<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q/A
(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, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 0-15542
LAMONTS APPAREL, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware #75-2076160
(State of Incorporation) (I.R.S. Employer Identification Number)
12413 Willows Road N.E., Kirkland, Washington 98034
(Address of Principal Executive Offices)
(206) 814-5700
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No
--- ---
As of December 11, 1996, there were 17,900,053 shares of the Registrant's Common
Stock, par value $0.01 per share, outstanding.
Exhibit Index on Page 16
Page 1
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LAMONTS APPAREL, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NOVEMBER 2, FEBRUARY 3,
1996 1996
------------ -----------
<S> <C> <C>
Current Assets:
Cash $2,694 $1,581
Receivables - net 2,478 2,458
Inventories 52,770 30,401
Prepaid expenses and other 2,315 2,076
Restricted cash 1,217 1,058
----------- -----------
Total current assets 61,474 37,574
Property and equipment - net of accumulated depreciation and amortization
$26,061 and $23,041 as of November 2 and February 3, respectively 31,924 42,083
Leasehold interests 3,595 4,570
Excess of cost over net assets acquired - net 11,681 13,278
Deferred financing costs - net 2,170 2,713
Restricted cash 1,139 1,278
Other assets 981 865
----------- -----------
Total assets $112,964 $102,361
----------- -----------
----------- -----------
Liabilities not subject to settlement under reorganization proceedings:
Current Liabilities:
Borrowings under DIP Facility $29,565 $20,334
Accounts payable 24,400 8,417
Accrued payroll and related costs 2,564 2,396
Accrued taxes 1,187 821
Accrued interest 526 207
Accrued store closure costs 2,695 3,254
Other accrued expenses 6,159 4,393
----------- -----------
Total current liabilities 67,096 39,822
Obligations under capital leases 2,808 --
Other 547 250
----------- -----------
Total liabilities not subject to settlement under reorganization proceedings 70,451 40,072
----------- -----------
Liabilities subject to settlement under reorganization proceedings 103,538 104,845
----------- -----------
Stockholders' Equity (Deficit):
Common stock, $0.01 par value, 40,000,000 shares authorized, 17,900,053 and
17,899,549 shares issued and outstanding as of November 2 and February 3,
respectively 179 179
Additional paid-in capital 62,963 62,921
Minimum pension liability adjustment (250) (250)
Accumulated deficit (123,917) (105,406)
----------- -----------
Total stockholders' equity (deficit) (61,025) (42,556)
---------- ----------
Total liabilities and stockholders' equity (deficit) $112,964 $102,361
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
LAMONTS APPAREL, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
AND ACCUMULATED DEFICIT
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------
NOVEMBER 2, OCTOBER 28,
1996 1995
----------- -----------
<S> <C> <C>
Revenues $50,705 $49,802
Cost of merchandise sold 32,283 32,162
--------- ---------
Gross profit 18,422 17,640
--------- ---------
Operating and administrative expenses 16,504 18,172
Depreciation and amortization 2,015 2,300
--------- ---------
Operating costs 18,519 20,472
--------- ---------
Loss from operations before other income (expense)
and reorganization expenses (97) (2,832)
Other income (expense):
Interest expense (contractual interest of $3.5 million
in 1996 and $3.6 million in 1995) (1,318) (1,416)
Other 3 33
--------- ---------
Loss from operations before reorganization expenses (1,412) (4,215)
Reorganization expenses 3,435 728
--------- ---------
Net loss (4,847) (4,943)
Accumulated deficit, beginning of period (119,070) (91,850)
--------- ---------
Accumulated deficit, end of period ($123,917) ($96,793)
--------- ---------
--------- ---------
Net loss per common share ($0.27) ($0.28)
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
LAMONTS APPAREL, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
AND ACCUMULATED DEFICIT
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------------------
NOVEMBER 2, OCTOBER 28,
1996 1995
----------- -----------
<S> <C> <C>
Revenues $138,284 $134,196
Cost of merchandise sold 88,237 87,658
--------- ----------
Gross profit 50,047 46,538
--------- ----------
Operating and administrative expenses 49,482 51,371
Depreciation and amortization 6,051 7,061
Impairment of long-lived assets 4,170 -
--------- ----------
Operating costs 59,703 58,432
--------- ----------
Loss from operations before other income
(expense) and reorganization expenses (9,656) (11,894)
Other income (expense):
Interest expense (contractual interest of
$10.3 million in 1996 and $10.2 million in 1995) (3,773) (3,729)
Other 8 183
--------- ----------
Loss from operations before reorganization expenses (13,421) (15,440)
Reorganization expenses 5,090 1,968
--------- ----------
Net loss (18,511) (17,408)
Accumulated deficit, beginning of period (105,406) (79,385)
--------- ----------
Accumulated deficit, end of period ($123,917) ($96,793)
--------- ----------
--------- ----------
Net loss per common share ($1.03) ($0.97)
--------- ----------
--------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
LAMONTS APPAREL, INC.
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------------------
NOVEMBER 2, OCTOBER 28,
1996 1995
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($18,511) ($17,408)
Adjustments to reconcile net loss to net cash used in operating
activities before reorganization items:
Depreciation and amortization 6,051 7,061
Impairment of long-lived assets 4,170 -
Reorganization expenses 5,090 1,968
Increase in accounts receivable (43) (461)
Increase in inventories (23,211) (13,949)
Decrease (increase) in prepaid expenses and other (700) 1,668
Increase in accounts payable 15,983 10,487
Increase in accrued interest 319 142
Increase in accrued expenses 1,684 1,022
Other (35) (1,500)
---------- ----------
Net cash used in operating activities before reorganization items (9,203) (10,970)
Operating cash flows used by reorganization items:
Payments for professional fees and other expenses related to the
Chapter 11 proceedings (2,195) (2,059)
---------- ----------
Net cash used in operating activities (11,398) (13,029)
---------- ----------
Cash flows from investing activities:
Capital expenditures (525) (1,088)
Proceeds from sale of land and building 4,459 --
Other 45 (502)
---------- ----------
Net cash provided by (used in) investing activities 3,979 (1,590)
---------- ----------
Cash flows from financing activities:
Post-petition borrowings under working capital facility 187,979 171,204
Post-petition payments under working capital facility (178,748) (161,175)
Principal payments on obligations under capital leases (650) (946)
Other (49) (46)
---------- ----------
Net cash provided by financing activities 8,532 9,037
---------- ----------
Net increase (decrease) in cash 1,113 (5,582)
Cash, beginning of period 1,581 7,972
---------- ----------
Cash, end of period $2,694 $2,390
---------- ----------
---------- ----------
Supplemental disclosures of cash flow information:
Cash paid for interest $3,615 $3,587
---------- ----------
---------- ----------
Supplemental disclosure of noncash investing and financing activities:
Capital lease relating to sale-leaseback of Alderwood store $2,835 --
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
LAMONTS APPAREL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 2, 1996
NOTE 1 - PETITION FOR RELIEF UNDER CHAPTER 11
On January 6, 1995 (the "Petition Date"), Lamonts Apparel, Inc. (the
"Company") filed a voluntary petition for relief (the "Filing") under Chapter
11 ("Chapter 11") of title 11 of the United States Code (the "Bankruptcy
Code") in the United States Bankruptcy Court (the "Court") for the Western
District of Washington at Seattle. In Chapter 11, the Company has continued
to manage its affairs and operate its business as a debtor-in-possession.
The Company and representatives of the committees that represent Lamonts'
unsecured trade creditors, bondholders and equityholders (the "Committees")
have reached an understanding regarding the material economic terms of a
proposed consensual plan of reorganization designed to enable the Company to
emerge from Chapter 11. On August 23, 1996, that plan was filed with the
Court, along with the proposed disclosure statement relating to that plan.
On October 23, 1996, an amended plan of reorganization (the "Plan") and an
amended disclosure statement (the "Disclosure Statement") were filed with the
court. The Disclosure Statement was approved by the Court on October 24,
1996, and the Plan and Disclosure Statement have been transmitted to all
impaired creditors and equity security holders along with ballots for the
purpose of soliciting acceptances of the Plan. A hearing to consider
confirmation of the Plan has been scheduled by the Court for January 6, 1997.
The Plan provides that the Company's current equity holders will be
substantially diluted. The confirmation and effectiveness of the Plan, the
implementation of the Company's proposed business plan and the Company's
proposed equity distribution are each subject to numerous uncertainties set
forth in detail in the Plan and Disclosure Statement, and the Plan is subject
to modification and/or withdrawal. Accordingly, the value of the Company's
common stock remains highly speculative.
In a Chapter 11 reorganization plan, the rights of the pre-Filing creditors may
be significantly altered. Pre-Filing creditors may receive substantially less
than the full face amount of claims. Certain pre-Filing creditors have filed
claims with the Court substantially in excess of amounts reflected in the
Company's financial statements. The Company continues to analyze and reconcile
the claims filed by pre-Filing creditors with the Company's financial records,
but believes it has made appropriate provision for all claims filed. However,
no estimate of the amount of adjustments, if any, from recorded amounts, to
amounts to be realized by pre-Filing creditors, is available at this time.
These liabilities are included in the balance sheet as "liabilities subject to
settlement under reorganization proceedings."
As of the Petition Date, payment of pre-petition liabilities to unsecured
creditors, including trade creditors and noteholders, and pending litigation
against the Company are generally stayed while the Company continues its
business operations as a debtor-in-possession. Although the Company is
authorized to operate its business as a debtor-in-possession, it may not engage
in transactions outside the ordinary course of business without first complying
with the notice and hearing provisions of the Bankruptcy Code and obtaining
Court approval.
As a result of the Filing, the Company is currently in default under the
indentures governing the Company's 10-1/4% Subordinated Notes due November 1999
(the "10-1/4% Notes") and 13-1/2% Senior Subordinated Notes which were due
February 1995 (the "13-1/2% Notes"). As a result, all unpaid principal of, and
accrued pre-petition interest on, such debt became immediately due and payable.
The payment of such debt and accrued but unpaid interest thereon is prohibited
during the pendency of the Company's Chapter 11 case, and these liabilities have
been included in the balance sheet as "liabilities subject to settlement under
reorganization proceedings."
6
<PAGE>
Pre-petition liabilities subject to settlement under reorganization proceedings
include the following (dollars in thousands):
NOVEMBER 2, FEBRUARY 3,
1996 1996
------------ ------------
Accounts payable and accrued liabilities $23,194 $23,511
Capital lease obligations 11,395 12,321
10-1/4% Notes (including pre-petition
accrued interest) related party 67,576 67,576
13-1/2% Notes (including pre-petition
accrued interest) 838 838
Notes payable 535 599
------------ ------------
$103,538 $104,845
------------ ------------
------------ ------------
The reductions in capital lease obligations since February 3, 1996, consist of
payments to landlords for store locations in the ordinary course of business
operations of the Company.
In accordance with the Bankruptcy Code, the Company can seek Court approval for
the rejection of executory contracts, including real property leases. Any such
rejection may give rise to a prepetition unsecured claim for breach of contract.
In connection with the Company's Chapter 11 case, a review has been undertaken
of all the Company's obligations under its executory contracts. As of November
2, 1996, the Company has rejected 10 real property leases and certain executory
contracts and assumed 5 leases (with certain conditions and limitations).
The Company has filed with the Court a motion for approval of the rejection
of four additional leases for stores the Company is currently in the process of
closing. A hearing on the motion is scheduled for December 20, 1996. The
Plan provides for the assumption or rejection of other executory contracts and
leases which have not been previously assumed or rejected.
As a result of the reorganization proceedings, the Company may sell or otherwise
realize assets and liquidate or settle liabilities for amounts other than those
reflected in the financial statements. Further, a plan of reorganization could
materially change the amounts currently recorded in the financial statements,
including amounts recorded for the excess of cost over net assets acquired. The
accompanying financial statements do not include any adjustments that might
result from the outcome of these matters or adjustments that might result should
the Company be unable to continue as a going concern. Generally if a debtor-in-
possession is unable to emerge from Chapter 11, such debtor-in-possession could
be required to liquidate its assets.
Costs associated with the reorganization of the Company are charged to expense
as incurred. Under the requirements of the Chapter 11 Filing, the Company is
required to pay certain expenses of the Committees. The amounts charged to
reorganization expense by the Company have consisted and will continue to
consist primarily of write-off of property and equipment, professional fees,
lease related costs and severance costs.
NOTE 2 - BASIS OF PRESENTATION
The consolidated financial statements present the consolidated financial
position and results of operations of the Company and its subsidiaries, of which
all are inactive. All significant intercompany transactions and account
balances have been eliminated in consolidation. The financial statements
included herein should be read in conjunction with the audited, annual financial
statements for the fiscal year ended February 3, 1996, included in the Company's
Annual Report on Form 10-K. The year-end condensed balance sheet was derived
from audited financial statements, but does not include all disclosures required
by generally accepted accounting principles.
The accompanying consolidated financial statements of the Company have been
prepared on a going concern basis of accounting, and, for the periods subsequent
to the Filing, in accordance with the American Institute of Certified Public
Accountants Statement of Position 90-7, FINANCIAL REPORTING BY ENTITIES IN
REORGANIZATION UNDER THE BANKRUPTCY CODE. Recurring losses from operations and
the matters discussed herein related to the Filing raise substantial doubt about
the Company's ability to continue on a going concern. The ability of the
Company to continue as a going concern is dependent upon, among other things,
(i) the ability to comply with its debtor-in-possession financing agreement,
(ii) confirmation of a plan of reorganization under the Bankruptcy Code, (iii)
the ability to achieve profitable operations after such confirmation and (iv)
the ability to generate sufficient cash from operations to meet its obligations.
7
<PAGE>
The financial statements presented herein reflect all adjustments that are, in
the opinion of management, necessary to present fairly the operating results for
the periods reported. Except as discussed in Note 1, all such adjustments are
normal and recurring in nature. The results of operations for the quarterly
periods are not necessarily indicative of results for the entire year.
IMPAIRMENT OF LONG-LIVED ASSETS
In the first quarter of Fiscal 1996, the Company adopted Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("Statement
No. 121"). Statement No. 121 requires that long-lived assets and certain
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. If impairment has occurred, an impairment loss must be
recognized.
Statement No. 121 requires that assets be grouped and evaluated at the lowest
level for which there are identifiable cash flows that are largely
independent of the cash flows of other groups of assets. The Company has
identified this lowest level to be principally individual stores. The Company
considers historical performance and future estimated results in its
evaluation of potential impairment and then compares the carrying amount of
the asset to the estimated future cash flows expected to result from the use
of the asset. If the carrying amount of the asset exceeds estimated expected
undiscounted future cash flows, the Company measures the amount of the
impairment by comparing the carrying amount of the asset to its fair value.
The estimation of fair value is measured by discounting expected future cash
flows at a rate commensurate with the Company's borrowing rate.
During the first quarter of Fiscal 1996, the Company recognized a non-cash
impairment loss of $4.2 million. Of the total impairment loss, $2.3 million
represents impairment of property and equipment, $1.3 million relates to
excess of cost over net assets acquired and $0.6 million pertains to
leasehold interests. Considerable management judgment is necessary to
estimate discounted future cash flows. Accordingly, actual results could vary
significantly from such estimates.
NOTE 3 - LOAN AND SECURITY AGREEMENTS
On February 17, 1995, the Company received approval from the Court for a Loan
and Security Agreement (the "Old DIP Facility") with Foothill Capital
Corporation ("Foothill"). The Old DIP Facility provided for a borrowing
capacity of up to $32.0 million in revolving loans, including up to $15.0
million of letters of credit, subject to borrowing base limitations based upon,
among other things, the value of inventory and certain real property. The Old
DIP Facility provided that interest would accrue at the rate of 3% per annum in
excess of the Reference Rate (as defined therein), payable monthly in arrears.
The Old DIP Facility also provided that in the event of a default in the payment
of any amount due thereunder, the interest rate on such defaulted amount would
be 4.5% per annum in excess of the Reference Rate, payable on demand. At June
4, 1996, the date the Company ended its financing agreement with Foothill, the
Reference Rate was 8.25%.
The Old DIP Facility had been extended from its initial maturity date of May 17,
1996 to the earlier of August 17, 1996 (with provisions for two additional
quarterly renewals) or the effective date of the Company's plan of
reorganization. However, on June 4, 1996, the Company entered into a loan and
security agreement (the "FNBB Facility") with the First National Bank of
Boston ("FNBB") replacing the Old DIP Facility, after a hearing by the Court
and the entering of an order approving such financing. Although Foothill had
taken no action to declare the Company in default as of the date on which the
Old DIP Facility was terminated, the Company was in violation of the net
worth maintenance covenant in the Old DIP Facility.
Pursuant to the FNBB Facility the Company is able to borrow up to $32 million
in revolving loans (including $3 million of letters of credit), subject to
borrowing base limitations based upon, among other things, the value of
inventory and certain real property, during the pendency of the Company's
Chapter 11 proceeding or until June 30, 1997, whichever is sooner. Effective
November 8, 1996, the agreement was amended to increase the Company's
borrowing limit from $32 million to $35 million to accommodate seasonal
requirements for the Company's holiday season purchases. The borrowing limit
will revert to $32 million on December 15, 1996. In addition, during the
period beginning on December 15, 1996 and ending on January 31, 1997, the
Company is required to maintain the aggregate amount of outstanding
borrowings under the FNBB Facility at no more than $21.5 million for a period
of 30 consecutive days. Subject to FNBB's approval of a plan of
reorganization and other specified conditions, the FNBB Facility will
continue for a two year period following the effective date of a plan of
reorganization.
The FNBB Facility provides that for Base Rate (as defined therein), loans
interest will accrue at the rate of 1.5% per annum in excess of the Base Rate
payable monthly in arrears. For Eurodollar loans, the interest rate will be the
Eurodollar Rate (as defined therein) plus 2.75% (adjusted as provided therein).
The FNBB Facility also provides that in the event of a default in the payment of
any amount due thereunder, the interest rate on such default shall be the
greater of (i) 3.0% per annum in excess of the Base Rate and (ii) the applicable
rate on the loan, payable on demand. The interest rates for both Base Rate loans
and Eurodollar loans are subject to adjustment after the Plan is approved and
other conditions described in the FNBB Facility have occurred based on financial
ratios of the Company specified in the FNBB Facility. At November 2, 1996, the
Base Rate was 8.25% and the Eurodollar Rates ranged from 5.25% to 5.75%.
The Company has paid FNBB $ 235,000 in fees for the FNBB Facility as of November
2, 1996. Fees payable under the FNBB Facility consist primarily of monthly
payments equal to 0.5% (adjusted as provided therein) of the average unused
borrowing capacity and monthly payments equal to 0.125% of the borrowing
capacity. There will be an additional fee after
8
<PAGE>
the effective date of a plan of reorganization and the satisfaction of certain
conditions described in the FNBB Facility in the amount of $560,000 which shall
be payable as follows: (a) if the conditions are satisfied prior to December 31,
1996, $336,000 shall be payable on the date the conditions are satisfied and
$224,000 shall be payable on December 31, 1996 (or, if earlier, the time of
termination of the commitments), or (b) if the conditions are satisfied on or
after December 31, 1996, $336,000 shall be payable on the date the conditions
are satisfied and $224,000 shall be payable on December 31, 1997 (or, if
earlier, the time of termination of the commitments).
Borrowings under the FNBB Facility, together with cash flow from operations,
may be used by the Company to finance general working capital requirements,
including purchases of inventory and other expenditures permitted under the
FNBB Facility. The FNBB Facility is secured by inventory and substantially
all other assets and is an allowed administrative expense claim with super
priority over other administrative expenses in the Chapter 11 case. The FNBB
Facility imposes limitations on the Company with respect to, among other
things, (i) consolidations, mergers, and sales of assets, (ii) capital
expenditures in excess of specified levels and (iii) the prepayment of
certain indebtedness. Additionally, the Company must comply with certain
operating and financial covenants (as described therein). Although the
Company failed to comply with certain covenants related to inventory levels
for the months ending July 6, 1996 and August 3, 1996, the Company requested
and received a waiver relating to such breaches.
NOTE 4 - LOSS PER COMMON SHARE
Net loss per common share has been computed by dividing net loss by the weighted
average number of common shares outstanding during the period. The common stock
equivalents, represented by stock options and warrants were not considered in
the calculation as they either have an exercise price greater than the
applicable market price, or the effect of assuming their exercise or conversion
would be anti-dilutive. The weighted average number of shares outstanding for
the quarter and nine months ended November 2, 1996 were 17,900,053 and
17,899,857, respectively.
The weighted average number of shares outstanding for the quarter and nine
months ended October 28, 1995 were 17,896,363 and 17,891,566, respectively.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Company is involved in various matters of litigation arising in the
ordinary course of business. In the opinion of management, the ultimate
outcome of all such matters should not have a material adverse effect on the
financial position of the Company, but, if decided adversely to the Company,
could have a material adverse effect upon the distribution under the Plan by
increasing the total amount of allowed general unsecured claims and could
have a material adverse effect upon the Company's operating results during
the period in which the litigation is resolved. (See also Part II, Item 1.)
NOTE 6 - RESTATEMENT OF FINANCIAL STATEMENTS
The financial statements for the quarter ended November 2, 1996 have been
restated resulting in a decrease in the net loss to $4.8 million from $6.4
million as previously reported.
The financial statements for the nine months ended November 2, 1996 have been
restated resulting in an increase in the net loss to $18.5 million from $15.9
million as previously reported, and increasing the accumulated deficit to
$123.9 million from $121.3 million as previously reported.
The amended Quarterly Report reflects a decrease in reorganization expenses
of $1.5 million for the quarter ended November 2, 1996. As a result of these
changes, loss per share decreased from a previously reported loss of ($0.36)
to a loss of ($0.27) per share.
The amended Quarterly Report reflects an increase in operating costs of $4.2
million for the nine months ended November 2, 1996. As a result of these
changes, loss per share increased from a previously reported loss of ($0.89)
to a loss of ($1.03) per share.
The $4.2 million increase in operating costs and $1.5 million decrease in
reorganization expenses for the nine months ended November 2, 1996, the $3.8
million reduction in total assets, the $1.5 million decrease in accrued store
closure costs and the $0.4 million increase in other accrued expenses
represents the expense recognition of the impairment of long-lived assets due
to the adoption of Statement No. 121 during the nine months ended November 2,
1996.
9
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain information and statements included in management's Discussion and
Analysis of Financial Condition and Results of Operations including, without
limitation, statements containing the words "believes", "anticipates",
"expects" and words of a similar import, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. Such forward-looking statements involve known and unknown
risks, uncertainties, and other factors that may cause the actual results,
performance, or achievements of the Company, to be materially different from
any future results, performance, or achievements expressed or implied by such
forward-looking statements. Although it is no possible to itemize all the
factors and specific events that could affect the outlook of the Company,
factors that could significantly impact the expected results include, among
others, (i) national and local general economic and market conditions, (ii)
demographic changes, (iii) liability and other claims asserted against the
Company, (iv) competition, (v) the loss of significant customers or
suppliers, (vi) fluctuations in operating results, (vii) changes in business
strategy or development plans, (viii) business disruptions, (ix) the ability
to attract and retain qualified personnel, and (x) the confirmation of the
Plan and the terms thereof. The Company disclaims any obligations to update
any such factors or to announce publicly the result of any revisions to any
forward-looking statements contained or incorporated by reference herein to
reflect untrue events or developments.
BACKGROUND
Lamonts Apparel, Inc. (the "Company") retails brand-name apparel and accessories
for the entire family through its 42 full-line apparel stores. Lamonts
currently operates in malls and regional shopping centers located in the states
of Alaska, Idaho, Montana, Oregon, Utah and Washington. However, the Company
expects that four stores will be closed by year end, including the Montana
store.
On January 6, 1995 (the "Petition Date"), Lamonts Apparel, Inc. (the
"Company") filed a voluntary petition for relief (the "Filing") under Chapter
11 ("Chapter 11") of title 11 of the United States Code (the "Bankruptcy
Code") in the United States Bankruptcy Court (the "Court") for the Western
District of Washington at Seattle. In Chapter 11, the Company has continued
to manage its affairs and operate its business as a debtor-in-possession.
The Company and representatives of the committees that represent Lamonts'
unsecured trade creditors, bondholders and equityholders (the "Committees")
have reached an understanding regarding the material economic terms of a
proposed consensual plan of reorganization designed to enable the Company to
emerge from Chapter 11. On August 23, 1996, that plan was filed with the
Court, along with the proposed disclosure statement relating to that plan.
On October 23, 1996, an amended plan of reorganization (the "Plan") and an
amended disclosure statement (the "Disclosure Statement") were filed with the
court. The Disclosure Statement was approved by the Court on October 24,
1996, and the Plan and Disclosure Statement have been transmitted to all
impaired creditors and equity security holders along with ballots for the
purpose of soliciting acceptances of the Plan. A hearing to consider
confirmation of the Plan has been scheduled by the Court for January 6, 1997.
The Plan provides that the Company's current equity holders will be
substantially diluted. The confirmation and effectiveness of the Plan, the
implementation of the Company's proposed business plan and the Company's
proposed equity distribution are each subject to numerous uncertainties set
forth in detail in the Plan and Disclosure Statement, and the Plan is subject
to modification and/or withdrawal. Accordingly, the value of the Company's
common stock remains highly speculative.
In a Chapter 11 reorganization plan, the rights of the pre-Filing creditors may
be significantly altered. Pre-Filing creditors may receive substantially less
than the full face amount of claims. Certain pre-Filing creditors have filed
claims with the Court substantially in excess of amounts reflected in the
Company's financial statements. The Company continues to analyze and reconcile
the claims filed by pre-Filing creditors with the Company's financial records,
but believes it has made appropriate provision for all claims filed. However,
no estimate of the amount of adjustments, if any, from recorded amounts, to
amounts to be realized by pre-Filing creditors, is available at this time.
These liabilities are included in the balance sheet as "liabilities subject to
settlement under reorganization proceedings."
As of the Petition Date, payment of pre-petition liabilities to unsecured
creditors, including trade creditors and noteholders, and pending litigation
against the Company are generally stayed while the Company continues its
business operations as a debtor-in-possession. Although the Company is
authorized to operate its business as a debtor-in-possession, it may not engage
in transactions outside the ordinary course of business without first complying
with the notice and hearing provisions of the Bankruptcy Code and obtaining
Court approval.
10
<PAGE>
As a result of the Filing, the Company is currently in default under the
indentures governing the Company's 10-1/4% Subordinated Notes due November
1999 (the "10 1/4% Notes") and 13-1/2% Senior Subordinated Notes
which were due February 1995 (the "13 1/2% Notes"). As a result, all unpaid
principal of, and accrued pre-petition interest on, such debt became
immediately due and payable. The payment of such debt and accrued but unpaid
interest thereon is prohibited during the pendency of the Company's Chapter
11 case.
Since February 3, 1996, the Company has closed one store and is in the process
of closing four additional under-performing stores, with the approval of the
Court. In connection with the closing of these four stores, located in Spokane,
Washington; Twin Falls, Idaho; Missoula, Montana; and Hillsboro, Oregon; a
reserve in the amount of $4.2 million has been established for the anticipated
costs associated with closing these stores. The reserve was established in the
quarter ended November 2, 1996, and is included in Reorganization expenses.
Management is continually evaluating store locations and operations to determine
whether to close, downsize or relocate stores that do not meet performance
objectives.
Management believes that Lamonts has made substantial progress in the period
since the Filing. The Company has closed unprofitable stores, eliminated
unprofitable merchandise lines, added a home decor line, replaced its shoe
licensee and reduced operating expenses. In addition, management implemented
new merchandising strategies designed to: (i) improve the quality of
merchandise offered while maintaining price points geared to the Company's
customer base, (ii) reduce cash operating expenses, and (iii) increase inventory
turns to improve the Company's performance. The Company also has initiated a
policy to mark-down and clear out any unsold merchandise within its respective
season. As a result, the age and quality of inventory has been improved
significantly.
On June 4, 1996, the Company entered into a new loan and security agreement (the
"FNBB Facility") with the First National Bank of Boston ("FNBB") replacing the
Company's existing loan agreement (the "Old DIP Facility") with Foothill Capital
Corporation ("Foothill"), after a hearing by the Court and the entering of an
order approving such financing. See "Liquidity and Capital Resources" herein.
RESULTS OF OPERATIONS
The following discussion and analysis provides information with respect to the
results of operations for the quarter ("3rd Quarter 1996") and nine month period
("YTD 1996") ended November 2, 1996 compared to the quarter ("3rd Quarter 1995")
and nine month period ("YTD 1995") ended October 28, 1995.
REVENUES. Revenues of $50.7 million for the 3rd Quarter 1996 increased 1.8% on
a total store basis from $49.8 million for the 3rd Quarter 1995. Comparable
store revenues (i.e., stores open for at least a year) increased 3.3% for the
3rd Quarter 1996 as compared to 3rd Quarter 1995. Revenues of $138.3 million
for YTD 1996 increased 3.0% on a total store basis from $134.2 million for YTD
1995. Comparable store revenues increased 4.7% for YTD 1996 as compared to YTD
1995. Management believes that revenues have increased due to increased levels
of inventory and overall improvement in the quality of the merchandise offered
in the stores compared to the prior year periods. In addition, the Company's
new merchandising strategy has resulted in quicker turnover of certain
categories of merchandise, and the strength of the home decor department has
resulted in increased sales.
GROSS PROFIT. Gross profit, as a percentage of revenues, increased to 36.3%
during the 3rd Quarter 1996 compared to 35.4% during the 3rd Quarter 1995.
Gross profit, as a percentage of revenues, increased to 36.2% for YTD 1996
compared to 34.7% for YTD 1995. The increase in gross profit resulted primarily
from (i) policies implemented to establish more competitive pricing strategies
and (ii) management's purchasing strategies, which have decreased the cost of
merchandise sold.
OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative expenses
of $16.5 million for the 3rd Quarter 1996 decreased 9.2% from $18.2 million
for the 3rd Quarter 1995. The decrease of $1.7 million primarily relates to
(i) a decrease in advertising expense of $0.3 million (ii) a decrease in
credit card fees of $0.3 million due to a decrease in the reserve for
doubtful accounts (iii) a reduction in payroll costs of $0.6 million due to a
reduction in employees and (iv) a reduction in operating costs attributable
to closed stores operating in the 3rd Quarter 1995, accounting for
approximately $0.4 million.
Operating and administrative expenses of $49.5 million for YTD 1996 decreased
3.7% from $51.4 million for YTD 1995. The decrease of $1.9 million primarily
relates to (i) a reduction in operating costs attributable to closed stores
operating in the YTD 1995, accounting for approximately $1.2 million and (ii)
lower payroll costs of $1.8 million due to a reduction in employees, offset by
an increase in advertising expense of $1.2 million.
11
<PAGE>
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense of $2.0
million for the 3rd Quarter 1996 decreased $0.3 million as compared to $2.3
million for the 3rd Quarter 1995. Depreciation and amortization expense of $6.0
million for YTD 1996 decreased $1.1 million as compared to $7.1 million for YTD
1995. The decrease primarily relates to assets retired as a result of store
closures and assets becoming fully depreciated or amortized.
IMPAIRMENT OF LONG-LIVED ASSETS. A noncash charge of $4.2 million for the
impairment of long-lived assets was recognized during YTD 1996 due to the
adoption of Statement No. 121. See "Item 1 - Consolidated Financial
Statements - Note 2". The charge consists of a noncash write-off of the
excess of cost over net assets acquired, leasehold interest and leasehold
improvements determined to be impaired under the application of statement No.
121.
INTEREST EXPENSE. Interest expense of $1.3 million for the 3rd Quarter 1996
decreased $0.1 million from $1.4 million for the 3rd Quarter 1995. Interest
expense of $3.8 million for YTD 1996 increased $0.1 million from $3.7 million
for YTD 1995. This primarily relates to increased borrowing levels under the
Company's working capital facility, offset by lower interest rates.
REORGANIZATION EXPENSES. Reorganization expenses of $3.4 million for the 3rd
Quarter 1996 increased $2.7 million from $0.7 million for the 3rd Quarter 1995.
The YTD 1996 expense of $5.1 million increased $3.1 million from $2.0 million
for the YTD 1995. The reorganization expenses represent costs directly related
to the Company's Chapter 11 case and consist primarily of professional fees,
store closure costs and severance costs. The increase from the prior periods
consists of a $2.7 million store closure reserve established during the 3rd
Quarter 1996 in anticipation of the costs to close four stores by year end and
higher professional fees related to the preparation and filing of the Plan and
related proposed disclosure statement and the FNBB Facility.
NET LOSS. The Company reported a net loss of $4.8 million for the 3rd Quarter
1996 as compared to a net loss of $4.9 million for the 3rd Quarter 1995. The
loss for the 3rd Quarter 1996 increased $0.1 million from the prior period
primarily due to an increase of $2.7 million in reorganization expenses for
store closure reserve offset by (i) an increase of $0.8 million in gross profit,
(ii) a decrease of $0.3 million in depreciation and amortization expense and
(iii) a decrease of $1.7 million in operating expenses.
The YTD 1996 loss of $18.5 million decreased $1.1 million from the loss of $17.4
million for YTD 1995. The reduction for YTD 1996 resulted primarily from (i)
$3.5 million increase in gross profit, (ii) $1.9 million decrease in operating
and administrative expenses, and (iii) $1.0 million decrease in depreciation and
amortization expense, offset by $3.1 million increase in reorganization
expenses, $4.2 million increase in Impairment of long-lived assets and $0.2
million increase in net other income (expense).
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
The Company used $9.2 million of cash for operating activities before
reorganization items for YTD 1996, a decrease of $1.8 million as compared to
$11.0 million used for YTD 1995. Decreases in funds used was primarily due to a
decrease in net loss, offset by funds used to pay down trade payables and to
increase inventory levels.
The Company received $4.0 million of cash in investing activities for YTD 1996
as compared to using $1.6 million for YTD 1995. The increase of $5.6 million
results primarily from net sale proceeds of $4.5 million received from the sale-
leaseback of the Company's Alderwood store during YTD 1996 and less capital
expenditures.
The $0.5 million decrease in cash provided by financing activities is primarily
due to decreased borrowings of $0.8 million under the Company's working capital
facilities during YTD 1996 as compared to YTD 1995, offset by decreased payments
of capital leases of $0.3 million.
As of November 2, 1996, the Company had $2.7 million of cash and an additional
$1.2 million of current restricted cash, representing the prefunding of payroll
and taxes in connection with the Filing.
CAPITAL RESOURCES
On February 17, 1995, the Company received approval from the Court for a Loan
and Security Agreement with Foothill. The Old DIP Facility provided for a
borrowing capacity of up to $32.0 million in revolving loans, including up to
$15.0 million of letters of credit ("borrowing capacity"), subject to borrowing
base limitations based upon, among other things, the value of inventory and
certain real property. The Old DIP Facility had been extended from its initial
maturity date of May 17, 1996 to the earlier of August 17, 1996 (with provisions
for two additional quarterly renewals) or the effective date of the Company's
plan of reorganization. However, on June 4, 1996, the Company entered into the
FNBB Facility with FNBB replacing the Old DIP Facility, after a hearing by the
Court and the entering of an order approving such financing.
12
<PAGE>
Although Foothill had taken no action to declare the Company in default as of
the date on which the Old DIP Facility was terminated, the Company was in
violation of the net worth maintenance covenant in Old DIP Facility.
Pursuant to the FNBB Facility, the Company is able to borrow up to $32
million in revolving loans (including $3 million of letters of credit),
subject to borrowing base limitations based upon, among other things, the
value of inventory and certain real property, during the pendency of the
Company's Chapter 11 proceeding or until June 30, 1997. Effective November
8, 1996, the agreement was amended to increase the Company's borrowing limit
from $32 million to $35 million to accommodate seasonal requirements for the
Company's holiday season purchases. The borrowing limit will revert to $32
million on December 15, 1996. In addition, during the period beginning on
December 15, 1996 and ending on January 31, 1997, the Company is required to
maintain the aggregate amount of outstanding borrowings under the FNBB
Facility at no more than $21.5 million for a period of 30 consecutive days.
Subject to FNBB's approval of a plan of reorganization and other specified
conditions, the FNBB Facility will continue for a two year period following
the effective date of a plan of reorganization.
The FNBB Facility provides that for Base Rate loans interest will accrue at the
rate of 1.5% per annum in excess of the Base Rate (as defined therein), payable
monthly in arrears. For Eurodollar loans, the interest rate will be the
Eurodollar Rate (as defined therein) plus 2.75% (adjusted as provided therein).
The FNBB Facility also provides that in the event of a default in the payment of
any amount due thereunder, the interest rate on such default shall be the
greater of (i) 3.0% per annum in excess of the Base Rate and (ii) the applicable
rate on the loan, payable on demand. The interest rates for both Base Rate loans
and Eurodollar loans are subject to adjustment after the plan of reorganization
is approved and other conditions described in the FNBB Facility have occurred
based on financial ratios of the Company specified in the FNBB Facility. At
November 2, 1996, the Base Rate was 8.25% and the Eurodollar Rates ranged from
5.25% to 5.75%.
The Company has paid FNBB $235,000 in fees for the FNBB Facility as of November
2, 1996. Fees payable under the FNBB Facility consist primarily of monthly
payments equal to 0.5% (adjusted as provided therein) of the average unused
borrowing capacity and monthly payments equal to 0.125% of the borrowing
capacity. There will be an additional fee after the effective date of a plan of
reorganization and the satisfaction of certain conditions described in the FNBB
Facility in the amount of $560,000 which shall be payable as follows: (a) if the
conditions are satisfied prior to December 31, 1996, $336,000 shall be payable
on the date the conditions are satisfied and $224,000 shall be payable on
December 31, 1996 (or, if earlier, the time of termination of the commitments),
or (b) if the conditions are satisfied on or after December 31, 1996, $336,000
shall be payable on the date the conditions are satisfied and $224,000 shall be
payable on December 31, 1997 (or, if earlier, the time of termination of the
commitments).
Borrowings under the FNBB Facility, together with cash flow from operations,
may be used by the Company to finance general working capital requirements,
including purchases of inventory and expenditures permitted under the FNBB
Facility. The FNBB Facility is secured by inventory and substantially all
other assets and is an allowed administrative expense claim with super
priority over other administrative expenses in the Chapter 11 case. The FNBB
Facility imposes limitations on the Company with respect to, among other
things, (i) consolidations, mergers, and sales of assets, (ii) capital
expenditures in excess of specified levels and (iii) the prepayment of
certain indebtedness. Additionally, the Company must comply with certain
operating and financial covenants (as described therein). Although the
Company failed to comply with certain covenants related to inventory levels
for the months ending July 6, 1996 and August 3, 1996, the Company requested
and received a waiver relating to such breaches.
As of December 10, 1996, the Company had $27.2 million of borrowings
outstanding under the FNBB Facility with additional borrowing availability
thereunder of $7.8 million.
The Company's primary cash requirement is the procurement of inventory which
is currently funded through (i) borrowings under the FNBB Facility (ii) trade
credit and (iii) cash generated from operations. Like other apparel
retailers, the Company is highly dependent upon its ability to obtain trade
credit, which is generally extended by its vendors and a small number of
factoring institutions that continually monitor the Company's credit lines.
If the Company is able to obtain its expected trade credit terms, the Company
believes that borrowings under the FNBB Facility and cash generated from
operations will provide the cash necessary to fund the Company's immediate
cash requirements. The adequacy of the Company's long-term capital resources
and liquidity will depend on whether and when the Plan is confirmed, as well
as other factors.
In addition, on October 11, 1996, the Company retained an investment banking
firm, with the approval of the Court, to raise additional equity capital to meet
the Company's long-term liquidity requirements. However, there can be no
assurances that the Company will be able to raise such equity capital, or
regarding the terms on which such capital may be available.
13
<PAGE>
OTHER
The Company has never declared or paid cash dividends on its Common Stock or any
other equity security, and does not anticipate paying cash dividends on the
Common Stock, or any other equity security, in the foreseeable future. Any
future determination as to the payment of dividends will depend upon certain
debt instrument limitations, future earnings, results of operations, capital
requirements and the financial condition of the Company. The ability of the
Company to pay dividends is restricted under the terms of the FNBB Facility.
Such restrictions prohibit the payment of dividends for the foreseeable future.
In addition, the Bankruptcy Code prohibits the Company's payment of cash
dividends (during the pendency of the Company's Chapter 11 case).
SEASONALITY
The Company's revenues are seasonal, with the Christmas season (included in the
Quarter ending the Saturday closest to January 31) being its strongest period.
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-01-1997
<PERIOD-START> FEB-04-1996
<PERIOD-END> NOV-02-1996
<CASH> 2,694
<SECURITIES> 0
<RECEIVABLES> 2,478
<ALLOWANCES> 0
<INVENTORY> 52,770
<CURRENT-ASSETS> 61,474
<PP&E> 31,924
<DEPRECIATION> 0
<TOTAL-ASSETS> 112,964
<CURRENT-LIABILITIES> 67,096<F1>
<BONDS> 0
0
0
<COMMON> 179
<OTHER-SE> (61,204)
<TOTAL-LIABILITY-AND-EQUITY> 112,964
<SALES> 138,284
<TOTAL-REVENUES> 138,284
<CGS> 88,237
<TOTAL-COSTS> 88,237
<OTHER-EXPENSES> 64,793<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,773
<INCOME-PRETAX> (18,511)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,511)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,511)
<EPS-PRIMARY> (1.03)
<EPS-DILUTED> 0
<FN>
<F1>EXCLUDES LIABILITIES SUBJECT TO COMPROMISE UNDER REORGANIZATION PROCEEDING.
<F2>INCLUDES: OPERATING & ADMINISTRATION EXPENSES OF $49,482 DEPRECIATION AND
AMORTIZATION OF $6,051, REORGANIZATION EXPENSES OF $5,090, AND IMPAIRMENT OF
LONG-LIVED ASSETS OF $4,170.
</FN>
</TABLE>
