FORM 10-Q SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended NOVEMBER 2, 1995
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-2759
McCRORY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
13-5580679
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification No.)
667 Madison Avenue, New York, New York 10021
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 735-9500
Indicate by check mark whether registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
At December 1, 1995, there were outstanding 11,111,111
shares of
common stock, par value $.50 per share, all of which were owned by
affiliates
of the registrant.
Applicable only to Issuers Involved
In Bankruptcy Proceedings During
the Preceding Five Years
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
Not Applicable X Yes No
FORM 10-Q
McCRORY CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
FORM 10-Q
McCRORY CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
UNAUDITED STATEMENTS OF CONSOLIDATED OPERATIONS
13 Weeks Ended 39 Weeks Ended
November 2, November 3, November 2, November 3,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
(In Thousands)
Revenues:
Net sales . $131,669 $187,927 $428,590 $581,229
Other - net . 5,419 3,141 17,113 9,932
Total revenues 137,088 191,068 445,703 591,161
Cost and Expenses:
Cost of goods sold 92,779 133,240 298,286 416,110
Selling, general and
administrative expenses 44,855 58,156 139,527 172,918
Depreciation and
amortization.. 3,231 4,935 10,613 15,829
Interest and debt expense
(excludes contractual interest expense of $5,197,000
and $15,779,000 for the 13 and 39 weeks ended
November 2, 1995, respectively, and $4,986,000 and
$14,774,000 for the 13 and 39 weeks ended
November 3, 1994,
respectively) . 2,849 1,995 6,451 4,271
Restructuring charges ... 21,844 - 26,600 -
Total costs and
expenses ... 165,558 198,326 481,477 609,128
Loss from Operations Before
Reorganization Items and
Provision for Income
Taxes ... (28,470) (7,258) (35,774) (17,967
Reorganization Items -
Professional fees and other
expenses directly related
to the bankruptcy ...... 2,500 3,000 8,800 11,000
Loss from Operations Before
Provision for Income
Taxes .... (30,970) (10,258) (44,574) (28,967)
Provision for Income
Taxes ...... 62 62 186 185
Net Loss ....... $(31,032) $(10,320) $(44,760) $(29,152)
See Notes to Consolidated Financial Statements.<PAGE>
FORM 10-Q
McCRORY CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
November 2,
1995 February 2,
(Unaudited) 1995
<C> <C>
ASSETS (In Thousands)
CURRENT ASSETS:
Cash and cash equivalents . $ 7,302 $ 8,573
Receivables:
Customers' accounts 6,675 3,143
Affiliates .............. 175 175
Sundry .................. 6,540 3,500
Allowances for doubtful
accounts .............. (303) (257)
Merchandise inventories (at lower of cost or
market, principally FIFO) 219,852 189,308
Self-insurance funds on deposit 8,304 8,304
Prepaid expenses .......... 9,698 5,309
Total current assets .... 258,243 218,055
PROPERTY AND EQUIPMENT:
Property and equipment -
at cost ................ 134,645 157,464
Less accumulated depreciation
and amortization ... 81,460 95,526
53,185 61,938
Capital leases, less accumulated
amortization .... 1,608 3,352
Property and equipment - net 54,793 65,290
OTHER ASSETS:
Excess of cost of investments over related
equities - net ............. 31,171 34,721
Lease acquisition costs - net 10,904 14,050
Self-insurance funds on deposit 31,022 31,022
Sundry ....................... 2,754 2,871
Total other assets ......... 75,851 82,664
TOTAL .................... $388,887 $366,009
See Notes to Consolidated Financial Statements.<PAGE>
FORM 10-Q
McCRORY CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
November 2,
1995 February 2,
(Unaudited) 1995
<C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIENCY (In Thousands)
CURRENT LIABILITIES
Post-Petition Revolving Credit Agreement $ 75,834 $ 14,396
Accrued expenses and sundry ................ 53,044 53,246
Accounts payable ........................... 45,490 37,409
Note payable to K and K, L.P. .............. 20,000 20,000
Due to Astrum International Corp. .......... 14,000 14,000
Reserves for store closings ................ 2,495 3,707
Capital lease obligations .................. 213 398
Current maturities of long-term debt ....... 18 48
Total current liabilities ................ 211,094 143,204
LIABILITIES SUBJECT TO SETTLEMENT UNDER
REORGANIZATION PROCEEDINGS ................. 408,038 403,291
LONG-TERM DEBT, LESS CURRENT MATURITIES ...... 120 239
OTHER NONCURRENT LIABILITIES:
Reserve for self-insurance ................. 15,048 17,447
Capital lease obligations .................. 1,292 4,003
Retirement benefits ........................ 33,824 33,820
Reserves for store closings ................ - 168
Sundry ..................................... 7,477 7,583
Total other noncurrent liabilities ....... 57,641 63,021
REDEEMABLE PREFERENCE STOCK SUBJECT TO
SETTLEMENT UNDER REORGANIZATION PROCEEDINGS 3,445 3,445
STOCKHOLDERS' DEFICIENCY:
Capital stock:
Preference stocks ....................... 15,598 15,598
Common stock - $.50 par value; authorized
11,200,000 shares; outstanding
11,111,111 shares ..................... 5,556 5,556
Additional paid-in capital ................. 358,117 358,117
Deficit .................................... (670,782) (626,462)
Unrealized gain on available-for-sale
securities.. 60 -
Total stockholders' deficiency ......... (291,451) (247,191)
TOTAL ............................... $ 388,887 $ 366,009
See Notes to Consolidated Financial Statements.<PAGE>
FORM 10-Q
McCRORY CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
UNAUDITED STATEMENT OF
STOCKHOLDERS' DEFICIENCY
FOR THE 39 WEEKS ENDED NOVEMBER 2, 1995
Additional Available -
Preference Common Paid-In For-Sale
Stocks * Stock Capital Deficit Securities
<C> <C> <C> <C> <C>
(In Thousands)
Balance, February 3, 1995 ......
$15,598 $5,556 $358,117 $(626,462) $ -
Net loss........................
(44,760)
Unrealized gain on available-
for-sale securities...........
60
Amortization of capital charge
related to the December 1990
acquisition of a leasehold
interest .....................
440
Balance, November 2, 1995.......
$15,598 $5,556 $358,117 $(670,782) $ 60
* Had McCrory not filed for protection under Chapter 11 of the
Bankruptcy Code
preferred
dividend payments would have been approximately $729,000, including
$96,000
of dividend
payments on preference stock of subsidiary, for the 39 weeks ended
November
2, 1995.
See Notes to Consolidated Financial
Statements.
FORM 10-Q
McCRORY CORPORATION AND
SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
UNAUDITED STATEMENTS OF
CONSOLIDATED CASH FLOWS
For the 39 Weeks Ended
November 2, November 3,
1995 1994
<C> <C>
(In Thousands)
Cash Flows from Operating Activities:
Loss from operations after income taxes before
reorganization items . $(35,960) $(18,152)
Adjustments to reconcile loss from operations after income
taxes before reorganization items to net cash used in
operating activities:
Depreciation and amortization (including intangibles)..
10,613 15,829
Gain on sales of property, equipment,
leaseholds and artwork....... (11,977) (3,111)
Restructuring charges.... 26,600 -
Other non-cash charges to operating
activities ....................... 2,149 4,070
Changes in operating assets and liabilities:
(Increase) decrease in receivables - net
(5,630) 5,423
Increase in merchandise inventories (41,942) (54,755)
Increase in prepaid expenses ... (4,403) (205)
Increase in accounts payable and accrued expenses
and sundry ...................... 496 1,088
Payments for charges to reserves for store closings .
(3,954) (6,456)
Payments for retirement benefits (2,231) (1,351)
Other - net ...... (49) (263)
Total adjustments ... (30,328) (39,731)
Net cash used in operating activities before
reorganization items ..... (66,288) (57,883)
Operating cash flows used for reorganization items:
Professional fees paid for services rendered in
connection with the Chapter 11
proceedings .......... (4,061) (6,031)
Loan fees paid in connection with the Post-Petition
Credit Agreement .................. (1,135) (2,764)
Net cash used in reorganization
items ............. (5,196) (8,795)
Net Cash Used in Operating Activities $(71,484) $(66,678)
See Notes to Consolidated Financial Statements.
FORM 10-Q
McCRORY CORPORATION AND
SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
UNAUDITED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Concluded)
For the 39 Weeks Ended
November 2, November 3,
1995 1994
(In Thousands)
Cash Flows from Investing Activities:
Proceeds from sales of property, equipment,
leaseholds and artwork.... $14,345 $ 4,053
Proceeds from sale of Newberry Canada - 1,943
Purchases of property and equipment . (5,278) (3,489)
Net Cash Provided by Investing Activities 9,067 2,507
Cash Flows from Financing Activities:
Proceeds from Post-Petition Credit Agreement 530,494 588,016
Payments of Post-Petition Credit Agreement (469,056) (539,487)
Proceeds from note issued to K and K, L.P... - 20,000
Payment to Astrum International Corp. ...... - (14,000)
Payments of other long-term debt ............. (17) (52)
Principal payments under capital lease
obligations (275) (468)
Net Cash Provided by Financing Activities .. 61,146 54,009
Net Decrease in Cash and Cash Equivalents . (1,271) (10,162)
Cash and Cash Equivalents at Beginning of Period 8,573 18,099
Cash and Cash Equivalents at End of Period $ 7,302 $ 7,937
Cash Paid During the Period for:
Interest ................................... $ 5,407 $ 3,527
Income taxes .............................. $ 82 $ 132
See Notes to Consolidated Financial Statements.
</TABLE>
McCRORY CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(A)
On February 26, 1992 (the "Petition Date"), McCrory Corporation,
("McCrory") and 27 of its subsidiaries, including all of its principal
subsidiaries (collectively, the "Debtors") except for J.J. Newberry Canadian,
Ltd. ("Newberry Canada"), McCrory's then owned Canadian subsidiary, and
York Insurance Company of Vermont ("York Insurance"), McCrory's captive
reinsurance subsidiary, and certain inactive subsidiaries, filed voluntary
petitions for relief under chapter 11 title 11 of the United States Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the Southern
District of New York (the "Bankruptcy Court"). The cases have been
assigned numbers 92-B-41133 through 92-B-41160 (CB). The separate
chapter 11 cases of the Debtors have been consolidated for procedural
purposes and are being jointly administered pursuant to an order of the
Bankruptcy Court (collectively, the "Chapter 11 Case").
The Chapter 11 Case was commenced by the Debtors because of a
combination of three factors: (i) the necessity of restructuring the
$74,980,000 principal amount of McCrory Senior Subordinated Exchangeable
Variable Rate Notes originally due July 15, 1994 that were "put" to McCrory
for payment in July 1992, thereby accelerating their maturity by two years,
and for which McCrory was unable, under then existing credit market
conditions, to obtain refinancing; (ii) the inability of the Debtors to obtain
trade credit on normal terms in the months leading up to the filing caused by
uncertainties related to the "put" described above and the significant number
of bankruptcy filings by retail chains, which resulted in increased reluctance
on the part of trade creditors to provide credit in uncertain retail situations;
and (iii) a need to reduce the costs associated with the Debtors' efforts to
effect restructurings through the elimination of a large number of
unprofitable stores and warehouses and relay facilities. It was more
difficult for the Debtors to address these factors because of the
depression in the nation's retail markets caused by the recession and
associated low levels of consumer confidence and spending, which caused
numerous other bankruptcy filings by major retailers.
On February 15, 1992, McCrory did not make the required payment at
maturity of $3,369,000 principal amount or pay the interest on their 6-1/2%
Convertible Subordinated Debentures. These factors, coupled with the
withholding by their vendors of normal credit terms and the difficult retail
environment, enhanced the desirability of seeking court protection. On
February 25, 1992, management concluded that the sources of liquidity and
other financing alternatives necessary to enable McCrory to meet both
itsshort-term and long-term cash requirements would not be available absent
the protection afforded post-petition lenders and creditors under the
Bankruptcy Code. On February 26, 1992, the Debtors commenced the
Chapter 11 Case.
Since the Petition Date, the Debtors have continued in possession of their
respective properties and are operating and managing their business as
debtors-in-possession pursuant to Sections 1107 and 1108 of the Bankruptcy
Code. The Debtors have sought, obtained, and are in the process of applying
for various orders from the Bankruptcy Court intended to stabilize their
business and minimize the disruption caused by the Chapter 11 Case,
including (i) authorizing the Debtors to pay certain pre-petition liabilities,
wages and other employee obligations; (ii) authorizing the Debtors to operate
their cash management systems substantially as they were operated prior to
the Chapter 11 Case; (iii) approving $120,000,000 of post-petition working
capital financings, as amended (as more fully described in Note H); (iv)
rejecting numerous nonresidential real property leases; (v) settling the
claims asserted against the Debtors by, among others, Astrum International
Corp. ("Astrum"), formerly E-II Holdings Inc., and its subsidiaries and
McCrory Parent Corp. ("MPC"); (vi) obtaining an order granting the Debtors
the exclusive right to obtain acceptances to its plan of reorganization
through January 31, 1996, subject to the right of any party in interest to
move to terminate exclusivity pursuant to the Bankruptcy Code; and (vii)
other orders necessary to preserve the value of its assets and operate its
business efficiently and effectively.
Shortly after the Petition Date, the United States Trustee for the Southern
District of New York appointed the members of the Official Committee of
Unsecured Creditors ("Creditors' Committee") for the Chapter 11 Case. The
role of the Creditors' Committee includes, among other things: (a)
consultation with the Debtors concerning the administration of the Chapter
11 Case; (b) investigation of the acts, conduct, assets, liabilities,
financial condition and operations of the Debtors, and the desirability of
the continuation of its business and other relevant matters; and (c)
participation in the formulation of a plan of reorganization. In discharging
these responsibilities, the Creditors' Committee has standing to raise issues
with the Bankruptcy Court relating to the business of the Debtors and the
conduct and course of the Chapter 11 Case. The Debtors are required to pay
certain expenses of the Creditors' Committee, including professional fees,
to the extent allowed by the Bankruptcy Court. For other information
concerning the bankruptcy process, see Note F and Part II "Other
Information," - Item 1 - "Legal Proceedings."
On December 7, 1992, the Debtors filed a joint plan of reorganization (as
amended, the "Plan"), which was subsequently amended concurrent with the
filing on February 19, 1993 of the disclosure statement for the Plan with the
Bankruptcy Court. On October 19, 1995, the Debtors filed a second
amended joint plan of reorganization (the "Amended Plan") and a disclosure
statement (the "Disclosure Statement") with the Bankruptcy Court. The
Amended Plan reflects an agreement between the Creditors' Committee
regarding the terms of the proposed restructuring of the Debtors. The
Amended Plan provides that Meshulam Riklis, Chairman and Chief Executive
Officer of McCrory ("Riklis") and certain of his children and grandchildren,
to be determined prior to the Amended Plan effective date, and/or entities
that are beneficially owned 100% by any one or more of the foregoing (the
"Riklis Family Group") will cause $50,000,000 to be contributed to
reorganized McCrory in exchange for 69% of the new common stock, a
$20,000,000 junior subordinated note, and 500,000 stock appreciation rights.
In full, complete satisfaction, release and discharge of existing creditor
claims: (i) McCrory's general unsecured creditors will receive 16.74% of
their allowed claims in 11% McCrory Senior Subordinated Notes which are
payable 20% of the original principal amount on each of December 31, 1996,
December 31, 1997, December 31, 1998, December 31, 1999 and December
31, 2000, with accrued interest from August 29, 1995 to the Amended Plan
effective date. Holders of Allowed Insured Claims as defined in the
Amended Plan) will be entitled to receive the lesser of (a) 16.74% of such
holder's Allowed Insured Claim and (b) $83,700 in cash, with interest
payable at 11% per annum, payable as follows: 20% of such amount on
each of the first, second, third, fourth and fifth anniversary of the later of
(A) December 31, 1995 and (B) the date a Disputed Insured Claim becomes and
Ultimately Allowed Insured Claim and to the extent such holder's Allowed
Insured Claim exceeds $500,000, the legal, equitable and contractual rights,
if any, to which the Allowed Insured Claim entitles the holder of such claim
against an insurance company under McCrory's general liability insurance
program, if any, shall remain unaltered; (ii) holders of McCrory's Senior
Subordinated Exchangeable Variable Rate Notes (as defined in the Amended
Plan) will receive their pro rata share of $38,156,394 in cash together with
interest on that amount accrued at 11% from August 29, 1995 to the
Amended Plan effective date and 12% of the new common stock to be issued
by reorganized McCrory; (iii) holders of McCrory's Subordinated Debentures
(as defined in the Amended Plan) will receive their pro rata share of 19% of
the new common stock to be issued by reorganized McCrory; and (iv)
McCrory's equity holders will receive no recovery and all existing equity
securities will be extinguished. Pursuant to Section 1125 of the Bankruptcy
Code, a hearing on the adequacy of the Disclosure Statement for the
Amended Plan has been scheduled for January 23, 1996 by the Bankruptcy
Court. Consummation of a plan of reorganization is subject to the review
and approval by the Bankruptcy Court, satisfaction of certain conditions
precedent to confirmation, including, but not limited to, a release of Riklis
by the Astrum Settlement Trust (as defined in the Amended Plan and see
Note K), obtaining adequate post-confirmation financing and satisfaction of
confirmation requirements contained in the Bankruptcy Code. By notice
dated October 20, 1995, the Bankruptcy Court set December 13, 1995 as the
date for a hearing to consider approval of the Disclosure Statement. The
hearing was subsequently adjourned until January 23, 1996.
On October 20, 1995, the Bankruptcy Court signed a consent order
pursuant to which the Debtors' exclusive right to solicit acceptances of their
Amended Plan was extended to January 31, 1996. The consent order further
provides that, if the Amended Plan is not consummated on or before January
31, 1996, the Debtors shall have the sole and exclusive right to automatically
further extend the solicitation period through March 31, 1996. In addition,
if the solicitation period is so extended, and the Amended Plan is not
consummated on or before March 31, 1996, the solicitation period will
automatically further extend through and including June 30, 1996; provided
however, that, from and after March 31, 1996, the Creditors' Committee
may file a plan in the Chapter 11 Case.
(B) The 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 Case and the uncertainties inherent
in that process, realization of assets and liquidation of liabilities are
subject to significant uncertainty. Under the protection of the Bankruptcy
Court, the Debtors may sell or otherwise dispose of assets, and liquidate or
settle liabilities and redeemable preference stock for amounts different from
those reflected in the consolidated financial statements. Further, a plan of
reorganization could materially change the amounts reported in the
consolidated financial statements, which do not reflect any adjustments to the
carrying value of assets or amountsof liabilities or redeemable preference
stock that might be necessary as a consequence of a plan of reorganization.
Accordingly, realization of the Debtors' assets and liquidation of their
liabilities in the ordinary course of business is dependent upon, among other
things, the Debtors' ability to (i) obtain approval of the creditors,
shareholders, and other interested parties and confirmation by the Bankruptcy
Court of a plan of reorganization; (ii) maintain continuance of and
compliance with the Post-Petition Revolving Credit Agreement dated as of
February 24, 1992, as amended (the "Post-Petition Credit Agreement"), see
Note H and (iii) achieve satisfactory levels of future operating profit and cash
flow that will support a plan of reorganization and necessary
post-confirmation financing. As a result of the Chapter 11 Case, the
realization of the benefits associated with downsizing the chain and the
elimination of the uncertainties involving the ability of McCrory to obtain
trade credit on a timely basis, among other matters, management views the
time operating as debtors-in-possession as a transitional period. Management
of McCrory plans to operate the chain as a going concern (although as part
of its ongoing review of operations, management may elect to close additional
stores) and seeks to grow the chain through adding stores in existing and new
markets, where McCrory can successfully compete. Management believes
that both discretionary and nondiscretionary spending will remain at
acceptable levels and management is continuing to work with vendors to
buildinventory levels and develop an inventory mix that is responsive to
current consumer spending habits and McCrory's merchandising plans.
Management believes that its fiscal 1995 merchandising plans will generate
sufficient sales and cash flow for the Debtors to continue to operate as a
going concern under the protection of the Bankruptcy Code. However,
consumer spending patterns and other economic factors, including closing of
stores by competition, that can significantly affect the retailing business and
management's fiscal 1995 merchandising plans cannot be projected with any
certainty. Management believes that reorganization under chapter 11 results
in the most favorable treatment of creditors, shareholders and other interested
parties. If the Amended Plan is accepted by creditors and confirmed by the
Bankruptcy Court, McCrory anticipates that it will emerge from the Chapter
11 Case during fiscal 1996. As discussed above, for financial reporting
purposes the consolidated financial statements have been prepared on a going
concern basis. In addition, the Debtors have applied the provisions of the
American Institute of Certified Public Accountants Statement of Position
90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("SOP 90-7"). Substantially all of the Debtors'
obligations, except for obligations under the Post-Petition Credit Agreement
and the subordinated financing from K and K (see Note H), were in default
in accordance with the terms of the applicable loan agreements,
notes, debentures and indentures. In accordance with SOP 90-7, those
liabilities and obligations whose disposition is dependent upon the outcome
of the Chapter 11 Case have been segregated and classified as "Liabilities
Subject to Settlement Under Reorganization Proceedings" in the consolidated
balance sheets at November 2, 1995 and February 2, 1995 (see Note F).
Likewise, the redeemable preference stock of the Debtors whose disposition
is also dependent upon the outcome of the Chapter 11 Case has been
segregated and classified as "Redeemable Preference Stock Subject to
Settlement Under Reorganization Proceedings" (see Note F). The Debtors
discontinued accruing interest and amortizing original issue discount on their
pre-petition debt obligations as of February 26, 1992. The ultimate adequacy
of security for any collateralized pre-petition debt obligations cannot be
determined until a plan of reorganization is confirmed.
(C)
In the opinion of the management of McCrory, the unaudited consolidated
financial statements for the 13 and 39 weeks ended November 2, 1995 and
November 3, 1994 include all adjustments, which comprise only normal
recurring accruals, necessary for a fair presentation of the results for such
periods. To facilitate comparison with the current period, certain amounts
in the prior period have been reclassified. It is suggested that these
unaudited consolidated financial statements be read in conjunction with the
consolidated financial statements and the notes thereto, Item 3 - "Legal
Proceedings," Item 5 - "Market for McCrory's Common Stock and Related
Stockholder Matters" and Item 13 - "Certain Relationships and Related
Transactions," all included in McCrory's Annual Report
on Form 10-K (the "Form 10-K") for the year ended February 2, 1995,
which has been filed with the Securities and Exchange Commission.
(D)
Since McCrory's business is seasonal in nature, the operating results for the
13 and 39 weeks ended November 2, 1995 and November 3, 1994 are not
necessarily indicative of the operating results which may normally be
expected for the full year. McCrory historically achieves its best operating
results during the Christmas selling season, which begins in November.
(E)
Eggregate proceeds received by McCrory from sales of property,
equipment,leaseholds and artwork were approximately $14,345,000 and
$4,053,000 and gains of approximately $11,977,000 and $3,111,000 were
recorded in other revenues for the 39 weeks ended November 2, 1995 and
November 3, 1994, respectively.
(F)
Petition Date liabilities that are expected to be settled as part of a plan of
reorganization are separately classified in the consolidated balance sheets and
include the following (all or a portion of which may be disputed by the
Debtors):
<TABLE>
1995
November 2, February 2,
(In Thousands)
<C> <C>
Accrued expenses and sundry . . . . . . . . .$ 6,204 $ 6,204
Accounts payable . . . . . . . . . . . . . 97,504 97,673
Accrued Federal income taxes . .. . . . . 6,486 6,486
Debt . . . . . . . . . . . . . . . . . . . 180,084 179,952
Reserve for self-insurance. . . . . . . . . 21,895 21,895
Reserves for store closings (see Note G). . 73,499 68,617
Deferred compensation and benefits . . . . 7,971 8,069
Sundry . . . . . . . . . . . . . . . . . . . 14,395 14,395
Total . . . . . . . . . . . . . . . . . $408,038 $403,291
</TABLE>
Redeemable preference stock, representing minority interest in Newberry, is
expected to be settled as part of a plan of reorganization and is separately
classified in the consolidated balance sheets.
Liabilities subject to settlement under reorganization proceedings include
McCrory's present estimates of substantially all liabilities as of the
Petition Date. As discussed above, payment of these liabilities, including
the maturity of debt obligations, are stayed while the Debtors continue to
operate their business as debtors-in-possession. The Debtors notified all
known or potential claimants for the purpose of identifying all pre-petition
claims against the Debtors. Additional bankruptcy claims and pre-petition
liabilities may arise by termination of contractual obligations, Bankruptcy
Court determination of allowed claims, and as certain contingent and/or
potentially disputed bankruptcy claims are settled for amounts which may
differ from those shown in the consolidated balance sheets.
The Bankruptcy Court entered an order, dated August 20, 1992, setting
September 28, 1992 as the last day for filing proofs of claim in the Chapter
11 Case (an earlier bar date of August 15, 1992 applied to pre-Petition Date
tort claims). Creditors who failed to file proofs of claim in respect of
pre-Petition Date claims before that date are barred from thereafter
asserting such claims against the Debtors, except for proofs of claim arising
from the rejection of executory contracts or unexpired leases after August
20, 1992 (which proofs of claim must have been or be filed before the later
of September 28, 1992 or the date set forth in the order of the Bankruptcy
Court authorizing such rejection). Creditors whose claims were listed in any
of the schedules filed by the Debtors in an amount and/or classification with
which such creditors agreed, and which claims were not listed in the
schedules as disputed, contingent or unliquidated, were not required to file
proofs of claim.
The Debtors are in the process of reconciling creditors' proofs of claim
filed with the Bankruptcy Court that differ in amount from the Debtors'
records. Certain creditors have filed claims substantially in excess of
amounts reflected in the Debtors' records. Based on ongoing analyses of
claims filed, the nature of such differences has been identified as being
attributable to duplicate claims for the same obligation filed with several,
and in certain cases all the Debtors; damages sought in legal suits, certain
of which, in the opinion of management, are of dubious merit; certain
contingent liabilities arising from contracts and other claims filed against
the Debtors; creditors claiming compensation and/or damages for completed
and
partially completed contracts and purchase orders; damages arising out of the
rejection of non-residential real property leases substantially in excess of
the maximum claim allowed under Section 502 (b)(6) of the Bankruptcy
Code
and other disputed items. In addition, claims have been filed which do not
state a specific claim amount or as to which a specific claim amount is not
readily determinable.
After completion of reconciliations, any remaining differences may be
resolved by negotiated agreement between the Debtors and the claimant or
by
the Bankruptcy Court as part of the Chapter 11 Case. Consequently, the
amounts included in the consolidated balance sheets at November 2, 1995 and
February 2, 1995 as liabilities and redeemable preference stock subject to
settlement under reorganization proceedings may be subject to adjustment.
The Debtors have made appropriate provision for all claims of creditors it
believes are valid; however, at this time, the Debtors cannot make a
prediction as to the aggregate amount of claims allowed or the ultimate
treatment of such allowed claims under a plan of reorganization.
(G)
In the last four fiscal years, management instituted programs to close 640
stores, two relay facilities and two warehouse facilities. In July and
October 1995, as part of management's ongoing review of store locations and
in connection with the Debtors' business reorganization plan, 19 and 118
additional store closings were indentified (the "Closing Stores") and,
accordingly, $4,756,000 and $21,844,000 pre-tax provisions were recorded
as restructuring charges, respectively. This provision includes costs
associated with closing stores, reductions in personnel and the write-off of
certain intangible assets. Twenty-five of the Closing Stores are to be sold
and 24 have leases which expire with no further option periods. The lease
obligations and related reserve for store closings have been reflected at the
estimated amount of the eventually allowed claims of the lessors in the
Chapter 11 Case as prescribed by Section 502 of the Bankruptcy Code for
rejection of leases. The lease obligations and related reserves for store
closings include numerous nonresidential real property leases rejected and
to be rejected and amounts for other executory contracts that have been
identified for rejection pursuant to Section 365 of the Bankruptcy Code (see
Note F). Sales of all stores that were closed were $19,536,000 and
$62,492,000, and $81,224,000 and $207,053,000 for the 13 and 39 weeks
ended
November 2, 1995 and November 3, 1994, respectively.
On November 6, 1995, the Bankruptcy Court approved the Debtors'
application to conduct going-out-of-business sales at the Closing Stores for
a period of approximately ninety days commencing on November 1, 1995 and
ending on or about January 31, 1996.
(H)
On the Petition Date, the Bankruptcy Court entered an interim order
approving the availability of $40,000,000 under the Post-Petition Credit
Agreement, among McCrory, as borrower, The CIT Group/Business Credit,
Inc. ("CIT"), as lender, and the subsidiaries of McCrory included in the
Chapter 11 Case, as guarantors. On March 17, 1992, the Bankruptcy Court
entered an order approving the remaining $60,000,000 of the Post-Petition
Credit Agreement. The Post-Petition Credit Agreement was amended and
restated as of March 31, 1992 to allow CIT to assign portions of any loans
made thereunder to certain other lenders (collectively with CIT, the
"Lenders"), for which CIT now acts as agent. The Post-Petition Credit
Agreement enables McCrory to finance general working capital requirements
including purchases of inventory and other expenditures permitted thereunder
generally through the earlier of February 28, 1996, or the date of the
substantial consummation of a plan of reorganization for McCrory that has
been confirmed by an order of the Bankruptcy Court. The Lenders'
commitment under the Post-Petition Credit Agreement is to make revolving
loans and issue letters of credit up to an amount determined by a formula,
which is principally based on the retail value of McCrory's inventory, but in
any event not to exceed $100,000,000 with a $30,000,000 sublimit for
documentary letters of credit, and a $5,000,000 sublimit for standby letters
of credit. At November 2, 1995 and February 2, 1995, the availability
determined by such formula under the Post-Petition Credit Agreement was
approximately $87,004,000 and $62,000,000, respectively. At November 2,
1995, there were direct borrowings of approximately $75,834,000, letters of
credit of $3,163,000, and standby letters of credit of $2,048,000 outstanding
under the facility. At February 2, 1995, there were direct borrowings of
$14,396,000, letters of credit of $9,084,000 and standby letters of credit of
$168,000 outstanding under the facility. Obligations under the Post-Petition
Credit Agreement have super priority administrative expense claim status in
the Chapter 11 Case (subject to certain limited exceptions) and are secured
by liens on and security interests in all assets and property of the Debtors,
other than inventory and the stock of York Insurance. Such liens and
security interests are junior to any liens existing on the Petition Date. The
Post-Petition Credit Agreement provides that outstanding loans shall bear
interest at the rate of 1-1/2% over the Reference Rate publicly announced by
Chemical Bank in New York, New York, 10.25% and 10.5% at November
2, 1995 and February 2, 1995, respectively, which is payable monthly in
arrears. On March 17, 1994, the Bankruptcy Court approved an amendment
which provided, among other matters, that the Debtors could, if no default
existed as of December 31, 1994, extend the termination date of the facility
until August 31, 1995. In addition, all prior defaults were waived and
covenants were established for the year ending February 2, 1995. In
connection therewith, McCrory paid to the lenders a $2,000,000
non-refundable fee. In April 1994, for the year ending February 2, 1995,
certain covenants were adjusted to reflect the closing of approximately 23
stores. On February 16, 1995, the Bankruptcy Court approved a further
amendment which provided for the waiver of any covenant defaults for 1994,
permitted the closing of stores and liquidation of inventory at these stores,
which has been completed, extended the termination of the facility until
August 31, 1995, and established covenants for the period ending August 31,
1995. In connection with this amendment, McCrory paid the Lenders a
$500,000 non-refundable fee. On August 15, 1995 the Bankruptcy Court
approved a further amendment which extended the termination date of the
facility until February 28, 1996, and established covenants for the
period ending February 28, 1996. In connection with this amendment,
McCrory paid the Lenders a $250,000 non-refundable fee. The Post-Petition
Credit Aggreement, as amended, includes restrictions on capital expenditures,
liens, indebtedness, payments of pre-Petition Date obligations,
dividends, transactions with affiliates and the disposition of assets, as well
ascovenant requirements relating to maintaining, on a cumulative monthly
basis, a minimum level of cash flow (as defined) and authorization to open
a limited number of new stores. In addition, the Post-Petition Credit
Agreement requires a 22-day period of no direct borrowings (as defined in
the Post-Petition Credit Agreement) commencing no later than December 29,
1995 (the "Mandatory Clean-Up"). Based upon results of current operations,
the Debtors do not expect that they will be in compliance with the Mandatory
Clean-Up provision. However, after discussions with the Lenders, the
Debtors anticipate that the failure to comply with the Mandatory Clean-Up
provision will not result in a default under the Post-Petition Credit
Agreement.
In connection with the March 17, 1994 amendment, the Lenders required that
the Debtors obtain additional subordinated financing of $20,000,000. K and
K provided such funds in the form of a subordinated term loan. The
$20,000,000 loan is subordinated to the Lenders, has super
priority administrative expense claim status in the Chapter 11 Case (subject
to certain limited exceptions) and is secured by liens on and security interests
in all assets and property of the Debtors, other than inventory and the stock
of York Insurance, subject to the prior lien of the Lenders. The agreement
provides that the amounts outstanding bear interest, at the rate of 3% over the
Reference Rate publicly announced by Chemical Bank in New York, New
York, aggregating 11.75% and 12% at November 2, 1995 and February 2,
1995, respectively, which is payable monthly in arrears. This agreement has
the same covenant requirements and term as the Post-Petition Credit
Agreement and is amended or modified as necessary and appropriate to
reflect any amendments or modifications in the Post-Petition Credit
Agreement. The loan can only be repaid after all obligations under the
Post-Petition Credit Agreement are repaid. Additionally, the Lenders
required that $5,000,000 be deposited with them as additional security for
payment or performance of the Debtors' obligations under the Post-Petition
Credit Agreement. K and K provided that deposit which is guaranteed by the
Debtors. This agreement provides that, in consideration for such additional
support provided by K and K, the Debtors will pay an annual fee to K and
K of 6%, payable monthly in arrears. This additional financing was
approved by the Bankruptcy Court in connection with the March 17, 1994
amendment to the Post-Petition Credit Agreement.
(I)
McCrory and its domestic subsidiaries are included in the Riklis Family
Corporation ("RFC") consolidated Federal income tax return and in certain
of the RFC state income tax returns.
(J)
McCrory and its affiliates have agreements with B-R Fund Corporation ("B-R
Fund"), R-E Adjusting Corp. ("R-E Adjusting") and Riklis Holding Corp.
("RHC") to provide for the processing, adjusting and payment of self-insured
casualty claims. McCrory and its affiliates also have agreements with Old
Republic Insurance Company ("Old Republic") to provide for the
processing, adjusting and payment of certain casualty claims which are
reinsured with York Insurance. As of November 2, 1995 and February 2,
1995, the estimated reserve for future payment of such casualty liabilities of
McCrory (representing the present value, discounted at 7%, of the projected
future casualty liability payments of McCrory) and related overhead
amounted to approximately $39,326,000. The assets available to discharge
such casualty liabilities amounted to approximately $52,406,000 and
$51,058,000 as of November 2, 1995 and February 2, 1995, respectively, as
follows:
<TABLE>
November 2,1995 February 2, 1995
<C> <C>
B-R Fund . . . . . . . . . . . $28,673,000* $ 574,000
York Insurance . . . . . . . . 23,733,000 22,184,000
RHC . . . . . . . . . . . . . . - 28,300,000*
Total . . . . . . . . . . . . . $52,406,000 $51,058,000
*Includes World Wide Financial notes (the "World Wide
Notes") in the amount of approximately $6,590,000, notes of unaffiliated parties
of approximately $9,810,000 and
McCrory's publicly-traded subordinated debentures in the amount of
approximately
$11,900,000 which is equal
to
McCrory's carrying value as of November 2, 1995
and February 2, 1995. At November 2, 1995 and February
2, 1995,
the estimated fair value of such debentures
was approximately $837,000 and $1,166,000, respectively,
based on
quoted market prices. The World Wide
Notes are secured by a McCrory promissory note dated June
17,
1994 in the principal amount of $7,000,000
issued to K and K. The World Wide Notes were previously
secured by works of art owned by Riklis, which art is now consigned for sale
with Christie, Manson & Woods International, Inc.; however, if the works of art
are returned, RHC had agreed to again accept the art as collateral
for the World Wide Notes and to return the aforesaid McCrory promissory note to
K and K. RHC and B-R Fund
are in discussions regarding a similar arrangement. These assets were
included in RHC as of February 2, 1995. Securities previously held by RHC on
behalf of B-R Fund have been transferred to B-R Fund. Investments held by
York Insurance at November 2, 1995 and February 2, 1995 primarily represent
government securities and corporate bonds, generally with original
maturities of less than one to three years; such investments are classified
as available-for-sale securities and are reported at fair value. As of
November 2, 1995 gross unrealized gains were approximately $69,000 and gross
unrealized losses were approximately $9,000.
</TABLE>
During the 39 weeks ended November 2, 1995, payments were made by B-R
Fund of approximately $3,827,000 for adjustments and settlement of claims
and expenses in connection therewith. McCrory reimburses B-R Fund
monthly for adjustments, settlement of claims and expenses.
Because of the stay imposed by Section 362(a) of the Bankruptcy Code,
substantially all pre-petition casualty claims (other than workers'
compensation claims) against the Debtors are now stayed. Pre-petition
workers' compensation claims continue to be administered, adjusted and paid
by Old Republic.
By order of the Bankruptcy Court entered on July 7, 1992, all holders of pre-
petition tort claims against the Debtors (other than holders of workers'
compensation claims) were required to file a proof of claim in the Chapter
11 Case on or before August 15, 1992. Persons who failed to file a proof
of claim in respect of a pre-Petition Date tort claim before this date are
barred from asserting such claim against the Debtors. In addition, on August
19, 1992, the Debtors obtained an order (the "Settlement Order") of the
Bankruptcy Court authorizing B-R Fund and R-E Adjusting (collectively, the
"Adjustors") to enter into self-executing settlements of pre-Petition Date
tort claims against the Debtors. Pursuant to such settlements, pre-Petition
Date tort claims may be allowed as pre-Petition Date unsecured claims in the
amount of $10,000 or less or released and discharged in exchange for a
contemporaneous cash payment of up to $1,000 provided, however, that no
more than $200,000 may be disbursed during the Chapter 11 Case for such
purpose.
The Settlement Order also authorized the Adjustors to enter into self-
executing settlements of post-Petition Date tort claims against the Debtors
in exchange for immediate cash payments of up to $10,000, provided,
however, that no more than $400,000 of payments may be made in any
12-month period to release and discharge post-Petition Date tort claims.
Settlements of pre- and post-Petition Date tort claims are funded from the
amounts on deposit at B-R Fund.
(K)
A compromise and settlement agreement (the "Settlement Agreement")
between and among the Debtors, Astrum, MPC (which was liquidated and
dissolved by January 31, 1995) and their respective related entities, was
reached and approved by the Bankruptcy Court on May 24, 1993. See Part
II -"Other Information," Item 1 - "Legal Proceedings - Astrum/MPC
Settlement" and Item 3 - "Legal Proceedings" of Form 10-K.
(L)
McCrory and certain of its present and former affiliates are defendants in
various actions relating to the 1990 Restructuring. See Item 3 - "Legal
Proceedings - The 1990 Restructuring" of Form 10-K. The actions purported
to allege, among other things, that the 1990 Restructuring constituted
fraudulent transfers and common law fraud and violated defendants'
purported contractual duties of good faith and fair dealing. McCrory intends
to vigorously defend such actions and management of McCrory believes,
after discussion with counsel, that defenses are available to McCrory. If the
defenses of McCrory are upheld by the Bankruptcy Court, then the plaintiffs'
claims would be severely prejudiced and, in the opinion of management of
McCrory, would not have a material adverse effect on McCrory's
consolidated financial position or its ability to formulate and consummate a
plan of reorganization. Additionally, it is the position of McCrory that these
actions are derivative in nature and were fully and finally settled and
released pursuant to the Settlement Agreement among McCrory, Astrum and
MPC.
By virtue of the automatic stay imposed by Section 362 of the Bankruptcy
Code, substantially all pending pre-petition litigations are stayed as
against the Debtors.
McCrory and certain of its subsidiaries are defendants in various other
actions commenced by former stockholders, vendors, customers, present and
former employees, alleged competitors, and others. However, these cases
have been stayed pursuant to Section 362 of the Bankruptcy Code and will
be dealt with as part of the claims resolution process (see Note F). Similarly
situated persons have asserted claims against McCrory and its subsidiaries
but have not made those claims the subject of litigation. McCrory and its
subsidiaries intend to defend vigorously such actions and claims.
Management of McCrory believes, based upon its assessment of the actions
and claims outstanding against McCrory and its subsidiaries and further based
upon the experience of McCrory in successfully defending or making
favorable disposition of comparable actions commenced or comparable claims
asserted against McCrory and its subsidiaries, that the ultimate outcome of
such other actions and claims pending against McCrory and its subsidiaries
will not have a material adverse effect on its consolidated financial position.
Various other legal proceedings are pending against or otherwise relate to
McCrory and its subsidiaries, involving a variety of causes of action arising
from the operations of its business. Management does not consider any of
these other proceedings to materialize and does not expect such proceedings
to have a significant impact on the Debtors' business or the Debtors' ability
to formulate a consensual plan of reorganization.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
UNAUDITED RESULTS OF OPERATIONS
Results of Operations
Net sales decreased approximately $56,258,000 and $152,639,000 for the 13
and 39 weeks ended November 2, 1995, respectively. This decrease was
primarily attributable to store closings (130 stores closed in March 1995 and
39 stores closed in April 1994 offset in part by 8, 14, 19 and 10 stores
opened in the fourth quarter of 1994, first quarter, second quarter and third
quarter of 1995, respectively), and a generally weak retail environment.
Other revenues increased approximately $2,278,000 and $7,181,000 for the
13 weeks and 39 weeks ended November 2, 1995, respectively, primarily due
to sales of leaseholds and artwork. Merchandise gross profit (net sales less
cost of goods sold) which includes occupancy costs decreased approximately
$15,797,000 and $34,815,000 for the 13 and 39 weeks ended November 2,
1995, respectively. This was primarily attributable to the sales decrease;
however, as a percent of sales, gross profit improved 0.4% to 29.5% from
19.1% and 2.0% to 30.4% from 28.4% for the 13 and 39 weeks ended
November 2, 1995 over the prior year, respectively. This percentage increase
was primarily due to increasing the percentage of basic, rather than
promotional products in the merchandise mix, purchasing more imported
merchandise with a higher margin percentage than comparably produced
domestic products, and retail price increases in selected markets. Selling,
general and administrative expenses decreased approximately $13,301,000
and $33,391,000 for the 13 and 39 weeks ended November 2, 1995,
respectively, primarily due to store closings and reductions in work force
in the field and home office made during the fourth quarter of 1994 and the
first and third quarters of 1995.
Depreciation and amortization expenses decreased approximately $1,704,000
and $5,216,000 for the 13 and 39 weeks ended November 2, 1995,
respectively, primarily due to closing of stores and the write-off of certain
intangibles during the fourth quarter of 1994.
Interest and debt expense increased approximately $854,000 and $2,180,000
for the 13 and 39 weeks ended November 2, 1995, respectively, primarily
due to higher borrowings, increased interest rates and accrued interest from
February 3, 1995 on the Astrum settlement payable, which was due January
10, 1995. In July and October 1995, as part of management's ongoing review
of store locations, 19 and 118 additional store closings were identified and
accordingly, provisions of $4,756,000 and $21,844,000 were recorded as
restructuring charges, respectively.
The Company's net loss increased approximately $20,712,000 and
$15,608,000for the 13 and 39 weeks ended November 2, 1995, respectively.
The increase in net loss was primarily due to restructuring charges (recorded
in the second and third quarters of 1995) offset by gains on sales of
leaseholds and artwork that were recorded in the first and third quarters of
1995.
Liquidity and Capital Resources
During the 39 weeks ended November 2, 1995, McCrory and its subsidiaries
have funded working capital requirements, debt repayments, additions to
property and equipment and store revitalization costs through depreciation
and amortization of property and other assets, borrowings under the
Post-Petition Credit Agreement and sales of assets. See Notes E and H to
Consolidated Financial Statements.
As a result of the Chapter 11 Case, the realization of the benefits associated
with downsizing the chain and the elimination of the uncertainties involving
the ability of McCrory to obtain trade credit on a timely basis, among other
matters, management views the time operating as debtors-in-possession as a
transitional period. Management of McCrory plans to operate the chain as a
going concern (although as part of its ongoing review of operations,
management may elect to close additional stores) and seeks to grow the chain
through adding stores in existing and new markets, where McCrory can
successfully compete. Management believes that both discretionary and
non-discretionary spending will remain at acceptable levels and management
is continuing to work with vendors to build inventory levels and develop an
inventory mix that is responsive to current consumer spending habits and with
McCrory's merchandising plans. Management believes its fiscal 1995
merchandising plans will generate sufficient sales and cash flow for the
Debtors to continue to operate as a going concern under the protection of the
Bankruptcy Code. However, consumer spending patterns and other economic
factors, including the closing of stores by competitors, that can significantly
affect the retailing business and management's fiscal 1995 merchandising
plans cannot be projected with any certainty. Management believes that
reorganization under chapter 11 results in the most favorable treatment of
creditors, shareholders and other interested parties. If the Amended Plan is
accepted by creditors and confirmed by the Bankruptcy Court, McCrory
anticipates that it will emerge from the Chapter 11 Case during fiscal 1996.
Based upon results of current operations, the Debtors do not expect that they
will be in compliance with the Mandatory Clean-Up provision. However,
after discussions with the Lenders, the Debtors anticipate that the failure to
comply with the Mandatory Clean-Up provision will not result in a default
under the Post-Petition Credit Agreement. <PAGE>
Item 1. LEGAL PROCEEDINGS
Commencement of Chapter 11 Proceedings
General
As discussed in Note A to the Unaudited Consolidated Financial Statements,
on February 26, 1992 the Debtors filed for relief under the Bankruptcy Code.
The following discussion sets forth certain aspects of the Chapter 11 Case.
Chapter 11 Reorganization Under the Bankruptcy Code
Pursuant to Section 362 of the Bankruptcy Code, the commencement of the
Chapter 11 Case imposed an automatic stay, applicable generally to creditors
and other parties in interest, of: (i) the commencement or continuation of
a judicial, administrative or other action or proceeding against the Debtors
that was or could have been commenced prior to commencement of the
Chapter 11 Case or to recover for a claim that arose prior to commencement
of the Chapter 11 Case; (ii) the enforcement against the Debtors or their
property of any judgments obtained prior to commencement of the Chapter
11 Case; (iii) the taking of any action to obtain possession of property of the
Debtors or to exercise control over property of the Debtors; (iv) the creation,
perfection or enforcement of any lien against the property of the Debtors'
bankruptcy estates; (v) any act to create, perfect or enforce against
property of the Debtors any lien that secures a claim that arose prior to the
commencement of the Chapter 11 Case; (vi) the taking of any action to
collect, assess or recover claims against the Debtors that arose before
commencement of the Chapter 11 Case; (vii) the setoff of any debt owing
to the Debtors that arose prior to commencement of the Chapter 11 Case
against any claim against the Debtors; or (viii) the commencement or
continuation of a proceeding before the United States Tax Court concerning
any of the Debtors. Any entity may apply to the Bankruptcy Court, upon an
appropriate showing of cause, for relief from the automatic stay to exercise
the foregoing remedies. Numerous persons have applied to the Bankruptcy
Court for a modification of the automatic stay to allow their litigations
against the Debtors to go forward and, in a limited number of instances, the
Bankruptcy Court has agreed to modify the automatic stay to allow such
litigants to continue discovery and/or liquidate their claims against the
Debtors; however, enforcement of judgments entered on these claims, if any,
is expressly prohibited without further Bankruptcy Court approval.
The Debtors are authorized to operate their business as
debtors-in-possession pursuant to Sections 1107 and 1108 of the Bankruptcy
Code. Although the Debtors are authorized to operate their business as
debtors-in-possession, they may not engage in transactions outside of the
ordinary course of business without first complying with the notice and
hearing provisions of the Bankruptcy Code and obtaining Bankruptcy Court
approval where necessary.
Plan of Reorganization - Procedures
For 120 days after the date of the filing of a voluntary petition for relief
under chapter 11, only the debtor-in-possession has the right to propose and
file a plan of reorganization with the Bankruptcy Court. Subject to the
Bankruptcy Court's discretion, if a debtor-in-possession files a plan of
reorganization during the 120-day exclusivity period, no other party may file
a plan of reorganization until 180 days after the date of filing of the
chapter 11 petition, during which period the debtor-in-possession has the
exclusive right to solicit acceptances of the plan. If a debtor-in-
possession fails to file a plan during the 120-day exclusivity period, or
such additional period as may be ordered by the Bankruptcy Court, or fails
to obtain acceptance of such plan from impaired classes of creditors and
equity security holders during the 180-day exclusive solicitation period, any
party in interest, including the debtor, a creditors' committee, any equity
security holders' committee, a creditor or any indenture trustee may file a
plan of reorganization for such debtor. Additionally, if the Bankruptcy
Court were to appoint a trustee, the exclusivity period, if not previously
terminated, would terminate.
On request of a party in interest made within the 120-day or 180-day period,
as applicable, and after notice and a hearing, the Bankruptcy Court may
change the above described 120-day and 180-day periods.
After a disclosure statement describing a plan is approved by the Bankruptcy
Court, following a hearing by the Bankruptcy Court, a disclosure statement
and a plan will be sent to all creditors of the Debtors. Following
acceptance or rejection of any plan by impaired classes of creditors and
equity security holders, the Bankruptcy Court, after notice and a hearing,
would consider whether to confirm the plan. Among other things, to confirm
a plan the Bankruptcy Court is required to find (i) with respect to each
impaired class of creditors and equity security holders, that each holder of
a claim or interest of such class either (a) will, pursuant to a plan,
receive or retain property of a value, as of the effective date of the plan,
that is at least as much as such holder would have received in a liquidation
of the Debtors on such date or (b) has accepted a plan, (ii) with respect to
each class of claims or equity security holders, that such class has accepted
a plan or such class is not impaired under a plan and (iii) confirmation of
a plan is not likely to be followed by the liquidation or need for further
financial reorganization of the Debtors or any successors unless such
liquidation or reorganization is proposed in a plan. The term "impaired" has
a specific meaning under the Bankruptcy Code.
If any impaired class of creditors or equity security holders does not accept
a plan and assuming that all of the other requirements of Section 1129(a) of
the Bankruptcy Code are met, the proponent of a plan may invoke the
so-called "cramdown" provisions of Section 1129(b) of the Bankruptcy Code.
Under these provisions, the Bankruptcy Court may confirm a plan,
notwithstanding the non-acceptance of a plan by an impaired class of
creditors or equity security holders, if certain requirements of the Bankruptcy
Code are met, including that (i) a plan does not discriminate unfairly and (ii)
a plan is fair and equitable with respect to each class of claims or interests
that is impaired thereunder, and has not accepted, a plan. The terms
"discriminate unfairly" and "fair and equitable" have specific meanings under
the Bankruptcy Code.
Other Legal Matters
As set forth in more detail in McCrory's Form 10-K, various legal
proceedings are pending relating to transactions in which McCrory or its
subsidiaries have been involved. These proceedings have been brought
against various defendants, including McCrory, its subsidiaries, and certain
of their respective officers, directors and affiliates.
Astrum/MPC Settlement
As more fully described in McCrory's Form 10-K, McCrory, Astrum and
MPC were engaged in numerous disputes, and each filed substantial claims
in the other's bankruptcy cases. With respect to all of the disputes between
and among the Debtors, Astrum, MPC and their respective related entities,
a compromise and settlement agreement (the "Settlement Agreement") was
reached and approved by the Bankruptcy Court on May 24, 1993.
Pursuant to and as is more fully described in the Settlement Agreement, the
Debtors:
(i) transferred their interests in their warehouse in Clinton, South Carolina
to a designee of Astrum;
(ii) transferred the McGregor Preferred Shares and the segregated interest-
bearing account in the name of McCrory, MPC and Rapid-American
Corporation, a privately-held Delaware corporation ("Rapid"), to the
settlement escrow established pursuant to the Settlement Agreement;
(iii) transferred approximately $59 million principal amount of MPC bonds
owned by McCrory to the settlement escrow; and
(iv) granted Astrum an allowed administrative expense claim, with the
consent of the lenders, in the Chapter 11 Case in the amount of $28 million
(to be paid to the settlement escrow), payable $14 million on January 10,
1994 (which was paid on March 17, 1994 with interest per annum of 3.25%)
and $14 million on the earlier of January 10, 1995 or the McCrory Effective
Date (as defined in the Settlement Agreement). Under the terms of the
Post-Petition Credit Agreement, as amended, the Debtors are prohibited from
making the 1995 settlement payment and have not done so. However,
McCrory, with the consent of the Lenders, has agreed to pay interest on the
unpaid $14 million at an annual rate equal to 3.5% in excess of the 90-day
treasury bill rate. The proceeds of the settlement escrow will be distributed
to the MPC liquidating trust and a settlement trust created under the Astrum
plan of reorganization on the McCrory Effective Date (as defined in the
Settlement Agreement).
Department of Labor
On June 21, 1991, the U.S. Department of Labor, Pension and Welfare
Benefits Administration (the "DOL") commenced an investigation in
connectio with the purchase by McCrory of a group annuity contract from
Executive Life Insurance Company ("Executive Life"). Effective October
1985, McCrory's prior defined benefit pension plan (the "Stores Pension
Plan") was terminated and, in December 1985, the Stores Pension Plan paid
approximately $76,000,000 to Executive Life, which committed itself to pay
the benefits due to pensioners under the Stores Pension Plan.
As a result of financial difficulties affecting Executive Life, from May 1991
through April 1992 McCrory's pensioners received only 70% of their
monthly annuities from Executive Life pursuant to an order of
conservatorship.
During this period McCrory paid a portion of such shortfall to those of its
pensioners who so requested. Due to supplemental funds provided by certain
State Insurance Guaranty Associations, in general, since May 1992
substantially all of McCrory's pensioners, other than pensioners who are
residents of the District of Columbia, Colorado, Louisiana or foreign
countries (who continue to receive 70% of their monthly annuities) or
pensioners whose annuity contract value exceeds their particular State's
guaranteed amount (who continue to receive a pro rata portion of the
supplemental funds provided by their State's Insurance Guaranty Association)
have been receiving 100% of their monthly annuities.
During 1993, Aurora National Life Assurance Company ("Aurora"),
successor to Executive Life, made retroactive payments to each of certain
McCrory pensioners in a maximum amount equal to that portion of such
pensioner's annuity that he or she did not receive from Executive Life or
McCrory during the period from May 1991 through April 1992. McCrory
was also reimbursed for certain shortfall payments it had made to each of its
pensioners during such period.
In September 1993, all legal obstacles to the implementation of the Plan of
Rehabilitation for Executive Life (the "Plan of Rehabilitation") were removed
by the California courts. McCrory understands that under the Plan of
Rehabilitation, each pensioner was given the opportunity to elect, prior to
February 12, 1994, to opt out of the Plan of Rehabilitation and receive a
lump sum benefit based on the value of his or her annuity under the Plan of
Rehabilitation (excluding the value of the supplemental funds which would
have been provided by the pensioner's applicable State Insurance Guaranty
Association over the course of the pensioner's life). Each pensioner who did
not opt out of the Plan of Rehabilitation by the February deadline will
continue to receive his or her annuity benefit from Aurora (including the
portion of the annuity funded by the pensioner's applicable State Insurance
Guaranty Association). McCrory understands that under the Plan of
Rehabilitation substantially all of its pensioners will continue to receive
the full amount of their monthly annuities from Aurora, provided they did not
elect to opt out of the Plan of Rehabilitation.
The DOL has filed a proof of Claim (the "DOL Proof of Claim") in the
Chapter 11 Case pursuant to the Employee Retirement Income Security Act
of 1974 ("ERISA") for various forms of equitable relief, including restitution,
purchase of a back-up annuity product (the "ELIC Annuity Contracts") and
other injunctive relief. The DOL asserts that McCrory's pensioners have
suffered losses of approximately $2,550,000 and, assuming that Executive
Life pays at least 70% of the future amounts owing to such pensioners, will
continue to suffer future losses actuarially estimated at approximately
$37,390,000. Therefore, the DOL Proof of Claim seeks the total cost
(estimated by the DOL to be approximately $39,940,000) of restitution and
other equitable relief (e.g., the purchase of a back-up annuity) necessary
to make the former pension plan and its participants whole. The basis for
this liability is asserted to be the Debtors' alleged breach of certain
fiduciary duties and other statutory restrictions imposed by ERISA.
McCrory believes it followed all necessary procedures and satisfied all legal
requirements in terminating its prior pension plan and purchasing the annuity
contract from Executive Life. The Debtors also believe that, because
substantially all of McCrory's pensioners are currently (and since May 1992
have been) receiving the full amount of their pensions (as described above),
the amounts sought in the DOL Proof of Claim are greatly exaggerated.
In connection with the DOL investigation, since on or about November 18,
1991, McCrory, MPC, Rapid, Riklis and others entered into several
agreements with the DOL that tolled the applicable statute of limitations.
On or about November 13, 1995, McCrory entered into a settlement
agreement the "DOL Settlement Agreement") with Robert B. Reich,
Secretary of Labor, (the "Secretary"), the DOL and certain former fiduciaries
(the "Fiduciaries") of the Stores Pension Plan. Under the terms of the DOL
Settlement Agreement, the Secretary and DOL will release and forever
discharge, among others: (i) the Stores Pension Plan, (ii) McCrory's current
and former officers, directors and employees, (iii) the Fiduciaries and (iv)
McCrory and its divisions and subsidiaries from any and all claims the
Secretary and the DOL have against them in connection with the termination
of the Stores Pension Plan and the purchase of the ELIC Annuity Contracts.
In exchange for the release, McCrory will purchase an annuity contract (the
"Shortfall Annuity") and make certain direct payments (the Shortfall Annuity
and direct payments collectively totalling approximately $250,000) to provide
for the payment of the shortfall in coverage between the amounts that were
scheduled to be paid under the ELIC Annuity Contracts and the sum of the
payments under the Plan of Rehabilitation, payments from applicable State
Insurance Guaranty Associations and payments from the conservatorship of
Executive Life. The above summary of the DOL Settlement Agreement is
qualified in its entirety by reference to such agreement which is attached
hereto as Exhibit 10(r) and incorporated herein. By order entered December
13, 1995, the Bankruptcy Court approved the DOL Settlement Agreement.
Pension Plan Claims
The PBGC filed proofs of claim against each Debtor in the Chapter 11 Case
with respect to the McCrory Pension Plan, the Schenley Pension Plan and the
Samsonite Corporation (a subsidiary of Astrum) Luggage Division Hourly
Pension Plan. The PBGC filed a claim against each Debtor with respect to
each plan in an unliquidated amount (a) for unpaid premiums, interest and
penalties for plan years unknown, and (b) on behalf of each plan, for unpaid
minimum contributions through the unspecified future termination date of
each plan.
The PBGC also filed contingent claims against each Debtor with respect to
the unfunded benefit liabilities (as defined in Section 4001(a)(18) of ERISA)
of each of the plans which would be payable to the PBGC if the plans were
terminated by the PBGC.
The PBGC had expressed concern about its future liability with respect to the
McCrory Pension Plan and the Schenley Pension Plan because upon the
consummation of the Astrum Plan, Astrum and its subsidiaries would no
longer be members of the relevant "controlled group" (as defined in Sections
414(b) and (c) of the Code) and would no longer be jointly and severally
liable, along with the Debtors and others, for the payment of required
contributions to such plans under Code Section 412 and ERISA Section 302,
premiums due to the PBGC under ERISA Section 4007 with respect to such
plans and any unfunded benefit liabilities in the event such plans are
terminated. The PBGC asserted that it was considering seeking court
approval to terminate the McCrory Pension Plan and the Schenley Pension
Plan prior to the effective date of the Astrum Plan in order to preserve its
ability to impose liability against Astrum and its subsidiaries. Termination
of the McCrory Pension Plan and the Schenley Pension Plan by the PBGC
would have exposed the Debtors to significant liabilities. As a result, on
April 6, 1993, McCrory filed a motion in the Bankruptcy Court, seeking an
order setting the liability of Astrum and its subsidiaries in the event of any
future termination of the McCrory Pension Plan and/or Schenley Pension
Plan by the PBGC. As a result of the approval by the Bankruptcy Court of
the Settlement Agreement, this motion was withdrawn on May 24, 1993,
without prejudice. See "Astrum/MPC Settlement."
McCrory anticipates entering into a settlement agreement with the PBGC and
Astrum with respect to these claims. The Settlement Agreement provides that
Astrum and its subsidiaries are liable for certain contributions required to be
made to the Schenley Pension Plan. The Debtors are in the process of
documenting its agreement with the PBGC to reflect its undertaking under the
Settlement Agreement.
The Settlement Agreement calls for McCrory and its subsidiaries to satisfy
all of their obligations to the McCrory Pension Plan and the Schenley Pension
Plan in accordance with Section 412 of the Tax Code after the McCrory
Effective Date, while reserving their rights against other members of the
controlled group. See "Astrum/MPC Settlement." As of February 2, 1995,
all contributions required to have been made under Section 412 of the Tax
Code to the McCrory Pension Plan and to the Schenley Pension Plan have
been made.
IRS Proof of Claim
The Internal Revenue Service (the "IRS") filed proofs of claim against
McCrory and twenty-one of the other Debtors in the Chapter 11 Case. The
claims against McCrory and six of the other Debtors are each for
approximately $35,000,000. These claims are for taxes asserted to be owed
from the tax periods ended November 30, 1977 and January 31, 1979 and
1986 and, in each case, interest. The claim relating to 1986 ($17,400,000,
including interest) is for an amount of taxes paid in 1986 that was refunded
to the consolidated group of which McCrory was a member (the "Tax
Group") as a result of the carryback of a loss sustained in a subsequent year
which was still open for audit. The balance of the claims are for tax
deficiencies determined with respect to audits that have been settled, plus
interest (the computation of which may be disputed by McCrory). The IRS
has asserted that a portion of each of the claims is secured (approximately
$11,500,000) to the extent the IRS has the right to offset over-assessments
against the amounts claimed.
The IRS claims against the other fifteen Debtors were for approximately
$17,400,000 each and included only the 1986 claim described above, since
the 1977 and 1979 claims derive from years prior to the time that these
fifteen Debtors joined the Tax Group. After filing these claims, the IRS
reviewed and approved the 1986 refunds, and, consequently, the claims
against these fifteen Debtors have been withdrawn. For the same reason, it
is expected that the IRS will amend the proofs of claim against McCrory and
the other six Debtors mentioned above to withdraw the portion of those
claims that relates to the 1986 claim and the 1979 claim, which have also
been resolved.
On December 13, 1993, the IRS allowed the carryback of losses and refund
claims with the result that the Tax Group became entitled to refunds of
$10,566,000 including interest of $5,386,000. Also, in December 1993, the
IRS agreed to pay additional previously approved refunds due to the Tax
Group which the IRS had been holding as security for its claims. Such
refunds total $10,434,000 including interest of $7,299,000. The IRS agreed
to apply refunds owed to one member of the Tax Group, against certain of
its claims and refund the balance of the refund claims (a total of
approximately $17,894,000 including interest), which were received in
January, March, April and May 1994. The balance of the IRS claim which
the Company believes will not exceed approximately $4,563,000 is expected
to be paid in equal monthly installments beginning at the time the Debtors
emerge from the Chapter 11 Case and ending in mid-1997. Any such
resolution would be subject to the execution of final documents and
Bankruptcy Court approval.
Walt Whitman Mall Fire
The Debtors have been sued for damages arising from a May 16, 1991 fire
that occurred at a McCrory store located in the Walt Whitman Mall shopping
complex in Huntington, New York. Approximately 17 suits were filed
before the Petition Date by adjacent store owners and/or as subrogation
actions against McCrory and various other defendants in connection with the
fire. Several additional suits were filed after the Petition Date and proofs of
claim have been submitted on behalf of a number of claimants (collectively
with the pre- and post-Petition Date actions, the "Walt Whitman Fire
Litigations"). The majority of claimants seek recovery for property damage,
although two of the pre-Petition Date suits are wrongful death actions relating
to the two deaths caused by the fire. In the aggregate, the claimants in the
Walt Whitman Fire Litigations seek damages of in excess of $140,000,000,
much of which will be covered by insurance. On or about February 2, 1993,
Charles Trapani, who was employed as a McCrory security guard at the time
of the fire, admitted to starting the fire and pled guilty to arson. Each of
the Walt Whitman Fire
Litigations is currently stayed by virtue of the automatic stay and an order
of the Bankruptcy Court, dated May 29, 1992, staying lawsuits against the
Debtors' landlords and employees, however, the Bankruptcy Court has
permitted certain discovery to proceed in the Walt Whitman Fire Litigations.
Logan Valley Mall Fire
On or about July 31, 1995, G.C. Murphy Company ("Murphy"), a
wholly-owned subsidiary of Mack Realty Company, which is a wholly-owned
subsidiary of McCrory, was served with a complaint naming Murphy as a
defendant in a civil action brought by thirty plaintiffs in the Court of
Common Pleas in Blair County, Pennsylvania. The action arises out of a fire
at the Logan Valley Mall located in Logan Township, Pennsylvania that
allegedly started on or about December 15 or 16, 1994 at a Murphy store
located in the mall, which fire allegedly damaged the plaintiffs' businesses.
The landlord and owner of the mall are also named as defendants. An
answer to the complaint has not yet been filed by Murphy.
Additional Litigation, Etc.
Various other legal proceedings are pending against or otherwise relate to
McCrory and its subsidiaries, involving a variety of causes of action arising
from the operation of its business. Substantially all of these actions are
stayed pursuant to Section 362 of the Bankruptcy Code. Management does
not consider any of these other proceedings to be material and does not
expect such proceedings to have a significant impact on the Debtors' ability
to formulate a consensual plan of reorganization.
As a debtor-in-possession under chapter 11 of the Bankruptcy Code, the
Debtors are subject to the jurisdiction of the Bankruptcy Court and are
continually subject to various proceedings under the Bankruptcy Code. It is
not practicable for McCrory to describe or refer to all such proceedings or
to predict the impact thereof on the Debtors or their efforts to formulate
a consensual plan of reorganization.
Item 3. DEFAULTS UPON SENIOR SECURITIES
(a) The filing by McCrory on February 26, 1992 of a petition for
reorganization under chapter 11 constituted a default under the terms of
substantially all of the Company's loan agreements, notes, debentures, and
indentures. The amount of interest and principal unpaid as of November 2,
1995 is $71,762,000 and $108,537,000, respectively. McCrory has also not
paid any dividends on its outstanding preferred stocks since the Petition
Date. As of November 2, 1995 the aggregate amount of dividends in arrears
is $3,647,000.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: 10(r) Settlement Agreement dated as of November 13, 1995,
by and among McCrory Corporation, Robert B. Reich, Secretary of Labor,
the Department of Labor and certain former fiduciaries of the McCrory
Stores Pension Plan.
(b) Form 8-K, dated October 19, 1995, filed with the Securities
and Exchange Commission on November 2, 1995.<PAGE>
FORM 10-Q
McCRORY CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
McCRORY
CORPORATION
(Registrant)
Date: December 18, 1995
/S/ ]
PAUL WEINER
Paul Weiner
Senior Vice President and Treasurer
(Principal Financial and Accounting Officer)
FORM 10-Q
McCRORY CORPORATION AND SUBSIDIARIES
(DEBTORS-IN-POSSESSION)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
McCRORY CORPORATION
(Registrant)
Date: December 18, 1995
Paul Weiner
Senior Vice President and Treasurer
(Principal Financial and Accounting Officer)
SETTLEMENT AGREEMENT
This settlement agreement (the "Agreement") by and between
McCrory Corporation ("McCrory"), Robert B. Reich, the Secretary of Labor
of the United States (the "Secretary"), by his duly authorized representative,
and Michael Magenheim, Seymour Greene, Saul Kagan, Amos Kaminski,
Arthur F. McGinness, Jr., Donald L. Miller, Stephen Pistner, Karl Margolis,
Meshulam Riklis, Harold S. Divine, Samuel Levy, Peter Thorner, David Helman,
Loren Schockley, Theresa Hopkins and the estate of Leonard Lane (the
"Fiduciaries") is made as of this 13th day of November, 1995.
WITNESSETH
WHEREAS, McCrory sponsored the McCrory Stores Pension Plan
(the "Plan"), a defined benefit plan, which was terminated effective October
11, 1985; and
WHEREAS, retirement annuity contracts (the "ELIC Annuity
Contracts") were purchased on behalf of certain employees and former
employees of McCrory (or its affiliates and former affiliates) (collectively,
and together with any beneficiaries thereof under the ELIC Annuity
Contracts, the "Annuity Holders") from Executive Life Insurance Company ("ELIC")
to satisfy all benefit obligations under the Plan; and
WHEREAS, on April 11, 1991, ELIC was placed in
conservatorship by the Insurance Commissioner of California; and
WHEREAS, as a result of the restructuring (the
"Rehabilitation") of ELIC pursuant to a plan of rehabilitation (the
"Rehabilitation Plan"), the ELIC Annuity Contracts of those Annuity Holders
who did not elect to "opt out" of the Rehabilitation Plan (the "Participating
Holders") were converted into annuity contracts ("Aurora Annuity Contracts")
issued by Aurora National Life Assurance Company ("Aurora"), successor to
ELIC; and
WHEREAS, pursuant to the Rehabilitation Plan, certain of the
Participating Holders are entitled to receive payments from applicable State
Guaranty Associations (the "Guaranty Associations"); and
WHEREAS, the amounts that the Participating Holders were
entitled to receive under the terms of their ELIC Annuity Contracts may in
some cases exceed the sum of the payments that they are entitled to receive
(i) from the Aurora Annuity Contracts as scheduled under the Rehabilitation
Plan (or if greater, the amounts actually received), (ii) from the Guaranty
Associations, and (iii) to the extent not included in the foregoing clauses
(i) and (ii), from Aurora, ELIC or John Garamendi, Commissioner of the
California Department of Insurance solely in his capacity as conservator,
rehabilitator, liquidator and as otherwise appointed pursuant to certain
insurance proceedings of ELIC and in his capacity as the Holdback Trustee
(or any successor to Mr. Garamendi, including Chuck Quackenbush) (the
"Rehabilitator") in connection with the Rehabilitation (the total such
difference is hereinafter referred to as the "Participating Holders
Shortfall"); and
WHEREAS, the amounts that those Annuity Holders who
elected to "opt out" of the Rehabilitation Plan (the "Non-Participating
Holders") were entitled to receive under the terms of their ELIC Annuity
Contracts may in some cases exceed the sum of the payments that they would have
been entitled to receive, had they not elected to "opt out" of the
Rehabilitation Plan, (i) from the Aurora Annuity Contracts as scheduled under
the Rehabilitation Plan (or if greater, the amounts they actually would have
received had they not opted out), (ii) from the Guaranty Associations, and
(iii) to the extent not included in the foregoing clauses (i) and (ii), from
Aurora, ELIC or the Rehabilitator in connection with the Rehabilitation (the
total such difference in the "Non-Participating Holders Shortfall"; and
together with the Participating Holders Shortfall is the "Shortfall"); and
WHEREAS, on February 26 1992, McCrory Corporation,
along with twenty-seven of its subsidiaries (the "Debtors"), filed separate,
voluntary petitions for relief under chapter 11 of title 11 of the United
States Code (the "Bankruptcy Code") in the United States Bankruptcy Court for
the Southern District of New York (the "Bankruptcy Court"), which cases have
been consolidated for procedural purposes and are being jointly administered
pursuant to an order of the Bankruptcy Court (collectively, the "Chapter 11
Case"); and
WHEREAS, the Secretary filed a proof of claim in the
amount of $39,940,000 (the "DOL Proof of Claim") in the Chapter 11 Case pursuant
to Title I of the Employee Retirement Income Security Act of 1974 ("ERISA"),
29 U.S.C. 1001 et seq., alleging that McCrory breached certain fiduciary duties
and other statutory restrictions imposed by ERISA in connection with the
termination of the Plan and the purchase of the ELIC Annuity Contracts, and
asserted that the DOL Proof of Claim was valued on the basis of a then
anticipated thirty percent shortfall in payments under the ELIC Annuity
Contracts; and
WHEREAS, the Fiduciaries filed proofs of claim in the
Chapter 11 Case seeking indemnification from McCrory in the event they were
obligated to make any payments to the Secretary in connection with the
termination of the Plan and the purchase of the ELIC Annuity Contracts; and
WHEREAS, the Secretary filed a proof of claim against the
McCrory Parent Corporation ("MPC") in the case styled In re McCrory
Parent Corporation, Case No. 91-B-15367 (CB), which proof of claim was settled
by MPC and the Secretary under terms whereby MPC agreed that the Secretary
would have an allowed claim against its estate in the amount of $1,000,000 (the
"MPC Claim"); and
WHEREAS, the Secretary is willing to release and forever
discharge the Plan; McCrory's current and former officers, directors,
employees, consultants, attorneys and agents, their heirs, executors,
administrators, personal representatives, attorneys, successors and assigns
(collectively, the "Released Persons"); the Fiduciaries, their heirs,
executors, administrators, personal representatives, attorneys, successors
ad assigns (collectively, the "Fiduciary Entities", and together with the
Released Persons the "Released Parties"); and McCrory, its divisions,
subsidiaries, affiliates, legal representatives, successors and assigns
(collectively, the "McCrory Entities") from any and all liability, if any,
to the Secretary in connection with the termination of the Plan and the
purchase of the ELIC Annuity Contracts; and
WHEREAS, it is the Secretary's position that a creditor's
claim against a nondebtor, such as the Secretary's claims against McCrory's
officers, cannot be released in bankruptcy absent the creditor's consent; and
WHEREAS, it is McCrory's position that a creditor's claim
against a nondebtor, such as the Secretary's claims against McCrory's
officers, can be released in bankruptcy even absent the creditor's consent;
and
WHEREAS, the Fiduciaries desire to release and forever
discharge the McCrory Entities and the Released Persons from any and all
liability, if any, in connection with the termination of the Plan and the
purchase of the ELIC Annuity Contracts; and
WHEREAS, McCrory desires to compensate the Annuity
Holders by providing for the payment of the Shortfall; and
WHEREAS, it is the desire of the parties hereto to settle and
compromise all of their existing disputes on the terms and conditions set
forth herein; and
WHEREAS, the restructuring of ELIC has substantially
reduced the amount of the anticipated shortfall in payments under the ELIC
Annuity Contracts, and the Secretary, after having investigated the facts
relating to the above circumstances, is satisfied that this Agreement adequately
safeguards the interests of the Annuity Holders and the public;
NOW THEREFORE, in consideration of the mutual promises
and agreements herein, and other good and valuable consideration, the receipt
and sufficiency of which is hereby acknowledged, it is hereby agreed as follows:
1. a. Within thirty (30) days after the "Effective
Date" (as defined in paragraph 11 hereof), McCrory agrees to purchase an annuity
contract or similar insurance product (the "Shortfall Annuity") to provide
for the payment of the Participating Holders Shortfall from an insurance
carrier mutually agreed upon by the Secretary and McCrory. The Shortfall
Annuity shall include a provision for the payment of a single lump sum
payment to each Participating Holder who is in pay status on the date of the
commencement of annuity payments under the Shortfall Annuity (the
"Shortfall Annuity Commencement Date") of his or her pro-rata portion of that
portion of the Participating Holders Shortfall which related to periods prior
to the Shortfall Annuity Commencement Date calculated using the interest rates
required under the Rehabilitation Plan with respect thereto.
b. Within thirty (30) days after the Effective
Date, McCrory agrees to make a single lump sum payment to each of the Non-
Participating Holders (such lump sums collectively, the "Direct Payment")
which shall include payment to each Non-Participating Holder of his or her
pro-rata portion of the present value as of the Effective Date of the Non-
Participating Holders Shortfall calculated using an interest rate of 7.2% for
that portion of the Non-Participating Holders Shortfall due before or on the
Effective Date and a discount rate of 7.2% for the present value for that
portion of the Non-Participating Holders Shortfall due after the Effective
Date.
2. Upon the purchase of the Shortfall Annuity and the
making of the Direct Payment in conformity with the terms of this Agreement, the
Secretary will terminate its investigation concerning the termination of the
Plan and the acquisition of the ELIC Annuity Contracts and no action will be
taken nor claim asserted by the Secretary in connection therewith against the
McCrory Entities or the Released Parties.
3. a. Upon the purchase of the Shortfall Annuity and
the making of the Direct Payment in conformity with the terms of this
Agreement, the Secretary hereby releases and forever discharges the Plan, the
McCrory Entities and the Released Parties from any and all obligations, claims,
proofs of claim, including, but not limited to the DOL Proof of Claim,
rights, causes of action and liabilities of every kind and nature, whether
known or unknown, suspected or unsuspected, by statute, including, but not
limited to, Title I of ERISA, at law or in equity, the Secretary has ever had
or now has against the Plan, the McCrory Entities or the Released Parties
with respect to the termination of the Plan, the purchase of the ELIC Annuity
Contracts, and the selection of the insurance carrier to provide the
Shortfall Annuity.
b. Upon the purchase of the Shortfall Annuity and
the making of the Direct Payment in conformity with the terms of this
Agreement, the Fiduciaries hereby release and forever discharge the Plan, the
McCrory Entities, and the Released Persons from any and all obligations, claims,
proofs of claim, rights, causes of action and liabilities of every kind and
nature, whether known or unknown, suspected or unsuspected, by statute at
law or in equity, the Fiduciaries have ever had or now have against the Plan,
the McCrory Entities, or the Released Persons with respect to the termination of
the Plan, the purchase of the ELIC Annuity Contracts, and the selection of
the insurance carrier to provide the Shortfall Annuity.
c. It is understood and agreed that none of the
parties, entities or persons hereby released, has admitted any liability, all
such liability being expressly denied.
d. Nothing in this Agreement is binding on any
governmental agency other than the United States Department of Labor.
4. Upon the purchase of the Shortfall Annuity and the
making of the Direct Payment in conformity with the terms of this Agreement, (i)
McCrory and the Secretary agree that the Secretary will not be considered a
"creditor" (as such term is defined in the Bankruptcy Code) of the Debtors
and will not be entitled to vote on any plan of reorganization of the
Debtors in the Chapter 11 Case, and (ii) the Secretary hereby assigns all of
his interest in the MPC Claim to McCrory.
5. In the event that in connection with the
Rehabilitation, Aurora, the Guaranty Associations, ELIC and/or the Rehabilitator
agreed to pay more to the Annuity Holders than the amounts they are entitled to
receive from the Aurora Annuity Contracts as scheduled under Rehabilitation Plan
(this difference is the "Excess"), the Secretary agrees to not object to any
agreement between McCrory, Aurora, the Guaranty Associations, ELIC, the
Rehabilitator, and/or any other party or parties which would allow McCrory
to recover the Excess to the extent that such Excess were it to be received
by the Annuity Holders, together with the sum of the amounts from the
Aurora Annuity Contracts as scheduled under the Rehabilitation Plan, the amounts
from the Guaranty Associations, the amounts from the Shortfall Annuity and
the amounts from the Direct Payment would allow the Annuity Holders to
receive more than they were entitled to receive under the ELIC Annuity
Contracts.
6. This Agreement shall be binding upon and inure to the
benefit of the parties hereto, their successors, agents and assigns.
7. This Agreement constitutes the entire agreement among
the parties with respect to its subject matter and supersedes any prior
agreement or understanding, whether oral or in writing, that any party may claim
exists.
8. This Agreement may not be amended or modified
except by a writing signed by all parties hereto and, to the extent such
modification or amendment is material, approved by final order of the
Bankruptcy Court; however, no amendment or modification shall require the
consent of any other person, including, without limitation, any Annuity Holder.
9. Any person signing this Agreement on behalf of any
party expressly acknowledges and represents thereby that he or she has the
authority to sign for and legally bind such party.
10. This Agreement may be executed in counterparts.
11. This Agreement (except this Paragraph, which shall
become effective when this Agreement has been executed and delivered by the
parties hereto) shall be of no force or effect whatsoever until and shall only
become effective if and when (i) McCrory files and appropriate motion (the
"Motion") in the Chapter 11 Case seeking approval of this Agreement which the
Bankruptcy Court grants, and (ii) the order approving this Agreement has
become final and non-appealable (the date upon which such order become
final and non-appealable being referred to herein as the "Effective Date").
McCrory will promptly seek such approval.
12. The Bankruptcy Court shall retain jurisdiction to
enforce compliance with the terms of this Agreement. The Secretary of the
United States Department of Labor shall have the right and standing under this
Agreement to enforce its terms in theBankruptcy Court or any other court with
jurisdiction to enforce its terms.
IN WITNESS WHEREOF, the parties hereto have subscribed
their names on the dates indicated by their respective signatures.
For the Secretary of Labor
By: Date:
Timothy D. Hauser
Senior Trial Attorney
For McCrory Corporation
By: Date:
Paul Weiner
Vice-President and Treasurer
By: Date:
Michael Magenheim
By: Date:
Seymore Greene
By: Date:
Saul Kagan
By: Date:
Amos Kaminski
By: Date:
Arthur F. McGinness, Jr.
By: Date:
Donald L. Miller
By: Date:
Stephen Pistner
By: Date:
Karl Margolis
By: Date:
Meshulam Riklis
By: Date:
Harold S. Divine
By: Date:
Samuel Levy
By: Date:
Peter Thorner
By: Date:
David Helman
By: Date:
Loren Schockley
By: Date:
Theresa Hopkins
For the estate of Leonard Lane
By: Date:
[name & title]<PAGE>
SECURITIES AND EXCHANGE
COMMISSION
Washington, DC 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):
October 19, 1995
McCRORY CORPORATION
(Exact name of Registrant as Specified in its charter)
Delaware 1-2759 13-5580679
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
667 Madison Avenue, New York, New York
10021
(Address of principal executive Offices) (Zip Code)
Registrant's telephone number, including area code:
(212) 735-9500
ITEM 5. OTHER EVENTS
On February 26, 1992, the McCrory Corporation ("McCrory")
and
twenty-seven of its subsidiaries (collectively, the "Debtors") filed
voluntary petitions for relief under chapter 11 title 11 of the United States
Code (the "Bankruptcy Code") with the United States Bankruptcy Court for
the
Southern District of New York (the "Bankruptcy Court").
On October 19, 1995, the Debtors filed a Second Amended Joint
Plan of Reorganization (the "Amended Plan") with the Bankruptcy Court. The
Amended Plan reflects an agreement between the Debtors and the Official
Committee of Unsecured Creditors ("Creditors' Committee") regarding the
terms of the proposed restructuring of the Debtors. The Amended Plan provides
that Meshulam Riklis, Chairman of the Board and Chief Executive Officer of
McCrory ("Riklis"), will cause $50,000,000 to be contributed to reorganized
McCrory in exchange for 69% of the new common stock, a $20,000,000 junior
subordinated note, and 500,000 stock appreciation rights. In full, complete
satisfaction, release and discharge of existing creditor claims: (i)
McCrory's general unsecured creditors will receive 16.74% of their allowed
claims in 11% McCrory Senior Subordinated Notes which are payable 20%
on each of December 31, 1996, December 31, 1997, December 31, 1998, December
31, 1999 and December 31, 2000, with accrued interest from August 29, 1995 to
the Amended Plan effective date. Holders of Allowed Insured Claims (as defined
in the Amended Plan) will be entitled to receive the lesser of (a) 16.74% of
such holder's Allowed Insured Claim and (b) $83,700 in cash, with interest
payable at 11% per annum, payable as follows: 20% of such amount on
each of the first, second, third, fourth and fifth anniversary of the later of
(A) December 31, 1995 and (B) the date a Disputed Insured Claim becomes an
Ultimately Allowed Insured Claim and to the extent such holder's Allowed
Insured Claim exceeds $500,000, the legal, equitable and contractual rights,
if any, to which the Allowed Insured Claim entitles the holder of such claim
against an insurance company under McCrory's general liability insurance
program, if any, shall remain unaltered; (ii) holders of McCrory's Senior
Subordinated Exchangeable Variable Rate Notes (as defined in the Amended
Plan) will receive their pro rata share of $38,156,394 in cash together with
interest on that amount accrued at 11% from August 29, 1995 to the
Amended Plan effective date and 12% of the new common stock to be issued by
reorganized McCrory; (iii) holders of McCrory's Subordinated Debentures
(as defined in the Amended Plan) will receive their pro rata share of 19% of the
new common stock to be issued by reorganized McCrory; and (iv)
McCrory's equity holders will receive no recovery and all existing equity
securities will be extinguished.
Consummation of a plan of reorganization is subject to the
review and approval by the Bankruptcy Court, satisfaction of certain conditions
precedent to confirmation, including, but not limited to, a release of Riklis
by the Astrum Settlement Trust (as defined in the Amended Plan), obtaining
adequate post-confirmation financing and satisfaction of confirmation
requirements contained in the Bankruptcy Code.
On October 20th, the Bankruptcy Court signed a consent order
pursuant to which the Debtors' exclusive right to solicit acceptances of
their Amended Plan was extended to January 31, 1996. The consent order
further provides that, if the Amended Plan is not consummated on or before
January 31, 1996, the Debtors shall have the sole and exclusive right to
automatically further extend the solicitation period through March 31, 1996.
In addition, if the solicitation period is so extended, and the Amended Plan
is not consummated on or before March 31, 1996, the solicitation period will
automatically further extend through and including June 30, 1996; provided
however, that, from and after March 31, 1996, the Creditors' Committee
may file a plan in the chapter 11 cases.
In October 1995, as part of management's ongoing review of
store locations and in connection with the Debtor's business reorganization
plan, 118 additional store closings were identified (the "Closing Stores") and
accordingly, a provision of approximately $22,000,000 has been recorded as
a restructuring charge. This provision includes costs associated with
closing stores, reductions in personnel and the write-off of certain
intangible assets.
On or about October 23, 1995, the Debtors filed an application
seeking authorization of the Bankruptcy Court to conduct going-out-of-
business sales of the Closing Stores for a period of approximately ninety
days commencing on November 1, 1995 and ending on or about January 31,
1996.
As of the date hereof, an order has not been entered by the Bankruptcy Court
approving such sales. The Debtors anticipate that an order will be entered
in the near term.
ITEM 7. EXHIBITS
Included as an exhibit to this filing is the Registrant's Second
Amended Joint Plan of Reorganization dated October 19, 1995.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
McCRORY CORPORATION
Date: November 2, 1995 By: Paul Weiner
Senior Vice President and Treasurer
