from the respective dates of acquisition by the Company through
September 25, 1993.
The adjustments to the unaudited consolidated condensed balance sheet of the
Company at September 25, 1993, reflects the impact of the Tweeds, Inc.
acquisition as if such transaction occurred on September 25, 1993. Company
Store Holdings, Inc. and Gump's, Inc. are included in the unaudited
consolidated balance sheet of Hanover Direct, Inc. as of September 25, 1993.
The Pro Forma Unaudited Consolidated Condensed Financial Statements have been
adjusted to reflect the elimination of assets and liabilities that were not
acquired and for transactions and charges that will occur in connection with
the acquisitions. The adjustments reflect entries that are to be made in
accordance with the purchase method of accounting. The pro forma information
is not necessarily indicative of the results that would have occurred or that
may be achieved in the future.
The Pro Forma Unaudited Consolidated Condensed Financial Statements for the
twelve months ended December 26, 1992 include the historical audited financial
statements of the Company, Gump's, Inc. and Tweeds, Inc. for the year ended
December 26, 1992, February 27, 1993 and January 31, 1993, respectively, and
the historical unaudited financial statements for Company Store Holdings, Inc.
for the twelve months ended January 30, 1993. The Pro Forma Unaudited
Consolidated Condensed Financial Statements for the nine months ended September
25, 1993 include the historical unaudited financial statements of the Company,
Gump's, Inc., Company Store Holdings, Inc. and Tweed's, Inc. for the nine
months ended September 25, 1993, for the twenty- seven weeks ended July 11,
1993, for the eight months ended August 25, 1993 and for the nine months ended
September 26, 1993, respectively.
The Pro Forma Unaudited Consolidated Condensed Financial Statements should be
read in conjunction with the historical financial statements of each company as
described in Item 7(a) and filed as part of this Report.
-1-
<PAGE> 107
HANOVER DIRECT, INC.
CONDENSED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 25, 1993
(UNAUDITED)
<TABLE>
<CAPTION>
(in thousands) Hanover Direct, Inc. Tweeds, Inc. Pro Forma
September 25, 1993 September 26, 1993 Adjustments Pro Forma
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 1,360 $ 239 $ (100) A $ 1,499
Accounts receivable, net 23,868 743 (75) B 24,536
Inventories 75,259 2,795 (276) C 77,778
Deferred tax asset 2,975 2,975
Other current assets 35,446 2,024 (478) D 36,992
----------------------------------------------------------------------------
Total Current Assets 138,908 5,801 (929) 143,780
Net Property & Equipment 17,925 2,626 288 E 20,839
Excess of Cost over Net Assets
of Acquired Businesses 13,189 5,685 F 18,874
Deferred tax asset, net 7,656 7,656
Other Assets 4,317 267 933 G 5,517
----------------------------------------------------------------------------
Total Assets $ 181,995 $ 8,694 $ 5,977 $ 196,666
============================================================================
</TABLE>
- -------------------
A. Represents cash used in the purchase of Tweeds.
B. Represents the write off of accounts receivable in connection with the
purchase.
C. Represents reserves for Tweeds' inventory.
D. Represents the reduction of certain prepaid expenses of Tweeds to conform
with Hanover Direct, Inc.'s accounting policy.
E. Represents the increase in appraised value of Tweeds property and
equipment.
F. Represents goodwill associated with the purchase of Tweeds.
G. Represents the appraised value of Tweeds' mailing list, net of the
reduction of certain Other Assets.
H. Represents the issuance of common stock of Hanover Direct, Inc. in
connection with the purchase of Tweeds and the elimination of the Tweeds,
Inc. accumulated deficit and Preferred stock.
I. Represents the restructuring of long-term debt in connection with the
acquisition.
J. Represents transaction and transition costs and certain accruals to conform
with Hanover Direct, Inc.'s accounting policy.
-2-
<PAGE> 108
HANOVER DIRECT, INC.
CONDENSED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 25, 1993
(UNAUDITED)
<TABLE>
<CAPTION>
(in thousands) Hanover Direct, Inc. Tweeds, Inc. Pro Forma
September 25, 1993 September 26, 1993 Adjustments Pro Forma
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long term debt
and Capital Leases $ 237 $ 4,514 (4,514) I $ 237
Accounts payable & Accrued Liabilities 86,074 4,047 1,760 J 91,881
Other liabilities 5,886 5,886
--------------------------------------------------------------------------
Total Current Liabilities 92,197 8,561 (2,754) 98,004
--------------------------------------------------------------------------
Noncurrent Liabilities:
Long-term debt 55,401 700 4,514 I 60,615
Other 2,160 2,160
--------------------------------------------------------------------------
Total Noncurrent Liabilities 57,561 700 4,514 62,775
--------------------------------------------------------------------------
Total Liabilities 149,758 9,261 1,760 160,779
--------------------------------------------------------------------------
Commitments and Contingencies
Common and Other Shareholders' Equity (Deficit):
7.5% Preferred stock 7,158 7,158
Class B Preferred stock 25,516 25,516
Preferred Stock 20 (20) H 0
Class B Common Stock 123 123
Common Stock 40,777 50 465 H 41,292
Capital in excess of par 187,741 26,724 (23,589) H 190,876
Accumulated deficit (222,737) (27,361) 27,361 H (222,737)
--------------------------------------------------------------------------
38,578 (567) 4,217 42,228
Less:
Treasury Stock (3,451) (3,451)
Notes receivable from the sale of
common stock (2,002) (2,002)
Deferred compensation (888) (888)
--------------------------------------------------------------------------
Common and Other Shareholders'
Equity (Deficit) 32,237 (567) 4,217 35,887
--------------------------------------------------------------------------
Total Liabilities and Shareholders'
Equity $ 181,995 $ 8,694 $ 5,977 $ 196,666
==========================================================================
</TABLE>
-3-
<PAGE> 109
HANOVER DIRECT, INC.
CONDENSED PRO FORMA INCOME STATEMENT
TWELVE MONTHS ENDED DECEMBER 26, 1992
(UNAUDITED)
<TABLE>
<CAPTION>
Company Store
(In thousands) Hanover Direct, Inc. Gump's, Inc. Holdings, Inc. Tweeds, Inc.
Year Ended Year Ended 12 Months Ended Year Ended
December 26, 1992 February 27, 1993 January 30, 1993 January 31, 1993
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $ 586,562 $ 45,361 $ 74,551 $ 34,564
Operating costs and expenses:
Costs of sales and operating expenses 381,716 24,313 42,820 18,505
Selling expenses 138,494 21,783 27,230 13,033
General administrative expenses 51,950 5,263 7,659 2,631
----------------------------------------------------------------------------------
INCOME FROM OPERATIONS 14,402 (5,998) (3,158) 395
----------------------------------------------------------------------------------
Interest and other income (expenses):
Interest expense (13,379) (2,651) (2,417) (1,398)
Interest income 244 0 0 14
Other income (expense) 0 0 (822) 199
----------------------------------------------------------------------------------
(13,135) (2,651) (3,239) (1,185)
Income tax provision 219 0 0
----------------------------------------------------------------------------------
Income (loss) before extraordinary gains
and accounting change for income taxes $ 1,048 $ (8,649) $ (6,397) $ (790)
==================================================================================
Net income (loss) per share:
Income (loss) before extraordinary gains
and accounting change for income taxes $ 0.03
==========
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
Pro Forma
Adjustments Pro Forma
--------------------------------------
<S> <C> <C> <C>
REVENUES $ (7,584) A $ 733,454
Operating costs and expenses:
Costs of sales and operating expenses (691) B 466,663
Selling expenses (11,498) C 189,042
General administrative expenses (2,387) D 65,116
-------------------------------------
INCOME FROM OPERATIONS 6,992 12,633
-------------------------------------
Interest and other income (expenses):
Interest expense 4,076 E (15,769)
Interest income 258
Other income (expense) (623)
-------------------------------------
4,076 (16,134)
Income tax provision 219
------------------------------------
Income (loss) before extraordinary gains
and accounting change for income taxes $ 11,068 $ (3,720)
=====================================
Net income (loss) per share:
Income (loss) before extraordinary gains
and accounting change for income taxes $(0.09)
==========
</TABLE>
A. Represents the elimination of approximately $4,638 and $3,453 of revenues
related to operations not acquired for Gump's, Inc. and Company Store
Holdings, Inc., respectively. Also included in this amount is approximately
$507 representing the reclassification of Tweeds, Inc.'s financial
statements to conform with the Company's reporting classifications.
B. Represents the elimination of approximately $3,408 and $2,334 of costs
related to operations not acquired for Gump's, Inc. and Company Store
Holdings, Inc., respectively. Also included in this amount is approximately
$5,051 representing certain reclassifications of Tweeds, Inc.'s financial
statements to conform with the Company's reporting classifications.
C. Represents the elimination of approximately $2,902 and $1,356 of costs
related to operations not acquired for Gump's, Inc. and Company Store
Holdings, Inc., respectively. Also, approximately $4,544 representing
certain reclassifications of Tweeds, Inc.'s financial statements to conform
with the Company's reporting classifications; approximately $3,188 of
occupancy and payroll costs that are being eliminated from the operations of
Gump's, Inc. due to the downsizing of the Gump's, Inc. retail store, and
approximately $492 of additional costs for the amortization of the Tweeds,
Inc.'s and Gump's, Inc.'s mailing list.
D. Represents the elimination of approximately $545 of costs related to
operations not acquired for Gump's, Inc.; approximately $186 of amortization
of goodwill associated with the purchase of Tweeds, Inc. and Gump's, Inc.;
approximately $2,028 of costs for store and equipment leases, depreciation
expense and reorganization and amortization costs that are being eliminated
from Company Store Holdings, Inc.
E. Represents the elimination of higher interest expense for Gump's, Inc.
($2,140), Company Store Holdings, Inc. ($1,817) and Tweeds, Inc. ($119) as
the result of the elimination of certain operations.
-4-
<PAGE> 110
HANOVER DIRECT, INC.
CONDENSED PRO FORMA INCOME STATEMENT
NINE MONTHS ENDED SEPTEMBER 25,
(UNAUDITED)
<TABLE>
<CAPTION>
(In thousands) Gump's, Inc. Company Store
Hanover Direct, Inc. Twenty-seven Holdings, Inc.
Nine Months Ended Weeks Ended Eight Months Ended
September 25, 1993 July 11, 1993 August 25, 1993
----------------------------------------------------------------
<S> <C> <C> <C>
REVENUES $ 413,774 $ 27,309 $ 31,151
Operating costs and expenses:
Costs of sales and operating expenses 266,378 16,178 26,553
Selling expenses 99,250 8,230 6,285
General administrative expenses 38,190 5,745 4,419
----------------------------------------------------------------
INCOME FROM OPERATIONS 9,956 (2,844) (6,106)
----------------------------------------------------------------
Interest and other income (expense):
Interest expense (3,557) (1,367) (546)
Interest income 1,735 0 0
Other income (expense) 836 0 (56)
----------------------------------------------------------------
(986) (1,367) (602)
Income tax benefit (355) 0 0
----------------------------------------------------------------
Net income (loss) $ 9,325 $ (4,211) $ (6,708)
================================================================
Net income (loss) per share: $ 0.09
================
</TABLE>
<TABLE>
<CAPTION>
(In thousands)
Tweeds, Inc.
Nine Months Ended Pro
September 26, 1993 Adjustments Pro Forma
-------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $ 24,513 $ (1,735) A $ 495,012
Operating costs and expenses:
Costs of sales and operating expenses 15,426 (1,569) B 322,966
Selling expenses 6,910 (1,797) C 118,878
General administrative expenses 3,328 (1,966) D 49,716
--------------------------------------------------------------
INCOME FROM OPERATIONS (1,151) 3,597 3,452
--------------------------------------------------------------
Interest and other income (expense):
Interest expense (379) 1,491 E (4,358)
Interest income 1,735
Other income (expense) 184 964
--------------------------------------------------------------
(195) 1,491 (1,659)
Income tax benefit (355)
--------------------------------------------------------------
Net income (loss) $ (1,346) $ 5,088 $ 2,148
==============================================================
$ .03
Net income (loss) per share: =============
</TABLE>
A. Represents the elimination of revenues related to operations not acquired
for Company Store Holdings, Inc.
B. Represents the elimination of costs related to operations not acquired for
Company Store Holdings, Inc.
C. Represents the elimination of approximately $1,364 and $739 of costs
related to operations not acquired for Gump's, Inc. and Company Store
Holdings, Inc., respectively, and approximately $306 of additional costs
for the amortization of Tweeds, Inc.'s and Gump's, Inc.'s mailing list.
D. Represents the elimination of approximately $1,357 of net reorganization
and amortization costs for Gump's Inc., Company Store Holdings, Inc. and
Tweeds, Inc., and the elimination of approximately $609 of store and
equipment leases and depreciation expense for Company Store Holdings, Inc.
E. Represents the elimination of higher interest expense for Gump's, Inc.
($1,270), Company Store Holdings, Inc. ($146) and Tweeds, Inc. ($75) as the
result of the elimination of certain operations.
-5-
