<PAGE>
Relates to Form S-1
Registration No. 333-44311
Filed under Rule 424 (b)(3) and (c)
SUPPLEMENT TO
PROSPECTUS
OF
LAMONTS APPAREL, INC.
The following information supplements the Prospectus, dated June 15,
1998, of Lamonts Apparel, Inc. (the "Company") related to 8,746,291 shares of
the Company's Class A Common Stock (the "Common Stock"); 1,810,380 Class A
Warrants, each to purchase 1 share of Common Stock; 581,184 Class B Warrants,
each to purchase 1 share of Common Stock; and 228,639 Class C Warrants, each
to purchase an aggregate of 15 shares of Common Stock (the "Prospectus").
Capitalized terms used in this Supplement and not defined herein have the
meaning set forth in the Prospectus. This Supplement should be read in
conjunction with the Prospectus.
THE DATE OF THIS SUPPLEMENT IS DECEMBER 16, 1998.
The following information was included in the Company's quarterly report
on Form 10-Q for the thirteen weeks ended October 31, 1998, as filed with the
Securities and Exchange Commission on December 15, 1998.
S-1
<PAGE>
LAMONTS APPAREL, INC.
SUMMARY OF CONSOLIDATED FINANCIAL DATA
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The financial data presented below for the thirteen weeks ended October 31, 1998
("3rd Quarter 1998") and November 1, 1997 ("3rd Quarter 1997") is derived from
the Company's unaudited consolidated financial statements. Such unaudited
consolidated financial statements reflect all adjustments which are, in the
opinion of management, necessary and of a normal recurring nature to present
fairly the operating results for the interim periods reported. The results of
operations for 3rd Quarter 1998 are not necessarily indicative of the results to
be expected for the fiscal year ending January 30, 1999. This information should
be read in conjunction with the Consolidated Financial Statements and notes
thereto included elsewhere in the Prospectus. THE FOLLOWING FINANCIAL DATA IS
NOT NECESSARILY COMPARABLE FOR THE PERIODS SET FORTH BELOW BECAUSE OF THE
EFFECTS OF THE COMPANY'S EMERGENCE FROM CHAPTER 11 IN JANUARY 1998 AND THE
ADOPTION OF FRESH-START REPORTING.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED
-------------------------------------
STATEMENT OF OPERATIONS DATA: OCTOBER 31, 1998 | NOVEMBER 1, 1997
- ----------------------------- ---------------- | ----------------
<S> <C> <C>
Revenues $ 50,862 | $ 50,263
Cost of merchandise sold 32,089 | 31,760
---------------- | ----------------
Gross profit 18,773 | 18,503
---------------- | ----------------
|
Operating and administrative expenses 15,730 | 16,508
Depreciation and amortization 2,234 | 1,723
---------------- | ----------------
Operating costs 17,964 | 18,231
---------------- | ----------------
|
Income from operations before other income (expense), |
and reorganization expenses 809 | 272
|
Other income (expense): |
Interest expense (1,513) | (1,415)
Other income 6 | 2
---------------- | ----------------
|
Loss before reorganization expenses (698) | (1,141)
Reorganization expenses - | (930)
---------------- | ----------------
|
Net loss ($ 698) | ($ 2,071)
================ | ================
|
BASIC AND DILUTED LOSS PER COMMON SHARE: (a) ($ 0.08) | ($ 0.12)
|
WEIGHTED AVERAGE SHARES USED IN COMPUTING LOSS |
PER COMMON SHARE: |
|
Basic and Diluted 9,000,010 | 17,900,053
</TABLE>
S-2
<PAGE>
(a) For the thirteen weeks ended October 31, 1998 and November 1, 1997,
options and warrants to purchase Common Stock were not included in the
computation of diluted loss per common share since the effect of assuming
their exercise would be anti-dilutive.
If the Plan of Reorganization had been consummated on February 2, 1997,
the unaudited pro forma net loss per common share would have been $.11 per
share for the thirteen weeks ended November 1, 1997 and the weighted
average number of common shares outstanding would have been 9,000,010.
S-3
<PAGE>
LAMONTS APPAREL, INC.
SUMMARY CONSOLIDATED FINANCIAL DATA
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The financial data presented below for the thirty-nine weeks ended October 31,
1998 ("YTD 1998") and November 1, 1997 ("YTD 1997") is derived from the
Company's unaudited consolidated financial statements. Such unaudited
consolidated financial statements reflect all adjustments which are, in the
opinion of management, necessary and of a normal recurring nature to present
fairly the operating results for the interim periods reported. The results of
operations for YTD 1998 are not necessarily indicative of the results to be
expected for the fiscal year ending January 30, 1999. This information should be
read in conjunction with the Consolidated Financial Statements and notes thereto
included elsewhere in the Prospectus. THE FOLLOWING FINANCIAL DATA IS NOT
NECESSARILY COMPARABLE FOR THE PERIODS SET FORTH BELOW BECAUSE OF THE EFFECTS OF
THE COMPANY'S EMERGENCE FROM CHAPTER 11 IN JANUARY 1998 AND THE ADOPTION OF
FRESH-START REPORTING.
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
-------------------------------------
STATEMENT OF OPERATIONS DATA: OCTOBER 31, 1998 | NOVEMBER 1, 1997
- ----------------------------- ---------------- | ----------------
<S> <C> <C>
Revenues $ 140,924 | $ 137,394
Cost of merchandise sold 89,437 | 87,798
---------------- | ----------------
Gross profit 51,487 | 49,596
---------------- | ----------------
|
Operating and administrative expenses 45,162 | 47,235
Depreciation and amortization 6,008 | 5,484
---------------- | ----------------
Operating costs 51,170 | 52,719
---------------- | ----------------
|
Income (loss) from operations before other income (expense), |
and reorganization expenses 317 | (3,123)
|
Other income (expense): |
Interest expense (3,658) | (3,855)
Other income 13 | 6
---------------- | ----------------
|
Loss before reorganization expenses (3,328) | (6,972)
Reorganization expenses - | (1,924)
---------------- | ----------------
|
Net loss ($ 3,328) | ($ 8,896)
================ | ================
|
|
BASIC AND DILUTED LOSS PER COMMON SHARE: (a) ($ 0.37) | ($ 0.50)
================ | ================
|
WEIGHTED AVERAGE SHARES USED IN COMPUTING LOSS |
PER COMMON SHARE: |
|
Basic and Diluted 9,000,010 | 17,900,053
</TABLE>
S-4
<PAGE>
<TABLE>
<CAPTION>
THIRTY-NINE WEEKS ENDED
-------------------------------------
STATEMENT OF CASH FLOWS DATA: OCTOBER 31, 1998 | NOVEMBER 1, 1997
- ----------------------------- ---------------- | ----------------
<S> <C> <C>
Cash used by operating activities ($ 8,649) | ($ 9,530)
Cash used by investing activities (1,292) | (789)
Cash provided by financing activities 10,994 | 10,551
|
BALANCE SHEET DATA (END OF PERIOD): |
Working capital ($ 6,443) |
Total assets 114,109 |
Long-term debt and obligations under capital leases, |
net of current maturities 22,789 |
Stockholders' equity 16,628 |
</TABLE>
(a) For the thirty-nine weeks ended October 31, 1998 and November 1, 1997,
options and warrants to purchase common stock were not included in the
computation of diluted loss per common share since the effect of
assuming their exercise would be anti-dilutive.
If the Plan of Reorganization had been consummated on February 2, 1997,
the unaudited pro forma net loss per common share would have been $.74 per
share for the thirty-nine weeks ended November 1, 1997 and the weighted
average number of common shares outstanding would have been 9,000,010.
S-5
<PAGE>
LAMONTS APPAREL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Statements in this report containing the words "believes," "anticipates,"
"expects," and words of similar import, and any other statements which may be
construed as a prediction of future performance or events, 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, or industry results, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Although it is not
possible to itemize all factors that could affect actual results, such factors
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 a significant number of
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, (x) ownership of Common
Stock, (xi) volatility of stock price, and (xii) the additional risk factors
identified in the Company's Registration Statement on Form S-1 (No. 333-44311)
initially filed with the SEC on January 15, 1998, and those described from time
to time in the Company's other filings with the SEC, press releases and other
communications. The Company disclaims any obligations to update any such factors
or to announce publicly the result of any revisions to any of the
forward-looking statements contained or incorporated by reference herein to
reflect future events or developments.
RESULTS OF OPERATIONS
FRESH-START REVALUATION
Because Fresh-Start Reporting was adopted as of January 31, 1998, the
consolidated results of operations for the thirteen weeks and thirty-nine weeks
ended October 31, 1998 are not comparable to the consolidated results of
operations for the thirteen weeks and thirty-nine weeks ended November 1, 1997
due to the inclusion of reorganization expenses prior to January 31, 1998 and
the change in depreciation and amortization expense related to the revaluation
of assets. Accordingly, a vertical black line is shown to separate
post-emergence operations from those ended prior to January 31, 1998 in the
consolidated results of operations.
The following discussion and analysis provides information with respect to the
results of operations for the thirteen weeks ("3rd Quarter 1998") and
thirty-nine weeks ("YTD 1998") ended October 31, 1998 compared to the thirteen
weeks ("3rd Quarter 1997") and thirty-nine weeks ("YTD 1997") ended November 1,
1997.
S-6
<PAGE>
REVENUES. Comparable store revenues (i.e., stores open since the beginning of
each of the periods presented) of $50.9 million for the 3rd Quarter 1998
increased $0.6 million or 1.2% from $50.3 million for the 3rd Quarter 1997.
Comparable store revenues of $140.9 million for YTD 1998 increased $3.5 million
or 2.6% as compared to $137.4 million for YTD 1997. Comparable store revenues
were equal to total store revenues for all periods presented. Management
believes that revenues have increased due to higher average inventory levels,
continued improvement in the quality of the merchandise offered in the stores
compared to the prior period, and strong sales in the Alaska market, which more
than offset a decline of revenue in other markets. There can be no assurance
that revenues will increase in future periods.
GROSS PROFIT. Gross profit, as a percentage of revenues, was 36.9% for the 3rd
Quarter 1998, compared to 36.8% for the 3rd Quarter 1997. Gross profit, as a
percentage of revenues, increased 0.4%, from 36.1% for YTD 1997, to 36.5% for
YTD 1998, partially due to better inventory management and controls. In
addition, gross profit in the first quarter of 1997 was negatively impacted by
markdowns associated with severe winter storms.
OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative expenses
were $15.7 million or 30.9% of sales for the 3rd Quarter 1998, compared to $16.5
million or 32.8% of sales for the 3rd Quarter 1997. Operating and administrative
expenses were $45.2 million or 32.0% of sales for YTD 1998, compared to $47.2
million or 34.4% of sales for YTD 1997. Excluding the curtailment gain of $1.0
million recognized in the first quarter of fiscal 1998 (see Note 6 to the
consolidated financial statements), operating and administrative expenses for
YTD 1998 were 32.8% of sales. Expense savings initiatives, including lower
occupancy expense at the Company's leased distribution center and lower store
payroll expense, partially offset by an increase in Year 2000 remediation costs,
accounted for the remainder of the reduction in operating and administrative
expenses for YTD 1998 as compared to YTD 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was $2.2
million for the 3rd Quarter 1998 and $1.7 million for the 3rd Quarter 1997.
Depreciation and amortization expense was $6.0 million for YTD 1998 and $5.5
million for YTD 1997. Both increases are primarily due to the revaluation of
assets in connection with fresh-start reporting.
INTEREST EXPENSE. Interest expense was $1.5 million for the 3rd Quarter 1998
compared to $1.4 million for the 3rd Quarter 1997. Interest expense was $3.7
million for YTD 1998 compared to $3.9 million for YTD 1997. Interest expense is
primarily related to outstanding borrowings under the Company's BankBoston
Facility, referred to below. The decrease in YTD 1998, is primarily the result
of an adjustment, totaling approximately $0.8 million, for a change in estimate
recorded in the twenty-six weeks ended August 1, 1998, partially offset by
higher average outstanding balances on the BankBoston Facility during 1998
periods.
REORGANIZATION EXPENSES. Reorganization expenses of $0.9 million for the 3rd
Quarter 1997 and $1.9 million for YTD 1997 represent costs directly related to
the Company's Chapter 11 case and consist primarily of professional fees. No
such costs were incurred in the 3rd Quarter 1998 or YTD 1998.
S-7
<PAGE>
NET LOSS. As a result of the foregoing, the Company recorded a net loss of $0.7
million for the 3rd Quarter 1998, compared to a net loss of $2.1 million for the
3rd Quarter 1997. The YTD 1998 net loss of $3.3 million decreased $5.6 million
from the net loss of $8.9 million for YTD 1997. The $5.6 million improvement is
primarily due to (i) the increase in gross profit of $1.9 million, due mainly to
the increase in store revenues, (ii) the decrease in operating and
administrative expenses of $2.1 million, which includes the curtailment gain of
$1.0 million, and (iii) the reduction in reorganization expenses of $1.9
million. These improvements were partially offset by the increase in
depreciation and amortization expense of $0.5 million.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW
The Company used $8.6 million of cash for operating activities for YTD 1998.
Cash for operating activities was used to fund losses in YTD 1998, the seasonal
inventory build-up required to meet the Company's sales objectives, and the
payment of accrued reorganization expenses as required under the Plan. These
uses of cash were partially offset by a seasonal increase in accounts payable.
Cash used for operating activities decreased by $0.9 million as compared to YTD
1997. The reduction is primarily due to the decrease in the net loss (after
giving effect to the curtailment gain) and a reduction in restricted cash due to
emergence from Chapter 11. These increases in cash provided by operating
activities were partially offset by a reduction of accrued expenses related to
the payment of bonuses, reorganization and other expenses, and an increase in
inventory levels (net of the increase in accounts payable), compared to YTD
1997.
The Company used $1.3 million of cash in investing activities for YTD 1998,
representing an increase of $0.5 million as compared to $0.8 million used in YTD
1997. The increase is partially attributable to higher capital expenditures. In
addition, the Company received approximately $0.2 million from the sale of land
during YTD 1997.
For YTD 1998, the Company received $11.0 million of cash from financing
activities as compared to $10.6 million for YTD 1997, due primarily to higher
net borrowings under the Revolver.
As of October 31, 1998, the Company had a working capital ratio of 0.9. The
Company believes that borrowings under the BankBoston Facility, referred to
below, trade credit, and cash generated from operations will provide the cash
necessary to fund the Company's cash requirements for the foreseeable future.
S-8
<PAGE>
CAPITAL RESOURCES
The Company entered into the Amended and Restated Debtor-in-Possession and Exit
Financing Loan Agreement, dated as of September 26, 1997 (the "Loan Agreement"),
between the Company and BankBoston, N.A. ("BankBoston"), pursuant to which
BankBoston provides Lamonts with (i) a revolving line of credit (the "Revolver")
with a maximum borrowing capacity of $32 million, $35 million for the period
October 15, 1998 to December 15, 1998; and (ii) a term loan in the amount of $10
million (the "Term Loan" and, together with the Revolver, the "BankBoston
Facility"). In addition, the Company must maintain a Revolver balance of less
than $20.5 million for 30 consecutive days between December 15, 1998 and January
31, 1999. See Note 7 to the consolidated financial statements for the 52 weeks
ended January 31, 1998, included in the Company's Annual Report on Form 10-K, as
amended, for a description of the BankBoston Facility.
The Company expensed fees of approximately $0.8 million YTD 1998 and $0.6
million YTD 1997 for the BankBoston Facility.
As of December 9, 1998, the Company had $22.9 million of borrowings outstanding
under the Revolver and $9.950 million outstanding under the Term Loan. To meet
its obligation under the Revolver and to maintain borrowings under the Revolver
at less than $20.5 million for 30 consecutive days between December 15, 1998 and
January 31, 1999, the Company intends to pay down borrowings during such period
with cash flow from operations.
SEASONALITY
The Company's sales are seasonal, with the fourth quarter historically being the
strongest quarter as a result of the holiday season.
YEAR 2000
"Fiscal 1998" refers to the 52 weeks ending January 30, 1999, and "Fiscal 1999"
refers to the 52 weeks ending January 29, 2000.
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations.
The Company has established a compliance program to modify or replace existing
information technology systems to prevent the generation of invalid or incorrect
results in connection with processing year dates for the year 2000 and later.
The Company believes that it will complete its Year 2000 modifications by the
third quarter of Fiscal 1999 and, based on its current
S-9
<PAGE>
understanding of its systems, does not currently anticipate any material
disruption in its operations as a result of Year 2000 issues. However, if such
modifications or replacements are not properly made, or are not timely
completed, the reasonably worst case scenario is that various non-essential
stand-alone systems would be impaired and the Company would lose its ability
to efficiently process merchandise through its leased distribution center,
which might have a material adverse effect on its operations.
As of October 31, 1998, the Company estimates that 80% of its information
technology ("IT") systems have been tested and are currently operating as Year
2000 compliant systems. The Company estimates that an additional 10% of its IT
systems have been reviewed and modified, but not yet tested. A summary of the
expected completion dates for work currently in process to make all IT operating
systems and application systems software Year 2000 compliant is as follows:
Fourth Quarter of Fiscal 1998: Mid-range computer operating systems and
application systems software.
First Quarter of Fiscal 1999: Local area network, servers and desktop
personal computers.
Second Quarter of Fiscal 1999: Full test of all systems at a disaster
recovery site which will emulate the
changeover to the Year 2000.
Third Quarter of Fiscal 1999 1. Replacement of in-store registers,
computers, and operating systems, with
new state-of-the art NCR hardware and
software.
2. Leased distribution center
Suppliers of the Company and other third parties exchange information with the
Company or rely on the Company's merchandising systems for certain sales and
stock information. The Company currently does not have complete information
concerning the compliance status of its suppliers or other third parties.
However, because third-party failures could have a material adverse impact on
the Company's ability to conduct business, the Company plans to request
confirmations from major suppliers to certify that plans are being developed to
address Year 2000 issues.
Beginning in the fourth quarter of Fiscal 1998, the Company will develop
contingency plans for all IT and non-IT systems, as well as develop
contingencies for dealing with those suppliers and other third parties who have
not responded to Year 2000 readiness questionnaires, or who are at risk of
non-compliance.
The Company spent $352,000 YTD 1998 and $325,000 through Fiscal 1997 to make its
computer systems Year 2000 compliant. The total cost of the project to date as
of October 31, 1998, was $677,000, and the Company estimates it will spend an
additional $150,000 in the remainder of Fiscal 1998, and $150,000 in Fiscal
1999.
The cost of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing
S-10
<PAGE>
numerous assumptions of future events, including the continued availability of
certain resources, cooperation of vendors and other factors. However, there
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in the area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
The Company presently believes that Year 2000 issues will not pose significant
operational problems for the Company. However, if all Year 2000 issues are not
properly identified, or assessment, remediation and testing are not effected
timely with respect to Year 2000 problems that are identified, there can be no
assurance that Year 2000 issues will not materially adversely impact the
Company's results of operations or adversely affect the Company's relationships
with customers, vendors, or others. Additionally, there can be no assurance that
the Year 2000 issues of other entities will not have a material adverse impact
on the Company's systems or results of operations.
S-11
<PAGE>
LAMONTS APPAREL, INC.
8,746,291 SHARES OF CLASS A COMMON STOCK
1,810,380 CLASS A WARRANTS
581,184 CLASS B WARRANTS
228,639 CLASS C WARRANTS
------------------
This Prospectus relates to the offer and sale by the persons named herein
under the caption "Selling Security Holders" of (i) 1,810,380 Class A Warrants
(the "Class A Warrants"), each of which entitles the holder thereof to purchase
one share of Class A Common Stock, par value $.01 per share (the "Common
Stock"), of Lamonts Apparel, Inc. ("Lamonts" or the "Company") at a current
exercise price of $.01 per share, (ii) 581,184 Class B Warrants (the "Class B
Warrants"), each of which entitles the holder thereof to purchase one share of
Common Stock at a current exercise price of $.01 per share, (iii) 228,639 Class
C Warrants (the "Class C Warrants," and together with the Class A Warrants and
the Class B Warrants, the "Warrants"), each of which entitles the holder thereof
to purchase fourteen shares of Common Stock (the "Initial Shares") at a current
exercise price of $1.25 per share and one share of Common Stock (the "Adjustment
Shares") at a current exercise price of $.01 per share, and (iv) 8,746,291
shares of Common Stock (including 5,821,149 shares issuable upon exercise of the
Warrants). The shares of Common Stock being offered by the Selling Security
Holders represent approximately 97.2% of currently outstanding shares of Common
Stock. The availability of such a large number of shares of Common Stock may
have the effect of depressing the market price of the Common Stock.
The securities being offered hereby were issued by the Company pursuant to
the Company's Modified and Restated Plan of Reorganization Under Chapter 11 of
the Bankruptcy Code (the "Plan of Reorganization") in full or partial exchange
for various pre-petition and administrative claims of the Selling Security
Holders. The issuance of such securities was not registered under the Securities
Act of 1933, as amended (the "Securities Act"), in reliance on the exemptions
provided by section 1145 of Chapter 11 ("Chapter 11"), title 11 of the United
States Code (the "Bankruptcy Code") and, with respect to the Class C Warrants,
section 4(2) of the Securities Act. In connection with the Plan of
Reorganization, the Company granted certain registration rights to the Selling
Security Holders, including the right to require the Company to file the
Registration Statement of which this Prospectus is a part. The distributions
under the Plan of Reorganization and the terms of the Warrants (including the
initial exercise price per share of Common Stock issuable upon exercise of the
Warrants) were determined after negotiations with the committees representing
the Company's unsecured trade creditors, bondholders and equity security holders
(the "Committees"). The Plan of Reorganization was confirmed by the United
States Bankruptcy Court (the "Bankruptcy Court") for the Western District of
Washington at Seattle on December 18, 1997 and became effective on January 31,
1998 (the "Plan Effective Date").
The numbers of shares of Common Stock and Warrants (and the shares issuable
upon the exercise of such Warrants) that are being offered by this Prospectus
correspond to the total numbers of such shares of Common Stock and Warrants that
were received by the Selling Security Holders pursuant to the first two
distributions under the Plan of Reorganization. The Company contemplates
effecting one or more additional distributions of Common Stock, Class A Warrants
and Class B Warrants following the resolution of pending claims filed against
the Company during its Chapter 11 case. The Company intends to file a
post-effective amendment updating the amount of shares of Common Stock and
Warrants covered by this Prospectus after any such distribution occurs.
The Class A Warrants are exercisable on or after the first date on which the
Aggregate Equity Trading Value (as defined in the following paragraph) equals or
exceeds $20 million. The Class B Warrants are exercisable on or after the first
date on which the Aggregate Equity Trading Value equals or exceeds $25 million.
If not previously exercised, each Class A Warrant and Class B Warrant will
expire on January 31, 2008. The Class C Warrants to purchase the Initial Shares
are currently exercisable and the Class C Warrants to purchase the Adjustment
Shares are exercisable on or after the first date on which the
<PAGE>
Aggregate Equity Trading Value equals or exceeds $25 million; provided that the
portion of each Class C Warrant to purchase an Adjustment Share shall not be
exercisable by the holder thereof unless and until the portion of such Class C
Warrant to purchase the Initial Shares has been exercised in full by such
holder. If not previously exercised, the Class C Warrants to purchase the
Initial Shares will expire on January 31, 2002 and the Class C Warrants to
purchase the Adjustment Shares will expire on January 31, 2008. The exercise
price per share and the number of shares of Common Stock issuable upon exercise
of the Warrants are subject to certain antidilution adjustments. The exercise
price per share of Common Stock issuable pursuant to the exercise of the Class C
Warrants is subject to a 25% increase and the expiration dates for such Warrants
are subject to a one year extension, in each case upon the happening of certain
events described below.
"Aggregate Equity Trading Value" means, as of any date, the product of (a)
either (i) if the Common Stock is listed on any national securities exchange or
quoted on a national quotation system, the average of the daily closing prices
of the Common Stock for the five (5) trading days immediately preceding such
date, or (ii) if the Common Stock is not so listed or quoted, the fair market
value per share of the Common Stock determined in good faith by the Company's
Board of Directors as of a date within 30 days of such date, multiplied by (b)
the total number of issued and outstanding shares of Common Stock as of such
date (assuming for purposes of determining such number of shares the exercise in
full of all in-the-money options outstanding on such date to purchase shares of
Common Stock and, for purposes of determining whether the Class B Warrants are
exercisable, the exercise of all Class B Warrants which are exercisable as of
such date). As of May 1, 1998, the Aggregate Equity Trading Value equaled
$18,018,082 based on an average daily closing price of $1.39 per share of Common
Stock and 12,962,649 shares outstanding.
The Common Stock is quoted on the OTC Bulletin Board ("OTC") under the
symbol "LMNT." The Class A Warrants, Class B Warrants and Class C Warrants are
quoted on the OTC under the symbols "LMNTZ," "LMNTW' and "LMNTH," respectively.
------------------------
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE INFORMATION SET FORTH
UNDER "RISK FACTORS."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
IT IS ANTICIPATED THAT THE SELLING SECURITY HOLDERS WILL OFFER AND SELL THE
SECURITIES WHICH MAY BE SOLD BY SUCH PERSON HEREUNDER FROM TIME TO TIME IN
ORDINARY TRANSACTIONS TO OR THROUGH ONE OR MORE BROKERS OR DEALERS IN THE
OVER-THE-COUNTER MARKET OR IN PRIVATE TRANSACTIONS AT SUCH PRICES AS MAY BE
OBTAINABLE. ANY SUCH PERSON MAY BE DEEMED TO BE AN "UNDERWRITER" AS THAT TERM IS
DEFINED BY THE SECURITIES ACT. HOWEVER, THE COMPANY AND SUCH PERSONS DISCLAIM
THAT ANY SUCH PERSON IS AN UNDERWRITER. SEE "PLAN OF DISTRIBUTION." THE COMPANY
WILL RECEIVE NO PROCEEDS FROM THE SALE BY THE SELLING SECURITY HOLDERS OF THE
WARRANTS OR THE SHARES OF COMMON STOCK, BUT WILL RECEIVE AN AGGREGATE OF
APPROXIMATELY $4.03 MILLION UPON EXERCISE OF ALL WARRANTS COVERED BY THIS
PROSPECTUS BASED ON CURRENT EXERCISE PRICES. THE COMPANY WILL PAY ALL THE
EXPENSES INCIDENT TO THE REGISTRATION OF THE SECURITIES OFFERED HEREBY, EXCEPT
FOR COMMISSIONS OF BROKERS OR DEALERS. SEE "USE OF PROCEEDS."
THE DATE OF THIS PROSPECTUS IS JUNE 15, 1998.
2
<PAGE>
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFERING MADE HEREBY AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY SELLING SECURITY HOLDER OR ANY OTHER PERSON. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO
BUY ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION SET FORTH HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
Statements in this Prospectus, including the words "believes,"
"anticipates," "expects," and words of 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, or industry results, to be
materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors 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, (x) ownership of Common Stock, (xi) volatility of
stock price and (xii) without duplication, the risk factors included elsewhere
in this Prospectus. GIVEN THESE UNCERTAINTIES, THOSE READING THIS PROSPECTUS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. The
Company disclaims any obligation to update any such factors or to publicly
announce the result of any revisions to any of the forward-looking statements
contained or incorporated by reference herein to reflect untrue events or
developments.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
AVAILABLE INFORMATION...................................................................................... 5
PROSPECTUS SUMMARY......................................................................................... 6
PLAN OF REORGANIZATION..................................................................................... 10
RISK FACTORS............................................................................................... 12
USE OF PROCEEDS............................................................................................ 17
MARKET PRICES OF COMMON STOCK.............................................................................. 18
DIVIDEND POLICY............................................................................................ 18
CAPITALIZATION............................................................................................. 19
SELECTED CONSOLIDATED FINANCIAL DATA AND OTHER OPERATING DATA.............................................. 20
PRO FORMA FINANCIAL DATA................................................................................... 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 23
BUSINESS................................................................................................... 30
MANAGEMENT................................................................................................. 35
PRINCIPAL STOCKHOLDERS..................................................................................... 42
CERTAIN TRANSACTIONS....................................................................................... 44
SELLING SECURITY HOLDERS................................................................................... 46
PLAN OF DISTRIBUTION....................................................................................... 47
DESCRIPTION OF CAPITAL STOCK............................................................................... 48
DESCRIPTION OF CERTAIN INDEBTEDNESS........................................................................ 53
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS.................................................................. 55
EXPERTS.................................................................................................... 56
LEGAL MATTERS.............................................................................................. 56
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................................................. 57
</TABLE>
4
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed by the Company can be inspected and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as at
the Regional Offices of the Commission at 7 World Trade Center, 13th Floor, New
York, New York 10048, and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials can be obtained at
prescribed rates by writing to the Public Reference Section of the Commission at
the above Washington D.C. address. The Commission maintains a World Wide Web
site on the Internet at http://www.sec.gov that contains reports, proxy
statements and other information regarding registrants that file electronically
with the Commission.
This Prospectus, which constitutes a part of a Registration Statement filed
by the Company with the Commission under the Securities Act, omits certain
information contained in the Registration Statement, and reference is hereby
made to the Registration Statement and to the exhibits thereto for further
information with respect to the Company and the securities offered hereby.
Statements contained herein concerning provisions of any document are not
necessarily complete, and each such statement is qualified in its entirety by
reference to the copy of such document filed with the Commission. All material
contracts required to be described herein are described in this Prospectus.
------------------------
5
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND THE CONSOLIDATED FINANCIAL STATEMENTS, INCLUDING THE NOTES
THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE
REQUIRES, REFERENCE TO THE "COMPANY" OR "LAMONTS" REFERS TO LAMONTS APPAREL,
INC. AFTER GIVING EFFECT TO THE PLAN OF REORGANIZATION AND THE RELATED
TRANSACTIONS DESCRIBED BELOW.
THE COMPANY
Lamonts is a Northwest-based regional retailer with 38 stores in five
states. The Company offers an assortment of moderately priced fashion apparel,
and home and fashion accessories at competitive prices for the entire family.
Lamonts purchases finished goods from approximately 1,200 vendors and uses a
distribution center in Kent, Washington for processing and warehousing
merchandise for distribution to its stores. Lamonts employs approximately 1,600
people in salaried, hourly, or part-time positions. The Company's stores average
approximately 47,000 square feet and are generally located in shopping centers
and malls. The Company's revenues for the 52 weeks ended January 31, 1998
("Fiscal 1997") were approximately $201.6 million. As of January 31, 1998
Lamonts' total assets and total liabilities, at reorganization value,
approximated $97.5 million and $77.5 million, respectively.
Despite numerous attempts to restructure the Company's capital structure
from 1992 through 1994, and as a result of the continued deterioration of the
Company's financial position, on January 6, 1995 (the "Petition Date"), the
Company filed a voluntary petition for relief under Chapter 11 of the Bankruptcy
Code. In Chapter 11, the Company continued to manage its affairs and operate its
business as a debtor-in-possession. On October 31, 1997, the Company filed with
the Bankruptcy Court its Plan of Reorganization, along with the proposed
disclosure statement relating to the Plan of Reorganization (as amended, the
"Disclosure Statement"). The Plan of Reorganization was confirmed by the
Bankruptcy Court on December 18, 1997 and became effective on January 31, 1998.
Under the Plan of Reorganization, among other things, certain indebtedness of
Lamonts was cancelled in exchange for new equity interests (including certain of
the Common Stock and Warrants being offered hereunder by the Selling Security
Holders), certain indebtedness was reinstated, certain other pre-petition claims
were discharged, certain claims were settled, existing equity interests were
extinguished and new equity interests were issued (including certain of the
Common Stock and Warrants being offered hereunder by the Selling Security
Holders), executory contracts and unexpired leases were assumed or rejected, and
the members of a new board of directors were designated. See "Plan of
Reorganization."
6
<PAGE>
THE OFFERING
Securities Offered by the Selling Security Holders
<TABLE>
<CAPTION>
AGGREGATE NUMBER OF
SHARES OF COMMON EXERCISE PRICE
NUMBER AND TITLE OF EACH CLASS STOCK UNDERLYING PER SHARE OF
OF SECURITIES OFFERED SECURITIES CONDITIONS TO EXERCISABILITY COMMON STOCK
- ----------------------------------------------- ------------------- ------------------------------------ -------------------
<S> <C> <C> <C>
8,746,291 Shares of Class A Common Stock, par N/A N/A N/A
value $.01 per share..........................
1,810,380 Class A Warrants, each to purchase 1,810,380 Aggregate Equity Trading Value $.01
one share of Common Stock..................... equals or exceeds
$20 million
581,184 Class B Warrants, each to purchase one 581,184 Aggregate Equity Trading Value $.01
share of Common Stock......................... equals or exceeds
$25 million
228,639 Class C Warrants, each to purchase 3,200,946 Currently exercisable $1.25
fourteen shares of Common Stock...............
228,639 Class C Warrants, each to purchase one 228,639 Aggregate Equity Trading Value $.01
share of Common Stock......................... equals or exceeds
$25 million(1)
</TABLE>
- ------------------------------
(1) No Class C Warrant with a per share exercise price of $.01 shall be
exercisable by the holder thereof unless such holder has exercised in full
such holder's portion of such Class C Warrant with a per share exercise
price of $1.25.
<TABLE>
<S> <C>
Securities Offered by the 5,821,149 shares of Common Stock issuable upon exercise
Company......................... of the Warrants.
Class A Warrants.................. Each Class A Warrant entitles its registered holder to
purchase from the Company one share of Common Stock at
an exercise price of $.01 per share, subject to
adjustment from time to time upon the occurrence of
certain events. The Class A Warrants are exercisable on
or after the first date on which the Aggregate Equity
Trading Value equals or exceeds $20 million and, if not
previously exercised, will expire on January 31, 2008.
See "Description of Capital Stock--Class A Warrants and
Class B Warrants."
Class B Warrants.................. Each Class B Warrant entitles its registered holder to
purchase from the Company one share of Common Stock at
an exercise price of $.01 per share, subject to
adjustment from time to time upon the occurrence of
certain events. The Class B Warrants are exercisable on
or after the first date on which the Aggregate Equity
Trading Value equals or exceeds $25 million and, if not
previously exercised, will expire on January 31, 2008.
See "Description of Capital Stock--Class A Warrants and
Class B Warrants."
Class C Warrants.................. Each Class C Warrant entitles its registered holder to
purchase from the Company fourteen shares of Common
Stock at an exercise price of $1.25 per share and one
share of Common Stock at an exercise price of $.01 per
share, in each case subject to adjustment from time to
time upon the occurrence of certain events. The Class C
Warrants to purchase the Initial Shares are currently
exercisable and, if not previously exercised, will
expire on January 31, 2002. The Class C Warrants to
purchase the
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Adjustment Shares are exercisable on or after the first
date on which the Aggregate Equity Trading Value equals
or exceeds $25 million and, if not previously exercised,
will expire on January 31, 2008; provided that the
portion of each Class C Warrant to purchase an
Adjustment Share shall not be exercisable by the holder
thereof unless and until the portion of such Class C
Warrant to purchase the Initial Shares has been
exercised in full by such holder. The exercise price per
share of Common Stock issuable pursuant to the exercise
of the Class C Warrants is subject to a 25% increase and
the expiration date for such Warrants is subject to a
one year extension, in each case upon the happening of
certain events. See "Description of Capital Stock--Class
C Warrants."
Common Stock to be outstanding
after offering.................. 17,483,930 shares assuming (i) exercise of options
("Stock Options") to purchase 1,669,228 shares of Common
Stock reserved for issuance under the Company's 1998
Stock Option Plan (the "Stock Option Plan"), and (ii)
exercise of all Warrants issued and outstanding as of
the date of this Prospectus (including Warrants not
covered by this Prospectus). Excludes potential exercise
of the warrants issuable by the Company 120 days
following the Plan Effective Date to Gordian Group, L.P.
("Gordian"). See "Description of Capital Stock--Gordian
Warrants."
OTC Bulletin Board symbol for
Class A Common Stock ........... LMNT
OTC Bulletin Board symbol for
Class A Warrants................ LMNTZ
OTC Bulletin Board Symbol for
Class B Warrants................ LMNTW
OTC Bulletin Board Symbol for
Class C Warrants................ LMNTH
</TABLE>
8
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA AND CERTAIN OPERATING DATA
The following pro forma and historical data should be read in conjunction
with, and is qualified in its entirety by, the Consolidated Financial Statements
and Notes thereto, the "Pro Forma Financial Data" and the other information
included elsewhere in this Prospectus. The historical financial data of the
Company for Fiscal 1997, the 52 weeks ended February 1, 1997 ("Fiscal 1996") and
the 53 weeks ended February 3, 1996 ("Fiscal 1995") have been derived from the
historical consolidated financial statements of the Company audited by Coopers &
Lybrand L.L.P., independent accountants, whose report with respect thereto is
included elsewhere in this Prospectus.
The pro forma data of the Company for Fiscal 1997 gives effect to the
reorganization under the Plan of Reorganization and adoption of Fresh-Start
Reporting and the amounts are presented as though the reorganization had been
consummated at the beginning of Fiscal 1997. The historical consolidated balance
sheet includes the effect of the reorganization, which was effective on January
31, 1998. The unaudited pro forma data does not purport to be indicative of the
results of operations that would actually have been reported had such
transactions actually been consummated on such date or of the results of
operations that may be reported by the Company in the future.
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL
----------- ---------------------------------------
52 WEEKS 52 WEEKS 52 WEEKS 53 WEEKS
ENDED ENDED ENDED ENDED
JANUARY 31, JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1998 1997 1996
----------- ----------- ----------- -----------
(UNAUDITED)
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AND STORE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues(1)......................................................... $ 201,623 $ 201,623 $ 203,602 $ 199,548
Cost of merchandise sold............................................ 131,700 131,700 130,480 131,677
----------- ----------- ----------- -----------
Gross profit........................................................ 69,923 69,923 73,122 67,871
----------- ----------- ----------- -----------
Operating and administrative expenses............................... 67,633 67,844 67,173 71,372
Depreciation and amortization....................................... 7,012 7,141 7,999 9,232
Impairment of long-lived assets..................................... -- -- 4,170 --
----------- ----------- ----------- -----------
Operating costs..................................................... 74,645 74,985 79,342 80,604
----------- ----------- ----------- -----------
Loss from operations before other income/(expense), reorganization
expenses, fresh-start revaluation and extraordinary item.......... (4,722) (5,062) (6,220) (12,733)
Other income (expense):
Interest expense.................................................. (5,770) (5,900) (5,053) (5,098)
Other income (expense)............................................ 8 8 12 196
----------- ----------- ----------- -----------
Loss from operations before reorganization expenses, fresh-start
revaluation and extraordinary item................................ (10,484) (10,954) (11,261) (17,635)
Reorganization expenses............................................. -- (5,995) 6,037 7,240
Fresh-start revaluation............................................. -- 70,495 -- --
----------- ----------- ----------- -----------
Income (loss) from operations before extraordinary item............. (10,484) 53,546 (17,298) (24,875)
Extraordinary item--gain on debt discharge.......................... -- 69,158 -- --
----------- ----------- ----------- -----------
Net income (loss)................................................... $ (10,484) $ 122,704 $ (17,298) $ (24,875)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
OTHER DATA
Number of stores at end of period................................... 38 38 38 43
BASIC AND DILUTED EARNINGS (LOSS) PER COMMON SHARE
Income (loss) from operations before extraordinary gain............. $ (1.16) $ 3.00 $ (0.97) $ (1.39)
Extraordinary item--gain on debt discharge.......................... -- 3.86 -- --
Net income (loss)................................................... (1.16) 6.86 (0.97) (1.39)
Weighted average number of shares................................... 9,000,000(2) 17,875,602 17,899,906 17,893,675
BALANCE SHEET DATA (AT END OF PERIOD)
Working capital (deficit)........................................... $ (5,625) $ (3,357) $ (2,248)
Total assets........................................................ 97,468 93,272 102,361
Liabilities subject to settlement under reorganization
proceedings....................................................... -- 102,858 104,845
Long-term debt and obligations under capital leases, net of current
maturities........................................................ 24,371 2,846 --
Stockholders' equity/(deficit)...................................... 19,956 (59,553) (42,556)
</TABLE>
- ----------------------------------
(1) The additional week in Fiscal 1995 accounted for $2.2 million of revenues.
(2) Pursuant to the Plan of Reorganization, the Company issued 9,000,000 shares
of Common Stock and granted warrants and options to purchase Common Stock.
Such warrants and options have not been included in the calculation of net
loss per common share because the effect of assuming their exercise would be
anti-dilutive.
9
<PAGE>
PLAN OF REORGANIZATION
The overall purpose of the Plan of Reorganization was to (i) alter the debt
and capital structure of Lamonts to permit it to emerge from Chapter 11 and (ii)
settle, compromise or otherwise dispose of certain claims on terms that Lamonts
considered to be reasonable.
The Plan of Reorganization resulted in an approximate $90 million net
reduction in the total indebtedness and liabilities subject to reorganization of
the Company. The Plan of Reorganization provided generally for, among other
things, payment in full by the Company of administrative expenses, certain other
priority claims and secured claims, other than the claim of BankBoston, N.A.
("BankBoston"), the agent and lender under the Company's bank credit facility
(the "BankBoston Facility"), (which was left unimpaired), cancellation of
certain indebtedness in exchange for new equity securities of the Company
(including certain of the Common Stock and Warrants being offered hereunder by
the Selling Security Holders), the discharge of certain other pre-petition
claims, the cancellation and/or rejection of existing equity securities of the
Company in exchange for new equity securities of the Company (including certain
of the Common Stock and Warrants being offered hereunder by the Selling Security
Holders), the assumption or rejection of executory contracts and unexpired
leases and the designation of a new board of directors. In addition, the Plan of
Reorganization provided that the Company assume all of the obligations under the
BankBoston Facility, including any unpaid accrued interest, fees, costs and
charges.
Pursuant to the Plan of Reorganization:
(a) an aggregate of 8,800,000 shares of Common Stock, 2,203,320 Class A
Warrants to purchase Common Stock and 700,237 Class B Warrants to purchase
Common Stock have been or will be issued to the holders of pre-petition claims
against Lamonts;
(b) an aggregate of 200,000 shares of Common Stock and 100,000 Class B
Warrants to purchase Common Stock were issued to the former holders of Lamonts
common stock (the "Old Common Stock"); and
(c) 228,639 Class C Warrants to purchase Common Stock and 10 shares of Class
B Common Stock, par value $.01 per share of the Company ("Class B Common
Stock"), were issued to Specialty Investment I LLC (the "Surety").
All such securities were or will be issued in exchange for various
pre-petition claims and interests allowed by the Bankruptcy Court, except those
issued to the Surety which were issued as required under the BankBoston Facility
in consideration of the guaranty made by the Surety of a $10 million term loan
(the "Term Loan") made to the Company prior to the Plan Effective Date and in
partial exchange for its administrative claim. All shares of Old Common Stock
were canceled pursuant to the Plan of Reorganization. As a result, holders of
Old Common Stock lost substantially all of their investment in the Company.
In addition, pursuant to the Plan of Reorganization, the Company granted
Stock Options as follows:
(i) Stock Options exercisable for the purchase of 1,000,000 shares of Common
Stock with an exercise price of $1.00 per share ("Base Options");
(ii) to prevent dilution resulting from the issuance of the Class A
Warrants, Stock Options exercisable for the purchase of an additional 244,813
shares of Common Stock with an exercise price of $0.01 per share, exercisable
only on or after the date on which the Class A Warrants become exercisable
("Protective A Options"); and
(iii) to prevent dilution resulting from the issuance of the Class B
Warrants, Stock Options exercisable for the purchase of an additional 88,915
shares of Common Stock with an exercise price of $0.01 per share, exercisable
only on or after the date on which the Class B Warrants become exercisable
("Protective B Options" and, together with the Protective A Options, the
"Protective Options").
10
<PAGE>
The number of Protective A Options and Protective B Options that may be
exercised is limited under certain circumstances. See "Description of Capital
Stock--Stock Options."
In addition, to prevent dilution resulting from the issuance of the Class C
Warrants to the Surety, the holders of Stock Options issued on the Plan
Effective Date were issued Class C Warrants exercisable for the purchase of an
aggregate of 381,060 shares of Common Stock (355,656 shares with an exercise
price of $1.25 per share and 25,404 shares with an exercise price of $.01 per
share).
As compensation to Gordian for investment banking services rendered to the
Company during the Company's Chapter 11 case, Gordian will be issued, on the
120th day following the Plan Effective Date, warrants (the "Gordian Warrants")
exercisable for a number of shares of Common Stock having a value equal to
$200,000. For a description of the terms of the Gordian Warrants, see
"Description of Capital Stock--Gordian Warrants."
In connection with the Plan of Reorganization, the Company entered into a
Grant of Registration Rights in favor of certain holders of the Warrants and the
Common Stock, pursuant to which, subject to certain exceptions, the Company
agreed to keep the Registration Statement of which this Prospectus is a part
continuously in effect until no securities registerable under the Grant of
Registration Rights are outstanding. In addition, the agreement provides for
certain "piggyback" registration rights. See "Description of Capital
Stock--Registration Rights."
Also in connection with the Plan of Reorganization, Alan R. Schlesinger and
Loren R. Rothschild entered into new employment agreements with the Company
(respectively, the "Schlesinger Employment Agreement" and the "Rothschild
Employment Agreement") which amended and restated the terms of their existing
employment agreements. Pursuant to the Schlesinger Employment Agreement, Mr.
Schlesinger received a one-time bonus of $175,000 for extending the term of his
employment to January 31, 2002 and, in connection with the Plan of
Reorganization, a bonus of $400,000, together with a grant of 800,237 Stock
Options and 15,243 Class C Warrants. Pursuant to the Rothschild Employment
Agreement, Mr. Rothschild received a one-time bonus of $80,000 for extending the
term of his employment to May 1, 2001 and, in connection with the Plan of
Reorganization, a bonus of $187,000, together with a grant of 200,059 Stock
Options and 3,811 Class C Warrants. See "Management--Employment Agreements."
The Plan of Reorganization was filed with the Bankruptcy Court on October
31, 1997. The Disclosure Statement, which was filed with the Bankruptcy Court on
October 31, 1997 and amended on November 21, 1997, was approved by the
Bankruptcy Court on November 24, 1997. The Plan of Reorganization was confirmed
by the Bankruptcy Court on December 18, 1997 and became effective on January 31,
1998.
With the exception of payments contemplated by the Plan of Reorganization to
be made subsequent to the Plan Effective Date, all payments and distributions
required under the Plan of Reorganization to be made in respect of pre-petition
liabilities have been made or otherwise provided for, and, other than as
contemplated by the Plan of Reorganization, no further recourse to the Company
may be had by any person with respect of such pre-petition claims.
11
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS, THE
FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN INVESTMENT IN
THE SECURITIES OFFERED BY THIS PROSPECTUS.
HIGH LEVERAGE. After giving effect to the reduction in its outstanding debt
pursuant to the Plan of Reorganization, the Company has a reduced, but
nevertheless substantial, degree of leverage. The Company's consolidated ratio
of total debt to equity as of January 31, 1998 was approximately 2.4:1. See
"Capitalization." If the Company is unable to generate sufficient cash flow from
operations in the future, or if it fails to satisfy the financial covenants
contained in the BankBoston Facility, it could face default on its restructured
obligations.
The leveraged nature of the Company's capital structure will have several
important effects on the Company and its operations, including the following:
(i) the Company continues to have significant cash requirements for debt
service; (ii) because the Company's indebtedness under the BankBoston Facility
bears interest at a floating rate to the extent the Company has not hedged its
interest rate exposure (see "Description of Certain Indebtedness" for a
description of the Company's forward interest rate swap agreement), the Company
is sensitive to any increase in prevailing interest rates; (iii) as a result of
the Company's debt service requirements and restrictions imposed under the terms
of the BankBoston Facility, funds available for capital expenditures and cash
dividends will be limited; and (iv) the Company's ability to meet its debt
service obligations (and to satisfy the financial covenants contained therein)
will be dependent upon its future performance which, in turn, will be subject to
general economic conditions and to financial, business and other factors
affecting the operations of the Company, including factors beyond the Company's
control. See "Description of Certain Indebtedness."
The Term Loan will mature on December 26, 1999, subject to earlier maturity
(including, as a result of acceleration, mandatory prepayment or otherwise) of
the Company's revolving credit facility with BankBoston (the "Revolver") (with
provision for two one-year extensions on the terms and conditions set forth in
the BankBoston Facility). Although the Company will be required to make monthly
principal payments of $25,000 on the Term Loan commencing on October 31, 1998,
the Term Loan provides for the repayment of the outstanding balance in a
lump-sum or "balloon" payment at maturity. In addition, BankBoston could demand
repayment prior to the maturity date of the Term Loan or the Revolver if certain
events of default were to occur. See "Description of Certain Indebtedness." The
ability of the Company to repay such indebtedness at maturity or otherwise may
depend upon the ability of the Company either to refinance or extend such
indebtedness, to repay such indebtedness with proceeds of other capital
transactions, such as the issuance of additional equity, or to sell assets.
There can be no assurance that such refinancing or extension will be available
on reasonable terms or at all, that additional equity will be issued, or that a
sale of assets will occur. The inability to repay such indebtedness could have a
material adverse effect on the Company. See "Description of Capital Stock--Class
B Common Stock" for a description of the special voting rights of the Class B
Common Stock upon the occurrence of certain defaults under the BankBoston
Facility.
COMPETITION. The retail business in which the Company is involved is highly
competitive, and many of the Company's competitors have substantially greater
resources than Lamonts. Numerous other companies, including publicly and
privately held independent stores and chains and department stores, also provide
competition on a national and regional basis. In addition, the competitive
environment is often affected by factors beyond a particular retailer's control,
such as shifts in consumer preferences, changes in style, business environment,
population trends, and traffic control. Although management attempts to
anticipate and respond to changes in consumer preferences and changes in styles,
and believes that the Company competes successfully, the Company could face
difficulties in continuing to compete successfully. See "Business--Competition."
12
<PAGE>
HISTORY OF LOSSES. The Company has experienced significant losses from
operations in the last five fiscal years. In the long term, the Company's
viability is dependent upon its ability to achieve profitable results of
operations and positive cash flows. Although improvements have been made each
year since the 52 weeks ended January 28, 1995, the Company has continued to
realize losses. For Fiscal 1995 the Company reported a net loss of $24.9
million, for Fiscal 1996 the Company reported a net loss of $17.3 million and
for Fiscal 1997 the Company reported a net loss of $16.9 million (exclusive of
the $70.5 million gain from fresh-start revaluation and the $69.2 million
extraordinary item--gain on debt discharge).
DEPENDENCE ON HIGH SALES VOLUME; SUCCESS OF MERCHANDISING STRATEGIES. The
Company's business is dependent upon a high volume of sales and, with respect to
its mall and shopping center stores, sales are derived, in part, from a high
volume of mall and shopping center traffic. Volume of sales and mall and
shopping center traffic may be adversely affected by local, regional, or
national economic downturns, demographic changes, new competition and, in the
case of its mall and shopping center stores, by the closing of "anchor" stores.
Revenues have been adversely affected by, among other things, (i) the general
lower demand for apparel experienced by the Company and many other apparel
retailers, (ii) the economy in the Company's markets, and (iii) the increase in
discounter's and mass merchandiser's retail space in the Company's markets.
Management believes that sales could in the future be adversely affected by the
foregoing, among other factors. In addition, the Company's performance could
also be adversely affected by (a) liability and other claims asserted against
the Company, (b) the loss of a significant number of customers or suppliers, (c)
changes in business strategy or development plans and (d) business disruptions.
Furthermore, management believes that there may be continued pressure on gross
profit in order to maintain a competitive position in the Company's markets.
There can be no assurance that the above factors or a future economic downturn
would not have a material adverse impact on the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company's profitability is also dependent upon the success of its
merchandising strategies and its ability to anticipate, gauge and respond to
changing consumer demands and fashion trends in a timely manner. New management
has developed and implemented numerous merchandising strategies, which are
designed to: (i) organize merchandising efforts in key departments on an
integrated basis to streamline operations and focus responsibility for
merchandise presentation, quality, price and availability; (ii) reduce or
eliminate low-margin items and departments and add higher margin goods; and
(iii) improve inventory mix to reduce inventory markdowns. There can be no
assurance, however, that the above strategies will result in improved
profitability.
MARKET FOR COMMON STOCK AND WARRANTS. The Old Common Stock of the Company
issued and outstanding prior to the Plan Effective Date was quoted on the OTC
and, until January 20, 1995, was listed on The NASDAQ SmallCap Market
("Nasdaq"). The Common Stock is quoted on the OTC under the symbol "LMNT." The
Class A Warrants, Class B Warrants and Class C Warrants are quoted on the OTC
under the symbols "LMNTZ," "LMNTW" and "LMNTH," respectively. Prior to the Plan
Effective Date, there had been a limited public trading market for the Old
Common Stock. There is a limited public trading market for the Common Stock and
the Warrants being offered hereby. There can be no assurance that any such
market will continue for the Common Stock or the Warrants or as to the liquidity
of such market, the ability of holders to sell such securities, or the price at
which holders would be able to sell such securities.
The shares of Common Stock being offered by the Selling Security Holders
represent approximately 97.2% of currently outstanding shares of Common Stock.
The availability of such a large number of shares of Common Stock may have the
effect of depressing the market price of the Common Stock.
LIMITATIONS ON FUTURE GROWTH. The Company's growth is subject to (i) its
ability to maintain revenues at existing stores, (ii) the availability of
capital and (iii) the restrictions on capital expenditures set forth in the
BankBoston Facility, which prohibits capital expenditures in excess of $6.5
million for the 52 weeks
13
<PAGE>
ending January 28, 1999 ("Fiscal 1998"). There can be no assurance that the
Company will be able to maintain revenues at current stores or that capital will
be available to the Company or, if available, that it will be available on terms
the Company considers reasonable. The failure or inability of the Company to
maintain such revenues or obtain such capital on favorable terms could have a
material adverse effect on the Company's operations, business or financial
condition.
The Company's current expansion plans are expected to require capital
expenditures of approximately $2.9 million during Fiscal 1998, which is within
the restrictions contained in the BankBoston Facility. The Company is
continually evaluating store locations and operations to determine whether to
close stores that do not meet its performance objectives. Additionally, the
Company may expand, downsize or relocate existing stores. Management has no
current plans to close any of the remaining 38 Lamonts stores. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL. The future success of the Company is largely
dependent on the talents and efforts of Mr. Alan R. Schlesinger, the Company's
President, Chief Executive Officer and Chairman of the Board, as well as on the
talents and abilities of other key management executives. The Company entered
into a four-year employment agreement with Mr. Schlesinger on the Plan Effective
Date, but does not maintain a key person life insurance policy on the life of
Mr. Schlesinger. The loss of Mr. Schlesinger could have a material adverse
effect on the Company's operations, business and financial condition. See
"Management--Employment Agreements."
RESTRICTIONS ON COMMON STOCK DIVIDENDS. The Company has never declared or
paid cash dividends on its Old Common Stock or any other equity security, and
does not anticipate paying cash dividends on the Common Stock offered hereby or
any other equity security in the foreseeable future. In addition, the BankBoston
Facility contains certain covenants which directly and indirectly restrict the
ability of the Company to pay dividends. Such restrictions specifically prohibit
the payment of cash dividends on the Common Stock and the Class B Common Stock.
See "Description of Certain Indebtedness."
RESTRICTIONS IMPOSED BY THE TERMS OF THE BANKBOSTON FACILITY. The
BankBoston Facility includes affirmative and negative covenants which
substantially restrict many aspects of the Company's operations and finances.
Such covenants include, without limitation, a prohibition on dividends and
restrictions on capital expenditures and the incurrence of indebtedness. The
covenants will reduce the Company's operational and financial flexibility and
its ability to respond to changing retail conditions and take advantage of
attractive business opportunities. Should the Company be unable to meet any of
these covenants when required, it will be necessary to request waivers and/or
amendments of the facility from BankBoston and the Surety. There can be no
assurance that the necessary waivers and/or amendments will be granted or that,
if granted, they will be on terms acceptable or favorable to the Company.
Failure to obtain such waivers and/or amendments could result in the obligations
of the Company under the BankBoston Facility being declared immediately due and
payable. In addition, BankBoston could foreclose on the collateral securing the
BankBoston Facility. See "Description of Certain Indebtedness." See also
"Description of Capital Stock--Class B Common Stock" for a description of the
special voting rights of the Class B Common Stock upon the occurrence of certain
defaults under the BankBoston Facility.
RECENT EMERGENCE FROM CHAPTER 11. The Company emerged from Chapter 11 on
January 31, 1998. The Company's experience in Chapter 11 may affect its ability
to negotiate favorable trade terms with manufacturers and other vendors and to
negotiate favorable lease terms with landlords. The failure to obtain such
favorable terms could have a material adverse effect on the Company's
operations, business or financial condition. In accordance with AICPA Statement
of Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" ("SOP 90-7"), the Company has adopted "Fresh-Start Reporting"
and has reflected the effects of such adoption in its Consolidated Balance Sheet
as of January 31, 1998. Accordingly, the Company's Consolidated Balance Sheets
at and after January 31, 1998 and its Consolidated Statements of Operations for
periods after January 31, 1998 will not be comparable to the Consolidated
Financial Statements for prior periods included elsewhere herein. Among other
things,
14
<PAGE>
the Consolidated Statement of Operations for Fiscal 1997 included an
extraordinary gain relating to the debt discharged in the Chapter 11
proceedings.
ANTITAKEOVER EFFECT OF BLANK CHECK PREFERRED STOCK. The Company's Second
Restated Certificate of Incorporation authorizes the issuance of "blank check"
preferred stock with such designations, rights, and preferences as may be
determined from time to time by the Board of Directors. Accordingly, the Board
of Directors is empowered, without stockholder approval, to issue preferred
stock with dividend, liquidation, conversion, voting or other rights which could
adversely affect the relative voting power or other rights of the holders of the
Common Stock. In the event of issuance, the preferred stock could be used, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of the Company and could prevent stockholders from receiving a
premium for their shares in the event of a third party tender offer or change of
control transaction. Although the Company has no present intention to issue any
shares of its preferred stock, there can be no assurance that the Company will
not do so in the future. Additionally, if the Company issues preferred stock,
the issuance may have a dilutive effect upon the holders of the Company's Common
Stock, including the purchasers of the shares of Common Stock offered hereby. In
addition, the Company is subject to Section 203 of the Delaware General
Corporation Law which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any of a broad range of business combinations with
an "interested stockholder" for a period of three years following the date that
such stockholder became an interested stockholder.
DILUTION. The Common Stock being offered hereby is subject to dilution by
the additional shares of Common Stock issuable upon exercise of the Class A
Warrants, the Class B Warrants, the Class C Warrants, the Stock Options, and the
Gordian Warrants. Moreover, the Company will have the right to issue additional
securities (including, without limitation, under the Stock Option Plan) in the
future upon compliance with applicable law and the Company's Second Restated
Certificate of Incorporation and Amended and Restated Bylaws, which could result
in further dilution.
TAX CONSEQUENCES OF THE PLAN OF REORGANIZATION; POTENTIAL LOSS OF CERTAIN
TAX ATTRIBUTES. As a result of the implementation of the Plan of
Reorganization, the Company will (i) undergo an "ownership change" (generally, a
greater than 50 percentage point change in ownership) for purposes of section
382 of the Internal Revenue Code of 1986, as amended (the "Code"), and (ii)
realize cancellation of indebtedness income ("COI") from the cancellation of
certain indebtedness in exchange for new equity securities. Because such
ownership change and cancellation of indebtedness will arise in a case under
Chapter 11, the Company will be able to avoid some of the adverse Federal income
tax consequences generally associated therewith (e.g, the COI realized will not
be includible in income). Nevertheless, the Company expects that its ability to
offset future taxable income with net operating loss and loss carryforwards
("NOLs"), as well as certain built-in losses and tax credits, will be limited
and that certain of its tax attributes, including NOLs, will be significantly
reduced (but not eliminated). In addition, the purchase of the securities
offered hereby, as well as the exercise of the Warrants by certain holders, may
cause the Company to undergo another "ownership change" for purposes of section
382 of the Code and, accordingly, may further limit the Company's ability to use
its NOLs and certain built-in losses and tax credits to offset future taxable
income.
MANAGEMENT DISCRETION AS TO USE OF PROCEEDS. The net proceeds to the
Company from the sale of Common Stock issuable upon exercise of the Warrants
being offered by this Prospectus have been allocated to general corporate
purposes. Therefore, management of the Company will have broad discretion,
subject to the restrictions of the BankBoston Facility, with respect to the use
of such proceeds. See "Use of Proceeds."
ASSETS OF THE COMPANY SECURE BANKBOSTON FACILITY. Obligations under the
BankBoston Facility are secured by liens on substantially all assets of the
Company. If, after default, BankBoston were to foreclose on the collateral
securing the BankBoston Facility or if the assets of the Company were
liquidated, the proceeds of such assets would be applied to satisfy the
Company's obligations under the BankBoston
15
<PAGE>
Facility. There can be no assurance that there would be sufficient assets
remaining to provide a recovery to the Company's equity holders. See
"Description of Certain Indebtedness."
YEAR 2000 COMPLIANCE. The Company has established a compliance program to
modify or replace existing information technology systems so that such systems
will not generate invalid or incorrect results in connection with processing
year dates for the year 2000 and later years. The Company believes that it will
be able to achieve Year 2000 compliance by the middle of the 52 weeks ending
January 29, 2000 ("Fiscal 1999") and does not currently anticipate any material
disruption in its operations as a result of any failure by the Company to
achieve compliance. The Company spent approximately $324,000 in Fiscal 1997 and
estimates it will spend approximately $500,000 in Fiscal 1998 and $150,000 in
Fiscal 1999 to make its computer systems Year 2000 compliant.
Additionally, suppliers of the Company and other third parties exchange
information with the Company or rely on the Company's merchandising systems for
certain sales and stock information. The Company currently does not have any
information concerning the compliance status of its suppliers or such other
third parties. However, because third-party failures could have a material
adverse impact on the Company's ability to conduct business, confirmations are
being requested from the Company's major suppliers to certify that plans are
being developed to address the Year 2000 issues.
16
<PAGE>
USE OF PROCEEDS
The Company will receive no proceeds from the sale by the Selling Security
Holders of the Warrants or the shares of Common Stock, but will receive an
aggregate of approximately $4.03 million upon exercise of all Class A Warrants,
Class B Warrants and Class C Warrants covered by this Prospectus based on
current exercise prices (approximately $.02 million upon exercise of such Class
A Warrants; approximately $.01 million upon exercise of such Class B Warrants;
and approximately $4.00 million upon exercise of such Class C Warrants). The
proceeds from the exercise of the Warrants, if any, will be used by the Company
for general corporate purposes. See "Risk Factors--Management Discretion as to
Use of Proceeds." All of the expenses incurred in connection with the
registration of the Warrants and the shares of Common Stock offered hereby will
be paid by the Company, except for commissions of brokers or dealers and any
transfer fees incurred in connection with sales of Warrants and shares of Common
Stock by the Selling Security Holders, which will be paid by the Selling
Security Holders.
17
<PAGE>
MARKET PRICES OF COMMON STOCK
Prior to the Plan Effective Date, the Old Common Stock was quoted on the OTC
and, until January 20, 1995, was listed on Nasdaq. The Common Stock is currently
quoted on the OTC under the symbol "LMNT." The following table sets forth, for
the periods indicated, the high and low closing bid prices of the Common Stock
and Old Common Stock, as applicable, as quoted on the OTC. The bid prices, as
stated, represent inter-dealer prices without adjustments for retail mark-ups,
mark-downs or commissions and may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Fiscal 1998 (Common Stock):
Quarter ended May 2.......................................................... 1 7/8 1 1/4
Fiscal 1997 (Old Common Stock):
Quarter ended January 31..................................................... 1/4 1/16
Quarter ended November 1..................................................... 3/16 1/16
Quarter ended August 2....................................................... 1/8 1/16
Quarter ended May 3.......................................................... 1/8 1/16
Fiscal 1996 (Old Common Stock):
Quarter ended February 1..................................................... 7/16 1/16
Quarter ended November 2..................................................... 1/4 1/8
Quarter ended August 3....................................................... 7/16 1/8
Quarter ended May 4.......................................................... 1/4 1/8
</TABLE>
At May 1, 1998, there were 1,298 holders of record of the Common Stock and
the average bid and ask price was $1.30 per share.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Old 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, the financial condition of the Company, and such other
factors as the Company's Board of Directors may consider. The ability of the
Company to pay dividends is directly and indirectly restricted under the terms
of the BankBoston Facility. Such restrictions prohibit the payment of dividends
for the foreseeable future. See "Description of Certain Indebtedness" and "Risk
Factors--Restrictions on Common Stock Dividends."
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
January 31, 1998. This table should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JANUARY 31,
1998
---------------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Current Debt
BankBoston Facility Revolver......................................... $ 18,967
Current Maturities of Long-Term Debt................................. 403
Current Maturities of Obligations under Capital Leases............... 1,454
----------
TOTAL CURRENT DEBT..................................................... 20,824
----------
Long-Term Debt
Obligations under Capital Leases, Net of Current Maturities.......... 13,835
Long-Term Debt, Net of Current Maturities............................ 10,536
Other................................................................ 2,852
----------
TOTAL LONG-TERM DEBT................................................... 27,223
----------
TOTAL DEBT............................................................. 48,047
----------
Stockholders' Equity:(1)
Common Stock......................................................... 90
Additional Paid in Capital........................................... 19,866
Retained Earnings.................................................... --
----------
TOTAL STOCKHOLDERS' EQUITY............................................. 19,956
----------
TOTAL CAPITALIZATION................................................... $ 68,003
----------
----------
</TABLE>
- ------------------------------
(1) Does not reflect the possible exercise of (i) Stock Options to purchase
1,333,728 shares of Common Stock issued on the Plan Effective Date, (ii)
Class A Warrants to purchase 2,203,320 shares of Common Stock, (iii) Class B
Warrants to purchase 800,237 shares of Common Stock and (iv) Class C
Warrants to purchase 3,810,645 shares of Common Stock, or the receipt of
proceeds by the Company from such exercise.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA AND OTHER OPERATING DATA
The following historical data should be read in conjunction with, and is
qualified in its entirety by, the Consolidated Financial Statements and Notes
thereto and the other information included elsewhere in this Prospectus. The
selected historical financial data of the Company for Fiscal 1997, Fiscal 1996,
Fiscal 1995, the 13 weeks ended January 28, 1995 and the 52 weeks ended October
29, 1994 ("Fiscal 1994") have been derived from the historical consolidated
financial statements of the Company audited by Coopers & Lybrand L.L.P.,
independent accountants, whose report with respect to Fiscal 1997, Fiscal 1996
and Fiscal 1995 is included elsewhere in this Prospectus. The historical
financial data for the 52 weeks ended January 28, 1995 have been derived from
the unaudited financial records of the Company. Such unaudited financial records
reflect all adjustments which are, in the opinion of management, necessary and
of a normal recurring nature to present fairly the operating results for the
periods presented.
The Company was operating under Chapter 11 during Fiscal 1997, Fiscal 1996
and Fiscal 1995. As a result, the financial condition and results of operations
of the Company for such fiscal years are not necessarily comparable. On March 9,
1995, the Company changed its fiscal year end from the Saturday closest to
October 31 to the Saturday closest to January 31. As a result, the financial
condition and results of operations of the Company for Fiscal 1997, Fiscal 1996
and Fiscal 1995 are not necessarily comparable to its prior fiscal years.
20
<PAGE>
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 53 WEEKS 52 WEEKS 13 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED ENDED
JANUARY 31, FEBRUARY 1, FEBRUARY 3, JANUARY 28, JANUARY 28, OCTOBER 29,
1998 1997 1996 1995(3) 1995 1994
------------ ------------ ------------ ------------ ------------ ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND STORE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues(1)........................... $ 201,623 $ 203,602 $ 199,548 $ 231,199 $ 71,014 $ 237,922
Cost of merchandise sold.............. 131,700 130,480 131,677 175,330 60,587 163,697
------------ ------------ ------------ ------------ ------------ ------------
Gross profit.......................... 69,923 73,122 67,871 55,869 10,427 74,225
------------ ------------ ------------ ------------ ------------ ------------
Operating and administrative
expenses............................ 67,844 67,173 71,372 87,807 22,400 88,520
Depreciation and amortization......... 7,141 7,999 9,232 11,355 2,666 11,441
Impairment of long-lived assets....... -- 4,170 -- -- -- --
Store closure costs................... -- -- -- 7,200 -- 7,200
------------ ------------ ------------ ------------ ------------ ------------
Operating costs....................... 74,985 79,342 80,604 106,362 25,066 107,161
------------ ------------ ------------ ------------ ------------ ------------
Loss from operations before other
income/(expense), reorganization
expenses, fresh-start revaluation,
income tax provision/(benefit) and
extraordinary item.................. (5,062) (6,220) (12,733) (50,493) (14,639) (32,936)
Other income (expense):
Interest expense
--Cash................................ (5,900) (5,053) (5,098) (6,698) (1,356) (8,130)
--Non-Cash(2)......................... -- -- -- (5,160) (1,670) (3,490)
Other income (expense)................ 8 12 196 27 29 (369)
------------ ------------ ------------ ------------ ------------ ------------
Loss from operations before
reorganization expenses, fresh-start
revaluation, income tax
provision/(benefit) and
extraordinary item.................. (10,954) (11,261) (17,635) (62,324) (17,636) (44,925)
Reorganization expenses............... (5,995) 6,037 7,240 7,499 7,499 --
Fresh-start revaluation............... 70,495 -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) from operations before
income tax provision/(benefit) and
extraordinary item.................. 53,546 (17,298) (24,875) (69,823) (25,135) (44,925)
Income tax provision/(benefit)........ -- -- -- (400) -- (400)
Extraordinary item--gain on debt
discharge........................... 69,158 -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Net income (loss)..................... $ 122,704 $ (17,298) $ (24,875) $ (69,423) $ (25,135) $ (44,525)
------------ ------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------ ------------
OTHER DATA
Number of stores at end of period..... 38 38 43 48 48 55
BASIC AND DILUTED EARNINGS (LOSS) PER
COMMON SHARE
Income (loss) from operations before
extraordinary item.................. $ 3.00 $ (0.97) $ (1.39) $ (4.13) $ (1.41) $ (3.05)
Extraordinary item--gain on debt
discharge........................... 3.86 -- -- -- -- --
Net income (loss)..................... 6.86 (0.97) (1.39) (4.13) (1.41) (3.05)
Weighted average number of shares..... 17,875,602 17,899,906 17,893,675 16,820,257 17,883,135 14,583,038
BALANCE SHEET DATA (AT END OF PERIOD)
Working capital (deficit)............. $ (5,625) $ (3,357) $ (2,248) $ 16,025 $ 16,025 $ 9,938
Total assets.......................... 97,468 93,272 102,361 120,269 120,269 152,589
Liabilities subject to settlement
under reorganization proceedings.... -- 102,858 104,845 108,333 108,333 --
Long-term debt and obligations under
capital leases, net of current
maturities.......................... 24,371 2,846 -- -- -- 80,642
Stockholders' equity/(deficit)........ 19,956 (59,553) (42,556) (17,509) (17,509) 7,560
</TABLE>
- ------------------------------
(1) The additional week in Fiscal 1995 accounted for $2.2 million of revenues.
(2) Non-cash interest expense is comprised of amortization of discounts on the
Company's long-term debt and interest paid-in-kind through issuance of
additional debt.
(3) On March 9, 1995, the Company changed its fiscal year end from the Saturday
closest to October 31 to the Saturday closest to January 31 in order to
enhance comparability of the Company's results of operations with other
apparel retailers. For purposes of comparing the data for Fiscal 1995, the
Company has provided data for the period ended January 28, 1995 which is
derived from unaudited financial records of the Company.
21
<PAGE>
PRO FORMA FINANCIAL DATA
The following pro forma financial data should be read in conjunction with,
and is qualified in its entirety by, the Consolidated Financial Statements and
Notes thereto for Fiscal 1997 and the other information included elsewhere in
this Prospectus. The pro forma financial data gives effect to the Plan of
Reorganization and adoption of Fresh-Start Reporting and the amounts are
presented as though the reorganization had been consummated at the beginning of
Fiscal 1997. The historical consolidated balance sheet includes the effect of
the reorganization, which was effective on January 31, 1998. The unaudited pro
forma financial data does not purport to be indicative of the results of
operations that would actually have been reported had such transactions actually
been consummated on such date or of the results of operations that may be
reported by the Company in the future.
For purposes of applying Fresh-Start Reporting in the pro forma financial
data set forth below, the Company has made certain adjustments to the historical
financial data as reported to give effect to the Plan of Reorganization and
reflect the assets and liabilities based on their estimated fair values in
accordance with SOP 90-7.
<TABLE>
<CAPTION>
52 WEEKS ENDED JANUARY 31, 1998
---------------------------------------
HISTORICAL
AS REPORTED ADJUSTMENTS PRO FORMA
----------- ----------- -----------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues.................... $ 201,623 $ 201,623
Cost of merchandise sold.... 131,700 131,700
----------- -----------
Gross profit................ 69,923 69,923
----------- -----------
Operating and administrative
expenses.................. 67,844 $ (211)(a) 67,633
Depreciation and
amortization.............. 7,141 (361)(b) 7,012
(723)(c)
955(d)
----------- -----------
Operating costs............. 74,985 74,645
----------- -----------
Loss from operations before
other income/(expense),
reorganization expenses,
fresh-start revaluation
and extraordinary item.... (5,062) (4,722)
Other income (expense):
Interest expense............ (5,900) 480(e) (5,770)
(280)(f)
(70)(g)
Other income (expense)...... 8 8
----------- ----------- -----------
Loss from operations before
reorganization expenses,
fresh-start revaluation
and extraordinary item.... $ (10,954) $ 470 $ (10,484)
----------- ----------- -----------
----------- ----------- -----------
BASIC AND DILUTED LOSS PER
COMMON SHARE
Loss from operations before
reorganization expenses,
fresh-start revaluation
and extraordinary item.... $ (.61) $ (1.16)
Weighted average number of
shares.................... 17,875,602 9,000,000(h)
</TABLE>
- ------------------------------
(a) To record reduced rent expense for several stores where the landlord agreed
to concessions upon assumption of the lease on the Plan Effective Date.
(b) To reflect the reversal of the historical amortization of excess of cost
over net assets acquired, which was eliminated with the application of
Fresh-Start Reporting.
(c) To reflect the reversal of the historical amortization of deferred financing
fees associated with outstanding warrants to purchase Old Common Stock which
were cancelled on the Plan Effective Date.
(d) To record additional depreciation and amortization based on the increase in
fair value of identifiable net assets as if the reorganization had occurred
at the beginning of Fiscal 1997.
(e) To reflect the reversal of the historical fees in respect of the Company's
working capital facility recorded while the Company was in Chapter 11.
(f) To reflect amortization of the facility fee in respect of the working
capital facility, payable in the amount of $336,000 on the Plan Effective
Date and in the amount of $224,000 on December 31, 1998.
(g) To record quarterly interest expense associated with debt arising from
allowed priority tax claims.
(h) Pursuant to the Plan of Reorganization, on the Plan Effective Date, the
Company issued 9,000,000 shares of Common Stock and granted warrants and
options to purchase Common Stock. Such warrants and options have not been
included in the calculation of net loss per common share because the effect
of assuming their exercise would be anti-dilutive.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the
Consolidated Financial Statements of the Company and Notes thereto included
elsewhere in this Prospectus. On March 9, 1995, the Company elected to change
its fiscal year end from the Saturday closest to October 31 to the Saturday
closest to January 31 in order to enhance comparability of the Company's results
of operations with other apparel retailers. Accordingly, for purposes of
comparing the results of operations of the Company for Fiscal 1995, the Company
believes it is meaningful to use the comparable prior year period as the basis
for comparison.
The information contained herein, 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,
or industry results, to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. Such factors 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 a
significant number of 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, (x) ownership of Common Stock, (xi) volatility of stock price and
(xii) without duplication, the risk factors included elsewhere in this
Prospectus. The Company disclaims any obligations to update any such factors or
to announce publicly the result of any revisions to any of the forward-looking
statements contained or incorporated by reference herein to reflect untrue
events or developments.
BACKGROUND
Despite numerous attempts to restructure the Company's capital structure
from 1992 through 1994, and as a result of the continued deterioration of the
Company's financial position, on the Petition Date, the Company filed a
voluntary petition for relief under Chapter 11 in the Bankruptcy Court. In
Chapter 11, the Company continued to manage its affairs and operate its business
as a debtor-in-possession. On December 18, 1997, the Bankruptcy Court confirmed
the Plan of Reorganization and, on January 31, 1998, the Plan of Reorganization
became effective. Under the Plan of Reorganization, among other things, certain
indebtedness of Lamonts was cancelled in exchange for new equity interests
(including certain of the Common Stock and Warrants being offered hereunder by
the Selling Security Holders), certain indebtedness was reinstated, certain
other pre-petition claims were discharged, certain claims were settled, existing
equity interests were extinguished and new equity interests were issued
(including certain of the Common Stock and Warrants being offered hereunder by
the Selling Security Holders), executory contracts and unexpired leases were
assumed or rejected, and the members of a new board of directors were
designated. See "Plan of Reorganization."
In an effort to return the Company's operations to profitability, the
Company has instituted cost containment measures and implemented expense
initiatives to reduce overall operating expenses. In addition, the Company has
adopted new merchandising strategies, which are designed to: (i) organize
merchandising efforts in key departments on an integrated basis to streamline
operations and focus responsibility for merchandise presentation and a more
attractive mix of quality, price and availability; (ii) reduce or eliminate
low-margin items and departments and add higher margin goods; and (iii) improve
inventory mix to reduce the amount of inventory markdowns. There can be no
assurance, however, that the above strategies will result in improved
profitability.
23
<PAGE>
STORE LOCATIONS
Since October 29, 1994, the Company has closed 19 stores due to poor
performance, 11 of which were closed after the Petition Date with the approval
of the Bankruptcy Court. Six were closed in January 1995, one was closed in
March 1996, and four additional stores were closed in December 1996. Management
is continually evaluating store locations and operations to determine whether to
close, downsize or relocate stores that do not meet performance objectives.
Management has no current plans to close any of the remaining 38 Lamonts stores.
In March 1995, the Company opened a new store in Issaquah, Washington.
Management is also evaluating possibilities of opening new stores in other
desirable geographic locations to facilitate revenue growth. The Company intends
to use funds generated from operating cash flow and, in certain circumstances,
landlord financing to cover the costs associated with opening such new stores.
There can be no assurance, however, that operating cash flow and/or the amount
of landlord financing will be sufficient to cover such costs.
FRESH-START REVALUATION
Effective January 31, 1998, the Company implemented the required accounting
for entities emerging from Chapter 11 in accordance with SOP 90-7 (also referred
to as "Fresh-Start Reporting"). Under Fresh-Start Reporting, the reorganization
value (determined as discussed below) of the Company was allocated to the
reorganized Company's net assets on the basis of the purchase method of
accounting, which required the adjustment of the Company's assets and
liabilities to reflect their estimated fair value at the Plan Effective Date.
In accordance with SOP 90-7, the Company's reorganization value was
determined as of the Plan Effective Date. The reorganization value was derived
by using various valuation methods, including discounted cash flow analyses
(utilizing the Company's projections), analyses of the market values of other
publicly traded companies whose businesses are reasonably comparable, and
analyses of the present value of the Company's equity. This value was viewed as
the fair value of the Company before considering liabilities and approximated
the amount a willing buyer would have paid for the assets of the Company
immediately after restructuring. Management determined the value of the equity
to be approximately $20 million by deducting working capital, operating debt,
and the new debt from the reorganization value.
The adjustments to reflect the consummation of the Plan of Reorganization
and the adoption of Fresh-Start Reporting, including the adjustment to restate
assets and liabilities at the fair value of net assets and the gain on debt
discharge for liabilities subject to settlement under reorganization
proceedings, are reflected in the Consolidated Statements of Operations under
the captions "Fresh-Start Revaluation" and "Extraordinary Item--Gain on Debt
Discharge." See Note 2 to "Consolidated Financial Statements."
FISCAL 1997 COMPARED TO FISCAL 1996
REVENUES. Revenues of $201.6 million for Fiscal 1997 decreased $2.0 million
on a total store basis from $203.6 million for Fiscal 1996. The decrease is
attributable to the closure of five stores that were operating during Fiscal
1996. Comparable store revenues, for the 38 stores, of $201.6 million for Fiscal
1997 increased 6.3% from $189.7 million for Fiscal 1996. Comparable store
revenues are defined as revenues generated at stores open for at least 12 months
in each of the periods. Management believes that revenues have increased due to
higher inventory levels and continued improvement in the quality of the
merchandise offered in the stores compared to the prior year. There can be no
assurance that a continuation of such factors will increase revenues in future
periods.
GROSS PROFIT. Gross profit as a percentage of revenues of 34.7% for Fiscal
1997, decreased from 35.9% for Fiscal 1996 due to additional markdowns in Fiscal
1997. Reductions in the LIFO inventory
24
<PAGE>
layers impacted the Consolidated Financial Statements of Operations by $0.2
million in each of Fiscal 1997 and Fiscal 1996.
OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative
expenses of $67.8 million, or 33.6% of revenues for Fiscal 1997, compared to
$67.2 million, or 33.0% of revenues, for Fiscal 1996. Operating and
administrative expense savings of $3.6 million attributable to closed stores
operating in the prior year were offset by increases in (i) credit card fees of
$0.4 million, (ii) advertising of $1.0 million, (iii) payroll of $0.5 million,
(iv) write-down of supplies inventory and other current assets of $1.1 million,
and (v) other expenses of $1.2 million, which included Year 2000 compliance
expenses. Year 2000 costs included in operating and administrative expenses for
Fiscal 1997 amounted to approximately $0.3 million.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense of
$7.1 million for Fiscal 1997 decreased $0.9 million from $8.0 million for Fiscal
1996. The decrease was primarily related to assets retired as a result of store
closures and assets becoming fully depreciated or amortized.
IMPAIRMENT OF LONG-LIVED ASSETS. A non-cash charge of $4.2 million for the
impairment of long-lived assets was recognized during Fiscal 1996 due to the
adoption of Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS No. 121"). See Note 3 to "Consolidated Financial Statements."
INTEREST EXPENSE. Interest expense of $5.9 million in Fiscal 1997 increased
from $5.1 million in Fiscal 1996. Interest expense is primarily related to
outstanding borrowings under the Company's bank credit facilities. The increase
in interest expense is primarily due to debt facility fees incurred in
connection with the Term Loan and Revolver.
REORGANIZATION EXPENSES. During the course of the Chapter 11 case, the
Company recognized $26.8 million in reorganization expenses, including
approximately $13.2 million of non-cash charges, of which $6.0 million was
incurred during Fiscal 1997 and $6.0 million during Fiscal 1996. The Fiscal 1997
expenses relate primarily to professional fees and bonuses paid to certain
employees associated with the Company's Chapter 11 case. In addition, the Fiscal
1996 expenses include accrued or estimated costs associated with the rejection
of real property leases and costs related to closing underperforming and
nonprofitable stores.
FRESH-START REVALUATION. The Company recorded a fresh-start revaluation
adjustment of $70.5 million in Fiscal 1997. See Note 2 to "Consolidated
Financial Statements."
NET INCOME. As a result of the foregoing factors, net income was $122.7
million for Fiscal 1997 compared to a net loss of $17.3 million for Fiscal 1996.
The $0.3 million improvement (exclusive of the $70.5 million fresh-start
revaluation and $69.2 million extraordinary item--gain on debt discharge) is
primarily due to no impairment of long-lived assets for Fiscal 1997 compared to
the recognition of a $4.2 million for impairment in Fiscal 1996, and the
decrease in depreciation and amortization expenses of $0.9 million, offset by
(i) the decrease in gross profit of $3.2 million, (ii) the increase in operating
and administrative expenses of $0.6 million, and (iii) the increase in interest
expense of $0.8 million.
FISCAL 1996 COMPARED TO FISCAL 1995
REVENUES. Revenues of $204 million for Fiscal 1996 increased 2.0% on a
total store basis from $199 million for Fiscal 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. Comparable store revenues, for the 38 stores, of $189.7 million
for Fiscal 1996 increased 4.6% from $181.2 million for Fiscal 1995 (after
deducting the 53rd week of sales in Fiscal 1995). Comparable store revenues are
defined as revenues generated at stores open for at least 12 months in each of
the periods.
25
<PAGE>
GROSS PROFIT. Gross profit as a percentage of revenues of 36.0% for Fiscal
1996 increased 1.5% from 34.5% for Fiscal 1995 (excluding the effect of non-cash
charges of $0.2 million in Fiscal 1996 and $0.9 million in Fiscal 1996). The
non-cash charges consist primarily of "LIFO" inventory valuation and net
realizable value adjustments. Reductions in the LIFO inventory layers impacted
the statements of operations by $0.2 million and $0.5 million for Fiscal 1996
and Fiscal 1995, respectively. The improvement in gross profit margins can be
attributed to the Company's continued efforts to improve the quality of
merchandise offered while maintaining price points geared to the Company's
customer base. The Company has also implemented policies to mark-down and clear
out any unsold merchandise within its respective season.
OPERATING AND ADMINISTRATIVE EXPENSES. Operating and administrative
expenses of $67.2 million, or 33.0% of revenues for Fiscal 1996, decreased 5.9%
from $71.3 million, or 35.8% of revenues, for Fiscal 1995. On a comparable store
basis, operating and administrative expenses of $62.0 million decreased 3.9%
from $64.5 million for Fiscal 1995. This improvement is primarily attributable
to reductions in payroll and corporate administration, offset slightly by
increases in rent and advertising.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense of
$8.0 million for Fiscal 1996 decreased 13.4% from $9.2 million for Fiscal 1995.
The decrease is primarily attributable to the closure of a store in early 1996
and the sale-leaseback of an additional store. The increase in depreciation and
amortization associated with newly acquired assets was offset by reductions due
to assets becoming fully depreciated or amortized.
IMPAIRMENT OF LONG-LIVED ASSETS. A non-cash charge of $4.2 million for the
impairment of long-lived assets was recognized during Fiscal 1996 due to the
application of SFAS No. 121. See Note 3 to "Consolidated Financial Statements."
The charge consists of a non-cash write-off of the excess of cost over net
assets acquired, leasehold interests and leasehold improvements determined to be
impaired under the application of SFAS No. 121.
INTEREST EXPENSE. Interest expense of $5.1 million in Fiscal 1996 remained
unchanged from Fiscal 1995.
REORGANIZATION EXPENSES. Since the Chapter 11 case, the Company has
recognized $20.8 million in reorganization expenses (approximately $13.2 million
of non-cash charges), of which $6.0 million was incurred during Fiscal 1996 and
$7.2 million during Fiscal 1995. These expenses related primarily to
professional fees associated with the Company's Chapter 11 case, the accrued or
estimated costs associated with the rejection of real property leases, and costs
related to closing underperforming and nonprofitable stores subsequent to the
Company's Chapter 11 case. The charges for store closures are primarily non-cash
write-offs of inventory losses realized in the inventory liquidation process.
NET LOSS. The net loss of $17.3 million for Fiscal 1996 decreased $7.5
million, a 30% improvement over the net loss of $24.9 million for Fiscal 1995.
The reduction in net loss is primarily a result of (i) a $5.2 million
improvement in gross margin which includes non-cash charges for LIFO as
discussed above, (ii) a $1.2 million decrease in costs related to reorganization
expenses, excluding the costs associated with the closing of stores in Fiscal
1996 compared to Fiscal 1995, (iii) lower operating and administrative expenses
of $4.2 million in Fiscal 1996 as discussed above, and (iv) a $1.2 million
decline in depreciation and amortization expense during Fiscal 1996, offset by a
$4.2 million non-cash charge for the impairment of long-lived assets.
LIQUIDITY AND CAPITAL RESOURCES
In Fiscal 1997, $0.8 million of cash was used by operating activities before
reorganization expenses as compared to $2.1 million of cash used by operating
activities before reorganization expenses in Fiscal 1996. The Company's primary
cash requirement is the procurement of inventory which is currently funded
26
<PAGE>
through borrowings under the BankBoston Facility, trade credit and 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 continues to obtain the trade
credit terms it is currently receiving, the Company believes that borrowings
under the BankBoston Facility and cash expected to be generated from operations
will provide the cash necessary to fund the Company's cash requirements for the
next 12 months.
The increase in net cash used in investing activities for Fiscal 1997 from
Fiscal 1996 of $5.1 million resulted primarily from net sales proceeds of $4.5
million received in the sale-leaseback of one of the Company's stores during
Fiscal 1996.
The Company received $5.8 million from financing activities for Fiscal 1997,
compared to $2.0 million for Fiscal 1996. The $3.8 million increase is the
result of proceeds from the Term Loan offset by lower net borrowings under the
Revolver.
FINANCING
The Company entered into the Amended and Restated Debtor in Possession and
Exit Financing Loan Agreement, dated as of September 26, 1997 (the "Loan
Agreement"), among the Company and BankBoston, as agent for itself and the
lenders from time to time parties thereto, pursuant to which BankBoston is
providing the Company with a $42 million Revolver and Term Loan on the terms and
conditions set forth in the Loan Agreement. See "Description of Certain
Indebtedness."
For Fiscal 1997, the weighted average interest rate for the loans ("Base
Rate Loans") based on the annual interest rate announced from time to time by
BankBoston as its "base rate" (the "Base Rate") was 10.0% (calculated on the
average monthly balance of Base Rate Loans) and the weighted average interest
rate for loans ("Eurodollar Loans") based on the rate (fully adjusted for
applicable reserve requirements) offered dollar deposits in the interbank
eurodollar market (the "Eurodollar Rate") was 8.45% (calculated on the average
monthly balance of Eurodollar Loans). The Company has expensed fees of
approximately $0.9 million for the BankBoston Facility during Fiscal 1997, which
consist primarily of monthly payments based on the average unused borrowing
capacity and on the borrowing capacity under the Revolver.
As of May 6, 1998, the Company had $24.6 million of borrowings outstanding
under the Revolver (with additional borrowing capacity thereunder of $3.9
million) and $10.0 million outstanding under the Term Loan.
To hedge the interest rate exposure from variable rate loans under the
BankBoston Facility, on March 24, 1998, the Company entered into a forward
interest rate swap letter agreement ("Swap Agreement") with BankBoston. The Swap
Agreement is for a fixed rate of 5.73% plus the margin from time to time
applicable to Eurodollar Loans on a notional amount of $20 million for a period
of two years beginning March 25, 1998. BankBoston has the right to terminate the
Swap Agreement on March 23, 1999 upon five days prior notice.
OTHER
The Company has never declared or paid cash dividends on its Old 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, the financial condition of the Company, and such other
factors as the Company's Board of Directors may consider. The ability of the
Company to pay dividends is directly and indirectly restricted under the terms
of the BankBoston Facility. Such restrictions prohibit the payment of dividends
for the foreseeable future. See "Risk Factors--Restrictions on Common Stock
Dividends."
27
<PAGE>
SEASONALITY
The Company's sales are seasonal, with the fourth quarter the strongest
quarter as a result of the Christmas Season. The table below sets forth the
effect of seasonality on the Company's business for Fiscal 1997 and Fiscal 1996.
<TABLE>
<CAPTION>
1ST QTR 2ND QTR 3RD QTR 4TH QTR TOTAL
--------- --------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
FISCAL 1997
Revenues.................................................. $ 37,648 $ 49,483 $ 50,263 $ 64,229 $ 201,623
% Contribution............................................ 18.7% 24.5% 24.9% 31.9%
FISCAL 1996
Revenues.................................................. $ 37,922 $ 49,657 $ 50,705 $ 65,318 $ 203,602
% Contribution............................................ 18.6% 24.4% 24.9% 32.1%
</TABLE>
INFLATION
The primary items affected by inflation include the cost of merchandise,
utilities, and labor. Retail sales prices are generally set to reflect such
inflationary increases, the effects of which cannot be readily determined.
Management believes that inflationary factors have had a minimal effect on the
Company's operations during the past three years.
YEAR 2000
The Company has established a compliance program to modify or replace
existing information technology systems so that such systems will not generate
invalid or incorrect results in connection with processing year dates for the
year 2000 and later years. The Company believes that it will be able to achieve
Year 2000 compliance by the middle of Fiscal 1999 and does not currently
anticipate any material disruption in its operations as a result of any failure
by the Company to achieve compliance. The Company spent approximately $324,000
in Fiscal 1997 and estimates it will spend approximately $500,000 in Fiscal 1998
and $150,000 in Fiscal 1999 to make its computer systems Year 2000 compliant.
Additionally, suppliers of the Company and other third parties exchange
information with the Company or rely on the Company's merchandising systems for
certain sales and stock information. The Company currently does not have any
information concerning the compliance status of its suppliers or such other
third parties. However, because third-party failures could have a material
adverse impact on the Company's ability to conduct business, confirmations are
being requested from the Company's major suppliers to certify that plans are
being developed to address the Year 2000 issues.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Comprehensive Income" ("SFAS No. 130").
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997 and
requires restatement of earlier periods presented. Management has determined
that the requirements of SFAS No. 130 do not impact the Company's financial
position and results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes
annual and interim reporting standards for a Company's business segments and
related disclosures about its products, services, geographic areas and major
customers. Statement No. 131 is effective for fiscal years beginning after
December 15, 1997, and requires the
28
<PAGE>
restatement of comparative information for earlier periods. Management has
determined that the requirements of SFAS No. 131 do not impact the Company's
financial position and results of operations.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" ("SFAS No. 132"). SFAS No. 132
significantly changes current financial statement disclosure requirements from
those that were required under Statement of Financial Accounting Standards No.
87, "Employers' Accounting for Pensions;" Statement of Financial Accounting
Standards No. 88, "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits;" and Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." SFAS No. 132 is effective for
fiscal years beginning after December 15, 1997, with earlier application
encouraged. Management has determined that the requirements of SFAS No. 132 have
no material impact on the Company's financial position and results of
operations.
29
<PAGE>
BUSINESS
GENERAL
Lamonts is a Northwest-based regional retailer with 38 stores in five
states. The Company offers an assortment of moderately priced fashion apparel,
and home and fashion accessories at competitive prices for the entire family.
The Company, which has been operating in the Northwest for thirty years, is well
recognized in the region as a retailer of nationally recognized brand name
apparel such as Levi, Liz Claiborne, Lee, Bugle Boy, Jockey, Alfred Dunner,
Koret, OshKosh and Health-Tex. Lamonts purchases finished goods from
approximately 1,200 vendors and uses a distribution center in Kent, Washington
for processing and warehousing merchandise for distribution to its stores.
Lamonts employs approximately 1,600 people in salaried, hourly, or part-time
positions. The Company's stores average approximately 47,000 square feet and are
generally located in shopping centers and malls.
The Company was incorporated in Delaware as Texstyrene Corporation in 1985,
changed its name to Aris Corporation in October 1988 and to Lamonts Corporation
in April 1991. In September 1989, the Company acquired Lamonts Apparel, Inc.
("Apparel") from LH Group, Inc., a subsidiary of Northern Pacific Corporation.
Prior to the completion of the divestiture of its original core business in
August 1989, the Company manufactured expandable polystyrene beads and converted
them into foam cups and containers, insulation products, packing materials, and
custom-molded packaging products. Apparel's predecessor was incorporated in
Washington in May 1923. On October 30, 1992, Apparel was merged with and into
the Company and the name of the Company was changed to Lamonts Apparel, Inc.
The Company's principal office is located at 12413 Willows Road N.E.,
Kirkland, Washington 98034, and its telephone number is (425) 814-5700.
PROMOTION AND MARKETING
Sales promotion and inventory allocation decisions are made centrally by
Lamonts' corporate staff. The Company generally maintains uniformity with
respect to inventory, pricing decisions, selection of promotional goods, and
markdown policies throughout all of its locations.
Lamonts advertises primarily through radio, television, newspaper and
newspaper inserts, direct mail, and charge statement inserts. The Company's
promotional strategy is to target specific merchandise products and consumer
groups, including holders of its proprietary credit card, for sale events.
SHOE LICENSEE
Lamonts utilizes a licensee, Shoe Corporation of America ("SCOA"), for its
family shoe department. The sales of shoes represented approximately 5.7% of the
Company's total annual revenues for Fiscal 1997, but are not reflected in such
revenues for financial reporting purposes because income derived from the rental
fees charged to the licensee is reported as an offset to operating expenses. The
rental fees paid to Lamonts by SCOA (approximately $1.3 million for Fiscal 1997)
range from 10% to 12% of annual net sales generated by the licensee. The license
agreement with SCOA expires in January 2001 with one three-year extension at
Lamonts' option.
PURCHASING
The Company's centralized buying organization includes general merchandise
managers, divisional merchandise managers, and buyers responsible for
maintaining vendor relationships. New management teams within the merchandising
departments were assembled during the Company's Chapter 11 case. In addition,
the Company's membership in Frederick Atkins, Inc. ("Atkins"), a merchandising
consultant and buying cooperative, provides it with industry research and the
use of Atkins' private label import program. Additionally, the Company backs
certain of its direct import purchases with letters of credit issued through
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<PAGE>
Atkins. The Company maintains a non-interest bearing deposit account with Atkins
equal to 17% of its historic annual purchases to cover costs associated with the
letters of credit.
The Company purchases its merchandise from approximately 1,200 vendors and
is not dependent on any single source of supply. The Company maintains no
long-term commitments with any supplier and believes that there will continue to
be an adequate supply of merchandise to satisfy its current and anticipated
requirements. However, like other apparel retailers, the Company is highly
dependent upon its ability to obtain trade credit.
DISTRIBUTION
The Company utilizes a contractor, Assembly Transportation Distribution
Systems, Inc. ("ATD"), to operate its distribution center pursuant to an
arrangement that continues through February 2001. Fees payable to ATD pursuant
to such arrangement are approximately $15,000 per month. Through its
distribution center, which is dedicated to the Company for centralized receiving
and marking (ticketing), the Company generally receives and ships merchandise to
its stores within a two-to-three day period. The Company believes that this
distribution center enables it to monitor vendor shipments more effectively,
reduce receiving and marking expenses, reduce related transportation costs,
improve inventory control, and reduce inventory shrinkage.
The current lease for this distribution facility, which is guaranteed by the
Company, covers 62,500 square feet of space and has an initial term running
through February 2001 with one three-year extension at Lamonts' option. The
amount of lease payments guaranteed by the Company pursuant to such lease are
approximately $21,000 per month.
RETURN POLICY
It is the Company's policy to exchange or issue a credit if a customer is
not completely satisfied with any Lamonts purchase. Management believes that the
Company's customer return policy and experience is consistent with industry
practices.
STORE LOCATIONS AND PROPERTIES
The Company considers its ability to maintain attractive, high traffic store
locations to be a critical element of its business and a key determinant of
Lamonts' future growth and profitability.
The Company currently operates 38 stores in the following locations:
<TABLE>
<CAPTION>
LAMONTS APPAREL STORES
- -----------------------------------------------------------------------------------------------------
ALASKA(7) WASHINGTON(23) UTAH(1)
- ------------------ --------------------- ------------------
<S> <C> <C> <C> <C>
Anchorage: 3 stores Seattle: 6 stores Logan
Fairbanks Bellevue/Eastside: 4 stores
Juneau Tacoma: 2 stores OREGON(2)
Soldotna Spokane: 2 stores Astoria
Wasilla Aberdeen Corvallis
Marysville
IDAHO(5) Moses Lake
Coeur d' Alene Olympia
Idaho Falls Port Angeles
Lewiston Silverdale
Moscow Tri-Cities
Pocatello Wenatchee
Yakima
</TABLE>
31
<PAGE>
Of the 38 Lamonts' stores, 14 are located in regional malls, 15 are located
in community malls, three are located in strip centers, and six are located in
free-standing locations.
All of the Company's stores are currently operated in facilities leased by
the Company, except one that is operated in a building owned by the Company
subject to a ground lease which expires in 2015. The leases for these facilities
have terms up to 30 years, with an average remaining term of seven years, not
including additional option periods. The Company leases its principal office in
Kirkland, Washington. The lease, which commenced May 1996, is for approximately
30,000 square feet and expires May 2006.
The Company's stores range from 20,700 to 80,000 square feet in size,
averaging approximately 47,000 square feet. The interiors of Lamonts' stores are
decorated and organized with the intention of maximizing traffic flow and
merchandise exposure. Signage and service facilities, such as fitting rooms and
customer service areas, are designed to create a pleasant and convenient
shopping environment.
During 1994, the Company closed eight stores because of poor performance.
Also, in connection with its operational restructuring, the Company received
permission from the Bankruptcy Court to close six additional underperforming
stores in early 1995. In 1996, the Company received permission from the
Bankruptcy Court to close five additional underperforming stores. In February
1996, the Company entered into a sale-leaseback transaction involving the land
and building at the Company's Alderwood store in Seattle, Washington. The
Company sold the property for approximately $5 million and leased the property
back for a 20 year period, plus option terms.
In March 1995, the Company opened a new 36,000 square-foot store in a
465,000 square-foot shopping center in Issaquah, Washington. This is the
Company's fourth store in the eastside area of the Seattle market. See "Risk
Factors--Limitations on Future Growth."
STORE OPERATIONS
The Company's store management team consists of a senior vice president,
three regional directors and 35 store managers. The three regional directors
also serve as store managers. Store managers are primarily responsible for
hiring and supervising store personnel and for day-to-day store operations. A
typical Lamonts store employs a staff of 23 to 40 people, including the store
manager, two to four area sales managers and 20 to 35 sales associates,
approximately two-thirds of whom are part-time.
EMPLOYEES
The Company employs approximately 1,600 people, approximately two-thirds of
whom are part-time. Approximately 275 employees working in Seattle, Washington
stores are represented by the United Food and Commercial Workers Union pursuant
to a contract that expires June 12, 1999. Approximately 35 employees working in
the Wenatchee, Washington store are represented by the United Food and
Commercial Workers Union; these employees have not negotiated a bargaining
agreement, and they work under the same working conditions as the Company's
non-union employees. Approximately 16 employees working in the Kirkland
corporate office are represented by the United Food and Commercial Workers Union
pursuant to an employee ratified agreement that expires on March 31, 2000.
Management believes that its employee relations are good.
COMPETITION
Lamonts competes with other specialty retail apparel stores, department
stores, discounters and mass merchandisers on the basis of product range,
quality, fashion, price and service. The Company attempts to differentiate
itself from its competitors by positioning itself as a focused specialty
retailer with emphasis on casual wear and high quality branded products, as well
as its private label, "Northwest Outfitters." Principal competitors in one or
more of the Company's market areas include The Bon Marche (a division of
Federated Department Stores, Inc.), Nordstrom, J.C. Penney Co., Inc., Sears
Roebuck and Company,
32
<PAGE>
and Mervyn's (a division of Dayton-Hudson Corporation). Many of the Company's
competitors have substantially greater financial resources than Lamonts. See
"Risk Factors--Competition."
TRADEMARKS
The Company currently owns various registered trademarks which are part of
its proprietary brand imports program. Management believes that, although such
trademarks are significant, the Company's business is not dependent on any of
such rights.
INFORMATION SYSTEMS
In recent years, the Company has invested in the development of management
information systems (MIS) in the areas of merchandise reporting, distribution
and allocation, customer service (full and promotional price look-up at the
register), as well as financing, credit authorization, and store operations. The
company has made generational improvements in its systems since the late 1980's
and is continuing to make enhancements to its merchandising systems.
The Company uses the Universal Product Code (UPC) on each ticket and
automatic price look-up and electronic data interchange (EDI) for re-ordering
basic merchandise and for vendor-provided advance ship notices (ASNs), which
improve in-stock inventories on predictable, basic merchandise. The point-of-
sale (POS) data provides the basis for merchandise unit reporting, merchandise
allocation decisions and electronic transmission of orders. In addition to
running its own automatic basic stock replenishment system, the Company also
uses automatic basic merchandise replenishment programs offered by key vendors.
Sales and POS markdowns are monitored daily by using POS terminals to record
ticketed information, which flows electronically from the stores to the
corporate office and then to the service bureau referred to below. These sales
and POS markdowns are combined with receipt, on-hand and on-order information to
support merchant reports and on-line screens at the department, vendor, class
style, and in some cases, color/size or UPC level.
Current MIS efforts are focused on enhancing vendor-level reporting to the
merchants, Year 2000 preparations, customer database, and direct marketing
systems, as well as a new POS platform to support enhanced customer service and
direct marketing initiatives.
The Company utilizes an outside service bureau, Affiliated Computer
Services, Inc. ("ACS"), for its mainframe computer processing pursuant to a
contract that continues through February 2000. Fees payable to ACS under such
contract are based on CPU utilization plus other miscellaneous charges. The
minimum monthly fee payable to ACS under such contract is $50,000. In addition,
ACS licenses certain system and application software programs to the Company.
CREDIT POLICY
The Company offers its customers various methods of payment including cash,
check, Lamonts charge card, certain major credit cards and a lay-away plan.
Since its inception in July 1988, the Company's charge card program has been
expanded to approximately 626,000 accounts, of which 131,000 have transactions
within the last 30 days. Growth in credit sales represents an important element
in the Company's marketing strategy because statistics show that Lamonts charge
card holders shop more regularly and purchase more merchandise than customers
who pay by cash, check or bank credit card. The Company believes that its
proprietary charge card program provides additional benefits because: (i)
industry research shows that proprietary credit cards build significant customer
loyalty and (ii) proprietary credit cards enhance target marketing by providing
valuable demographic and purchasing behavior information on customers.
33
<PAGE>
The Company's proprietary charge card, administered and owned by Alliance
Data Systems ("ADS")(which purchased the charge accounts from National City Bank
of Columbus), provides for the option of paying in full within 30 days of the
billed date with no finance charge or with revolving credit terms. Terms of the
short-term revolving charge accounts require customers to make minimum monthly
payments in accordance with prescribed schedules. Through a contractual
arrangement, as amended (the "Alliance Agreement"), ADS owns the receivables
generated from purchases made by customers using the Lamonts charge card.
The Alliance Agreement provides that the Company will be charged a discount
fee of 1.95% of Net Sales, as that term is defined in the Alliance Agreement.
Additionally, the Alliance Agreement provides for a supplemental discount fee
equal to one-tenth of one percent (0.1%) of Net Sales for each one million
dollar increment that Net Sales for a subject year are less than $48.0 million
(the "Minimum Level") up to a total maximum fee of 3% of the Net Sales for the
subject year. ADS waived the supplemental discount fee for Fiscal 1997. In the
event of store closures, the Alliance Agreement provides that the Minimum Level
may be decreased. Additionally, as of March 1, 1996, the Company is no longer
responsible for any net bad debt expense. The Alliance Agreement may be
terminated by either party after June 22, 1999 upon 180 days prior written
notice. The Company paid National City Bank of Columbus and ADS $0.1 million for
bad debt expense and $0.9 million in fees during Fiscal 1996. In Fiscal 1997,
fees totaled approximately $0.9 million.
REGULATION
The Company is subject to Federal, state and local laws and regulations
affecting retail apparel stores generally. The Company believes that it is in
substantial compliance with these laws and regulations.
LEGAL PROCEEDINGS
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 will not have a material adverse effect on the financial
position of the Company, but, if decided adversely to the Company, could have a
material effect on quarterly or annual operating results during the period such
matters are resolved.
In March 1995, the Company brought an action against one of its landlords,
Hickel Investment Company ("Hickel"), to recover overpayments of common area
maintenance and other charges made to Hickel. On February 20, 1998, the United
States District Court for the District of Alaska entered a final judgment
against Hickel for an amount in excess of $1.8 million. Hickel has since
appealed the judgment and posted a bond in the amount of $2.1 million to obtain
a stay pending appeal. There can be no assurance that the Company will be
successful on such appeal. As a result, no amounts relating to the final
judgment have been recorded in the Consolidated Financial Statements.
34
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The name, age, positions and offices with the Company, present occupation or
employment and employment history of each of the directors and executive
officers of the Company are set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Alan R. Schlesinger................................. 55 Chairman of the Board, President,
and Chief Executive Officer
Loren R. Rothschild................................. 59 Vice Chairman of the Board
Debbie A. Brownfield................................ 43 Executive Vice President, Chief Financial
Officer, Treasurer and Secretary
E.H. Bulen.......................................... 47 Executive Vice President Merchandising, Sales
Promotions and Stores
Gary A. Grossblatt.................................. 38 Senior Vice President and General Merchandise
Manager
Stanford Springel(*)................................ 51 Director
John J. (Jack) Wiesner(*)........................... 59 Director
Paul M. Buxbaum(*).................................. 42 Director
</TABLE>
- ------------------------
* Designated for appointment to the Board of Directors by the Board (as
constituted prior to the Plan Effective Date) and approved by the committees
that represented Lamonts' unsecured trade creditors and bondholders under
and in accordance with the Plan of Reorganization. Such individuals have
served on the Board of Directors of the Company since the Plan Effective
Date.
Mr. Schlesinger joined Lamonts as President and Chief Executive Officer in
November 1994. In December 1994, Mr. Schlesinger was appointed Chairman of the
Board. From 1991 to 1994, Mr. Schlesinger was a Senior Vice President with The
May Company Department Stores.
Mr. Rothschild, a Director of the Company since October 1992, became Vice
Chairman of the Board in December 1994. In addition, Mr. Rothschild has served
as President and Director of Sycamore Hill Capital Group since September 1993.
Prior to that time, he served as Vice Chairman and President of American
Protection Industries, Inc. ("API"), a privately held company engaged in direct
marketing of collectibles, home decor products, flowers by wire clearing house,
and real estate and agribusiness, and Vice Chairman of The Franklin Mint from
1985 to June 1992. From 1988 to June 1992, Mr. Rothschild also served as
Chairman and Chief Executive Officer of API's Agribusiness division.
Ms. Brownfield joined the Company as Vice President of Finance, Secretary
and Treasurer in September 1985 and served as Acting Chief Financial Officer of
the Company from January 1993 through August 1993. Ms. Brownfield was named
Senior Vice President and Chief Financial Officer in December 1995 and was named
Executive Vice President in June 1997.
Mr. Bulen joined Lamonts in November 1995 as Senior Vice President and
General Merchandise Manager and was named Executive Vice President
Merchandising, Sales Promotions and Stores in May 1998. Prior to joining the
Company, Mr. Bulen was Vice President, Retail Stores, with Vans, Inc. from April
1993. He also has an extensive retail background with The May Company Department
Stores, where he served in a variety of merchandising roles from February 1976
to January 1993.
Mr. Grossblatt joined Lamonts in August 1997 as Senior Vice President and
General Merchandise Manager. Prior to joining the Company, Mr. Grossblatt was
Divisional Vice President and Divisional Merchandise Manager for Robinsons-May,
where he served in a variety of merchandising roles since 1987.
Mr. Springel has served on the Board of Directors of the Company since the
Plan Effective Date. Since 1991, Mr. Springel has acted as an independent
consultant serving in a variety of executive roles providing domestic and
international turnaround management services to financially distressed
companies,
35
<PAGE>
including (i) Omega Environmental, Inc, an environmental services company
currently in Chapter 11 where, since June 1997, Mr. Springel has served as Chief
Executive Officer, (ii) Interlogic Trace, Inc. ("Interlogic"), a nationwide
provider of computer maintenance and repair services where, from February 1995
to December 1995, Mr. Springel served as Interim Chief Operating Officer and
Interim President, (iii) Riedel Environmental Technologies, Inc. ("Riedel"), an
environmental remediation and services company where, from January 1994 to March
1996, Mr. Springel served as Interim Chief Executive Officer and President and,
for a period of time, as a member of the board of directors, and (iv) Ter Meulen
Post, a Dutch retail catalogue company where, during 1993, Mr. Springel served
as Chief Operating Officer. Both Interlogic and Riedel were in Chapter 11 during
Mr. Springel's association with those companies. Since December 1995, Mr.
Springel has served on the board of directors of Pinebrook Capital and, since
December 1997, has served on the board of directors of P.F. Magic.
Mr. Wiesner has served on the Board of Directors of the Company since the
Plan Effective Date. Since 1987, Mr. Wiesner has served as Chairman of the Board
and Chief Executive Officer of C.R. Anthony Company, a regional apparel retailer
with 246 stores operating in 18 southwestern and midwestern states. Since July
1997, Mr. Wiesner has served on the board of directors of Stage Stores, Inc.
and, since December 1997, Mr. Wiesner has served on the board of directors of
Elder Beerman.
Mr. Buxbaum has served on the Board of Directors of the Company since the
Plan Effective Date. Since 1984, Mr. Buxbaum has been a principal of Buxbaum,
Ginsberg & Associates, Inc., a national consulting firm specializing in
providing liquidation analysis and asset recovery services to banks and other
financial institutions. Since January 1993, Mr. Buxbaum has served as Chairman
of the Board of Ames Department Stores, Inc., a discount department store with
more than 300 locations in the northeastern United States. Since April 1995, Mr.
Buxbaum has served on the board of directors of Richman Gordman 1/2 Price Stores
and, since May 1997, Mr. Buxbaum has served on the board of directors of the Jay
Jacobs Stores.
All directors and executive officers are elected for a term of one year and
serve until their successors are duly elected and qualified.
In order to assist it in carrying out its duties, the Board of Directors of
the Company has delegated certain authority to its Audit and Compensation
Committees. The initial members of each of such committees are Messrs. Springel,
Wiesner and Buxbaum. The Audit Committee's duties and responsibilities will
include, among other things, meeting with the independent accountants to review
the scope and results of audits and other activities of the Company, evaluating
the independent accountants' performance, and recommending to the Board of
Directors as to whether the accounting firm should be retained by the Company
for the ensuing fiscal year. In addition, the committee will review the
Company's internal accounting and financial controls and reporting systems and
practices. The Compensation Committee's duties and responsibilities include,
among other things, reviewing, approving and recommending to the full Board of
Directors the salaries and other compensation arrangements of all other
officer-employees of the Company and administering the Stock Option Plan.
COMPENSATION OF DIRECTORS
The Company has agreed to pay each director (other than Messrs. Schlesinger
and Rothschild) a fee of $2,500 for attending each meeting of the Board ($500
for each meeting attended telephonically) and $1,500 for attending each meeting
of the Audit Committee and the Compensation Committee, plus reimbursement for
reasonable out-of-pocket expenses incurred in connection with attending such
meetings. In addition, on February 26, 1998, the Compensation Committee granted
5,000 Stock Options to each director (other than Messrs. Schlesinger and
Rothschild). Each such Stock Option has an exercise price of $1.00, a term of
ten years and vests as follows: 25% on the date of grant; and 25% on each
anniversary of the date of grant.
36
<PAGE>
During Fiscal 1997, the Company did not pay any compensation to any person
as a director of the Company.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
paid during Fiscal 1997, Fiscal 1996 and Fiscal 1995 to (i) the Company's Chief
Executive Officer and (ii) the Company's four other most highly compensated
executive officers whose total salary and bonus exceed $100,000 (collectively,
the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION ----------------------------------
--------------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS COMPENSATION($)(1)
- ------------------------------- ----------- ----------- ----------- ------------------- ----------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Alan R. Schlesinger, .......... 1997 450,000 675,000(2) 0 1,028,882 8,475
Chairman of the 1996 450,000 100,000 0 0 5,100
Board, President and Chief 1995 450,000 100,000 0 0 3,600
Executive Officer
Loren R. Rothschild, .......... 1997 240,000 187,000(3) 0 257,224 2,790
Vice Chairman 1996 240,000 0 0 0 2,790
of the Board 1995 240,000 0 0 0 2,790
Debbie A. Brownfield, ......... 1997 170,000 65,000(4) 0 102,884 2,391
Executive Vice President, 1996 160,000 30,000 0 0 2,016
Chief Financial Officer 1995 121,249 35,000 0 0 1,497
and Secretary
E.H. Bulen, ................... 1997 175,000 50,000(6) 0 85,737 2,119
Executive Vice President 1996 152,000 15,000 0 0 661
Merchandising, Sales 1995 48,930(7) 0 0 0 0
Promotions
and Stores
Gary Grossblatt, .............. 1997 94,874 90,000(9) 66,641(10) 51,441 138
Senior Vice President,
General Merchandise
Manager (8)
</TABLE>
- ------------------------------
(1) "All Other Annual Compensation" consists of (a) Company contributions to a
tax qualified trust under the Company's Tax Relief Investments Protection
Plan, as amended to date, and (b) premiums paid by the Company for term
life insurance pursuant to the Lamonts Apparel Group Life and Long-Term
Disability Plan, effective July 7, 1991.
(2) Consists of a $400,000 bonus paid upon exit from Chapter 11, $100,000
annual guaranteed bonus, and $175,000 employment extension bonus.
(3) Consists of a $187,000 bonus paid upon exit from Chapter 11.
(4) Consists of a $35,000 bonus paid upon exit from Chapter 11 and a guaranteed
bonus of $30,000.
(5) Mr. Bulen commenced his employment with the Company in November 1995.
(6) Consists of a $30,000 bonus paid upon exit from Chapter 11 and a guaranteed
bonus of $20,000.
(7) Includes $24,430 in consulting fees for the period from September 27, 1995
to November 30, 1995.
(8) Mr. Grossblatt commenced his employment with the Company in August 1997.
(9) Consists of a $20,000 bonus paid upon exit from Chapter 11, a signing bonus
of $50,000, and a guaranteed bonus of $20,000.
(10) Consists of $66,641 of relocation expenses which were reimbursed to Mr.
Grossblatt.
37
<PAGE>
OPTION GRANTS DURING FISCAL 1997
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------------------- GRANT DATE
NUMBER OF VALUE(1)
SECURITIES ---------------
UNDERLYING EXERCISE OR GRANT DATE
OPTIONS PERCENT OF TOTAL BASE PRICE PRESENT
NAME GRANTED (#)(2) OPTIONS GRANTED ($/SHARE) EXPIRATION DATE VALUE($)
- --------------------------------- -------------- --------------------- --------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C>
Alan R. Schlesinger.............. 1,028,882(3) 60% (4) (5) $ 356,494
Loren R. Rothschild.............. 257,224(6) 15% (4) (5) $ 89,124
Debbie A. Brownfield............. 102,884(7) 6% (4) (5) $ 35,649
E.H. Bulen....................... 85,737(8) 5% (4) (5) $ 29,707
Gary A. Grossblatt............... 51,441(9) 3% (4) (5) $ 18,231
</TABLE>
- ------------------------
(1) The present value of the Stock Options and Class C Warrants was estimated on
their date of grant using the Black-Scholes option pricing model with the
following weighted average assumptions: (a) no dividend yield; (b) expected
volatility of 45%; (c) risk-free interest rate of 5.7%; and (d) expected
life of 10 years.
(2) Consists of Stock Options and Class C Warrants granted on the Plan Effective
Date to the Named Executive Officers.
(3) Consists of (i) Base Options exercisable for the purchase of 600,000 shares
of Common Stock, (ii) Protective A Options exercisable for the purchase of
146,888 shares of Common Stock, (iii) Protective B Options exercisable for
the purchase of 53,349 shares of Common Stock, and (iv) Class C Warrants
exercisable for the purchase of 228,645 shares of Common Stock.
(4) Each Base Option has an exercise price of $1.00 per share; each Protective A
Option and Protective B Option has an exercise price of $.01 per share; and
each Class C Warrant has a weighted average exercise price of $1.17 per
share (14 shares at an exercise price of $1.25 per share and 1 share at an
exercise price of $.01 per share).
(5) Each Base Option, Protective A Option, Protective B Option and the portion
of each Class C Warrant to purchase Common Stock at a per share exercise
price of $.01 expires on January 31, 2008; and the portion of each Class C
Warrant to purchase Common Stock at a per share exercise price of $1.25
expires on January 31, 2002.
(6) Consists of (i) Base Options exercisable for the purchase of 150,000 shares
of Common Stock, (ii) Protective A Options exercisable for the purchase of
36,722 shares of Common Stock, (iii) Protective B Options exercisable for
the purchase of 13,337 shares of Common Stock, and (iv) Class C Warrants
exercisable for the purchase of 57,165 shares of Common Stock.
(7) Consists of (i) Base Options exercisable for the purchase of 60,000 shares
of Common Stock, (ii) Protective A Options exercisable for the purchase of
14,689 shares of Common Stock, (iii) Protective B Options exercisable for
the purchase of 5,335 shares of Common Stock, and (iv) Class C Warrants
exercisable for the purchase of 22,860 shares of Common Stock.
(8) Consists of (i) Base Options exercisable for the purchase of 50,000 shares
of Common Stock, (ii) Protective A Options exercisable for the purchase of
12,241 shares of Common Stock, (iii) Protective B Options exercisable for
the purchase of 4,446 shares of Common Stock, and (iv) Class C Warrants
exercisable for the purchase of 19,050 shares of Common Stock.
(9) Consists of (i) Base Options exercisable for the purchase of 30,000 shares
of Common Stock, (ii) Protective A Options exercisable for the purchase of
7,344 shares of Common Stock, (iii) Protective B Options exercisable for the
purchase of 2,667 shares of Common Stock, and (iv) Class C Warrants
exercisable for the purchase of 11,430 shares of Common Stock.
38
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN FISCAL 1997 AND FISCAL YEAR END
OPTION/SAR VALUES
The following table provides information related to the number and value of
options held by the Named Executive Officers at the end of Fiscal 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS/SARS AT FISCAL THE-MONEY OPTIONS/SARS AT
YEAR END (#)(1)(2)(3) FISCAL YEAR END ($)
SHARES VALUE ----------------------- ---------------------------
NAME ACQUIRED REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ------------------------------------------- ------------- ----------- ----------------------- ---------------------------
<S> <C> <C> <C> <C>
Alan R. Schlesinger........................ 0 N/A 406,701 / 622,181 (4)
Loren R. Rothschild........................ 0 N/A 101,677 / 155,547 (4)
Debbie A. Brownfield....................... 0 N/A 40,668 / 62,216 (4)
E.H. Bulen................................. 0 N/A 33,890 / 51,847 (4)
Gary A. Grossblatt......................... 0 N/A 20,334 / 31,107 (4)
</TABLE>
- ------------------------------
(1) None of the Named Executive Officers exercised any Stock Options or Class C
Warrants during Fiscal 1997.
(2) Consists of Stock Options and Class C Warrants granted on the Plan Effective
Date to the Named Executive Officers.
(3) For purposes of calculating the number of securities underlying unexercised
options at fiscal year-end that are exercisable, options that are
exercisable include (a) vested Base Options and (b) that portion of the
vested Class C Warrants that are currently exercisable. Options that are
unexercisable include (i) unvested Base Options, (ii) Protective A Options
and Protective B Options, (iii) unvested Class C Warrants and (iv) that
portion of the vested Class C Warrants that are exercisable on the first
date on which the Aggregate Equity Trading Value equals or exceeds $25
million.
(4) All shares of Old Common Stock were canceled pursuant to the Plan of
Reorganization and trading in the Common Stock did not commence until
shortly after the Plan Effective Date. As a result, it is impracticable to
determine if and to what extent the Stock Options were in-the-money on
January 31, 1998.
39
<PAGE>
PENSION PLAN
The Company maintains the Lamonts Apparel, Inc. Employees Retirement Trust,
effective January 1, 1986 (as amended, the "Pension Plan"). The Pension Plan is
a noncontributory defined benefit plan under which benefits are determined
primarily by final average compensation and years of service. On February 26,
1998, the Board approved an amendment to the Pension Plan which provides that,
effective April 1, 1998, benefits under the Pension Plan will cease to accrue
and prohibits the entry of any new participants. Participants that are not yet
vested will continue to accrue vesting service after April 1, 1998. The
following table contains the estimated annual benefits payable to Pension Plan
participants in the specified compensation and years of service categories set
forth therein:
PENSION PLAN TABLE(1)(3)
<TABLE>
<CAPTION>
YEARS OF SERVICE AT RETIREMENT(2)
---------------------------------------------
FINAL AVERAGE EARNINGS 15 20 25 30
- ------------------------------------------------------------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
$150,000.......................................................... $ 20,302 $ 27,070 $ 33,837 $ 40,604
200,000.......................................................... 27,802 37,070 46,337 55,604
250,000.......................................................... 35,302 47,070 58,837 70,604
300,000.......................................................... 42,802 57,070 71,337 85,604
350,000.......................................................... 50,302 67,070 83,837 100,604
400,000.......................................................... 57,802 77,070 96,337 115,604
450,000.......................................................... 65,302 87,070 108,837 130,604
500,000.......................................................... 72,802 97,070 121,337 145,604
550,000.......................................................... 80,302 107,070 133,837 160,604
600,000.......................................................... 87,802 117,070 146,337 175,604
</TABLE>
- ------------------------------
(1) Compensation covered by the Pension Plan includes all payments for personal
services as an employee of the Company other than deferrals under any
non-qualified plan of the Company.
(2) As of May 1, 1998, credited years of service for the Named Executive
Officers are as follows: Alan R. Schlesinger (3 years); Loren R. Rothschild
(3 years); Debbie Brownfield (22.25 years); E.H. Bulen (2 years); and Gary
Grossblatt (0 years).
(3) Benefits are based on the product of years of service multiplied by the sum
of (a) 0.5% of the final average earnings plus (b) 0.5% of final average
earnings in excess of the average Social Security Wage Base ($29,304 for
1997). However, in the case of Debbie Brownfield's service prior to January
1, 1995, benefits are based on the product of years of service multiplied by
the sum of (a) 1.00% of final average earnings PLUS (b) 0.65% of final
average earnings in excess of the average Social Security Wage Base ($29,304
for 1997).
EMPLOYMENT AGREEMENTS
Pursuant to the Plan of Reorganization, Messrs. Schlesinger and Rothschild
entered into the Schlesinger Employment Agreement and the Rothschild Employment
Agreement, respectively, which amended and restated their existing employment
agreements. Pursuant to the Schlesinger Employment Agreement, Mr. Schlesinger
received a one-time bonus of $175,000 for extending the term of his employment
through January 31, 2002 and Mr. Schlesinger's base salary and guaranteed annual
bonus remained at $450,000 and $100,000, respectively, subject in each case to a
non-discretionary annual cost of living adjustment reflecting the increase in
the cost of living since the inception of Mr. Schlesinger's employment. As a
result of a cost of living adjustment made on February 1, 1998, Mr.
Schlesinger's base salary and guaranteed annual bonus are currently $495,000 and
$110,000, respectively. In connection with the Plan of Reorganization, Mr.
Schlesinger received a $400,000 bonus, together with a grant of 800,237 Stock
Options and 15,243 Class C Warrants. In addition, the Schlesinger Employment
Agreement provides that Mr. Schlesinger receive $1,500 per month for
unreimbursed business expenses and a car allowance. Pursuant to the Rothschild
Employment Agreement, Mr. Rothschild received a one-time bonus of $80,000 for
extending the term of his employment to May 1, 2001. For the first 90 days
following the Plan Effective
40
<PAGE>
Date, Mr. Rothschild's base salary remained at $240,000 per year and,
thereafter, was reduced to $150,000 per year, subject to a non-discretionary
annual cost of living adjustment reflecting the increase in the cost of living
since January 1, 1995. As a result of a cost of living adjustment made on
February 1, 1998, Mr. Rothschild's base salary was $252,192 per year through
April 30, 1998. Effective May 1, 1998, Mr. Rothschild's base salary was reduced
to $157,600 per year (as adjusted to reflect the annual cost of living
adjustment). In addition, in connection with the Plan of Reorganization, Mr.
Rothschild received a $187,000 bonus, together with a grant of 200,059 Stock
Options and 3,811 Class C Warrants.
If the Company terminates either executive's employment without cause during
the initial terms of the amended and restated employment agreements, such
executive will be entitled to receive, for a period of no more than 24 months in
the case of Mr. Schlesinger and for a period of no more than 12 months in the
case of Mr. Rothschild, the base salary and guaranteed minimum bonus (if any)
that the executive would have received had such termination not occurred and to
continue to participate in all benefit plans and receive all other benefits to
which the executive was entitled at the time of the termination. The Company may
elect to pay the severance payments payable under the Schlesinger Employment
Agreement in a single lump sum equal to the present value of such payments at an
effective annual interest rate of 10%. Upon a Change of Control (as defined in
the Schlesinger Employment Agreement), all outstanding options and warrants to
purchase Common Stock beneficially owned by Mr. Schlesinger shall immediately
vest.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The determination of Fiscal 1997 executive compensation was made by the
members of the Board of Directors. Messrs. Schlesinger and Rothschild were the
only members of the Board of Directors during Fiscal 1997 and are executive
officers of the Company. However, the compensation paid to Messrs. Schlesinger
and Rothschild was pursuant to employment agreements which were approved by the
Bankruptcy Court following notice and a hearing and approval by the Committees.
See "Employment Agreements" above.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under Section 145 of the General Corporation Law of the State of Delaware, a
Delaware corporation has the power, under specified circumstances, to indemnify
its directors, officers, employees and agents in connection with actions, suits
or proceedings brought against them by a third party or in the right of the
corporation, by reason of the fact that they were or are such directors,
officers, employees or agents, against liabilities and expenses incurred in any
such action, suit or proceeding. Article VIII of the Company's Amended and
Restated Bylaws provides that the Company shall indemnify all persons that are
officers and directors of the Company on or after the Plan Effective Date to the
fullest extent permitted by Section 145 of the General Corporation Law of the
State of Delaware.
The officers and directors of the Company have each entered into
indemnification agreements (the "Indemnification Agreements") with the Company
pursuant to which the Company has agreed to indemnify, to the fullest extent
permitted by applicable law, such officer or director against liabilities and
expenses incurred by such officer or director in any proceeding or action
because such officer or director is or was a director, officer, employee or
agent of the Company and certain other circumstances. The Indemnification
Agreements are in addition to the indemnification provided in the Company's
Amended and Restated Bylaws. In neither case will indemnification be provided if
prohibited under applicable law. Individuals not entering into indemnification
agreements will remain entitled to the indemnification provisions of the
Company's Amended and Restated Bylaws and as otherwise provided by law.
41
<PAGE>
PRINCIPAL STOCKHOLDERS
The following tables set forth as of May 1, 1998 information known to
management of the Company concerning the beneficial ownership of the Common
Stock by (a) each person who is known by the Company to be the beneficial owner
of more than five percent of such class, (b) each director and executive officer
of the Company and (c) all directors and executive officers of the Company as a
group.
CLASS A COMMON STOCK
For purposes of calculating beneficial ownership below, shares beneficially
owned include (a) shares of Common Stock issuable upon the exercise of vested
Base Options and Protective A Options and that portion of the vested Class C
Warrants held by directors and executive officers that are currently
exercisable, (b) shares of Common Stock issuable upon the exercise of the Class
A Warrants, (c) with respect to the Class C Warrants to be issued to the Surety,
shares of Common Stock issuable upon exercise of that portion of such Class C
Warrants that are currently exercisable and (d) shares of Common Stock
(including shares of Common Stock issuable upon exercise of Class A Warrants)
that may be distributed following the resolution of pending claims filed against
the Company during its Chapter 11 case. Shares beneficially owned do not include
(i) shares of Common Stock issuable upon the exercise of unvested Stock Options
or that portion of the vested Stock Options and Class C Warrants held by
directors and executive officers that become exercisable on the first date on
which the Aggregate Equity Trading Value equals or exceeds $25 million, (ii)
shares of Common Stock issuable upon the exercise of the Class B Warrants, and
(iii) with respect to the Class C Warrants to be issued to the Surety, the
shares of Common Stock issuable upon exercise of that portion of such Class C
Warrants that are exercisable on the first date of which the Aggregate Equity
Trading Value equals or exceeds $25 million.
<TABLE>
<CAPTION>
AS OF MAY 1, 1998
-----------------------------------------
AMOUNT AND NATURE
OF BENEFICIAL
OWNERSHIP OF CLASS
EXECUTIVE OFFICERS AND DIRECTORS A COMMON STOCK PERCENTAGE OF CLASS
------------------ ---------------------
<S> <C> <C>
Alan R. Schlesinger....................................................... 492,645(1) 5.2%
Loren R. Rothschild....................................................... 123,163(1) 1.4%
Debbie A. Brownfield...................................................... 54,286(1) *
E.H. Bulen................................................................ 46,260(1) *
Gary A. Grossblatt........................................................ 29,006(1) *
Stanford Springel 1,250(2) *
John J. Wiesner........................................................... 1,250(2) *
Paul M. Buxbaum .......................................................... 1,250(2) *
c/o Lamonts Apparel, Inc.
12413 Willows Road N.E.
Kirkland, WA 98034
All directors and executive officers as a group (8 persons)(1)(2)......... 749,110(1)(2) 7.7%
5% STOCKHOLDERS
BEA Associates(3) ........................................................ 568,646(4) 6.2%
153 East 53rd St.
New York, New York 10022
FMR Corp.(5) ............................................................. 4,840,521(4) 44.7%
82 Devonshire Street
Boston, Massachusetts 02109
Specialty Investment I LLC(6) ............................................ 3,200,946(7) 26.2%
40 Broad Street
Boston, Massachusetts 02109
</TABLE>
- ------------------------------
* Percentage equal to less than 1%
(1) Represents shares of Common Stock issuable upon the exercise of (i) vested
Base Options and vested Protective A Options and (ii) that portion of the
vested Class C Warrants held by executive officers that are currently
exercisable. Does not include shares
42
<PAGE>
of Common Stock issuable upon the exercise of unvested Stock Options or that
portion of the vested Stock Options and Class C Warrants held by executive
officers that become exercisable on the first date on which the Aggregate
Equity Trading Value equals or exceeds $25 million. Also includes, in the
case of Ms. Brownfield, 23 shares issued upon cancellation of Old Common
Stock.
(2) Represents shares of Common Stock issuable upon the exercise of vested Stock
Options with an exercise price of $1.00 per share.
(3) According to the Schedule 13G filed by BEA Associates on February 11, 1997,
CS Holding directly owns 80% of the partnership units in BEA Associates. CS
Holding and its direct and indirect subsidiaries, in addition to BEA
Associates, may beneficially own shares of the Company and such shares are
not reported in such Schedule 13G. CS Holding disclaims beneficial ownership
of shares of the Company beneficially owned by its direct and indirect
subsidiaries, including BEA Associates, and BEA Associates disclaims
beneficial ownership of all the shares of the Company, which shares are held
in discretionary accounts which BEA Associates manages. The Company has been
informed by Executive Life Insurance Company of New York ("ELICNY") that
these shares are held for the account of ELICNY.
(4) Represents shares issued upon cancellation of Old Common Stock and shares
issued in exchange for the Company's 10 1/4% Senior Subordinated Notes due
1999 (the "Old 10 1/4% Notes"), in each case pursuant to the first two
distributions under the Plan of Reorganization. Also includes (i) shares of
Common Stock issuable upon the exercise of Class A Warrants that become
exercisable on the first date on which the Aggregate Equity Trading Value
equals or exceeds $20 million and (ii) 12,146 shares of Common Stock
(including 2,432 shares issuable upon exercise of Class A Warrants) and
104,999 shares of Common Stock (including 21,023 shares issuable upon
exercise of Class A Warrants) representing the maximum amount of shares of
Common Stock (including shares issuable upon exercise of Class A Warrants)
that could be received by BEA Associates or FMR (as defined below),
respectively, pursuant to one or more subsequent distributions under the
Plan of Reorganization following the resolution of pending claims filed
against the Company during its Chapter 11 case. Does not include (i) 71,577
shares and 581,184 shares of Common Stock issuable upon the exercise by BEA
Associates and FMR, respectively, of Class B Warrants that become
exercisable on the first date on which the Aggregate Equity Trading Value
equals or exceeds $25 million, and (ii) any additional shares of Common
Stock issuable upon exercise of Class B Warrants that could be received by
BEA Associates or FMR pursuant to one or more subsequent distributions under
the Plan of Reorganization following the resolution of pending claims filed
against the Company during its Chapter 11 case.
(5) Such shares are owned indirectly by FMR Corp., a Massachusetts corporation
("FMR"). Such shares are owned directly by (a) various portfolios of
investment companies (the "Fidelity Funds") registered under Section 8 of
the Investment Company Act of 1940, as amended, which are advised by
Fidelity Management & Research Company ("FMRC"), a wholly-owned subsidiary
of FMR and an investment adviser registered under Section 203 of the
Investment Advisers Act of 1940, and (b) various private investment accounts
(the "Accounts") for which Fidelity Management Trust Company ("FMTC"), a
wholly-owned subsidiary of FMR and a bank as defined in Section 3(a)(6) of
the Exchange Act, acts as trustee or managing agent. Edward C. Johnson, III
and Abigail Johnson own 12% and 24.5%, respectively, of the aggregate
outstanding voting stock of FMR. Together with other members of the Edward
C. Johnson, III family, such persons collectively own shares of common stock
of FMR representing approximately 49% of the voting power of FMR.
(6) The sole member of Specialty Investment I LLC, the Surety, is GBP LLC.
Michael G. Frieze and Robert C. Sager are the ultimate beneficial owners of
in excess of 80% of the aggregate outstanding interests in GBP LLC. Certain
direct and indirect beneficial owners of Specialty Investment I LLC are also
beneficial owners of Gordon Brothers Partners, Inc.
(7) Represents shares of Common Stock issuable upon the exercise of that portion
of the Class C Warrants that are currently exercisable. Does not include
228,639 shares of Common Stock issuable upon the exercise of that portion of
the Class C Warrants which become exercisable on the first date on which the
Aggregate Equity Trading Value equals or exceeds $25 million.
CLASS B COMMON STOCK
<TABLE>
<CAPTION>
AS OF MAY 1, 1998
----------------------------------------------
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP OF
CLASS B COMMON STOCK PERCENTAGE OF CLASS
----------------------- ---------------------
<S> <C> <C>
5% STOCKHOLDERS
Specialty Investment I LLC(1) ........................ 10 100%
40 Broad Street
Boston, Massachusetts 02109
</TABLE>
- ------------------------------
(1) The sole member of Specialty Investment I LLC, the Surety, is GBP LLC.
Michael G. Frieze and Robert G. Sager are the ultimate beneficial owners of
in excess of 80% of the aggregate outstanding interests in GBP LLC. Certain
direct and indirect beneficial owners of Specialty Investment I LLC are also
beneficial owners of Gordon Brothers Partners, Inc.
43
<PAGE>
CERTAIN TRANSACTIONS
In connection with a recapitalization of the Company in October 1992 (the
"Recapitalization"), pursuant to which, among other things, the Company issued
an aggregate of $75 million in principal amount of its Old 10 1/4% Notes,
certain of the Company's post-Recapitalization stockholders, representing an
aggregate of approximately 8,717,000 shares or 98% of the Old Common Stock
outstanding immediately following the Recapitalization, entered into that
certain Voting Agreement dated as of October 30, 1992 (the "Voting Agreement").
The Voting Agreement provided, among other things, that (i) Apollo Retail
Partners ("ARP"), a holder of greater than 5% of the Old Common Stock, could
designate six persons to the Board of Directors, and (ii) a majority of certain
former holders of the Company's 13 1/2% Senior Subordinated Notes which were due
February 1995 (the "Old 13 1/2% Notes"), which notes were exchanged for Old
Common Stock pursuant to the Recapitalization, could designate two persons to
the Board of Directors. Lamonts' obligations under the Voting Agreement were
rejected as of the Plan Effective Date.
In connection with the Recapitalization, the parties to the agreement
effecting the Recapitalization (and/or their permitted assignees) entered into
an equity registration rights agreement and a debt registration rights
agreement. Under certain circumstances, the holders of at least 10% of the
aggregate principal amount of the then outstanding Securities (as defined
therein) covered by such agreements could exercise up to two demand
registrations with respect to such Securities. The Company was required to pay
all expenses (other than underwriting discounts and commissions) in connection
with all such registrations. The agreements also provided for certain piggyback
registration rights. The Old Common Stock held by ARP and Morgens Waterfall
Vintiadis & Company, Inc. ("Morgens"), a holder of greater than 5% of the Old
Common Stock, was covered by the equity registration rights agreement pursuant
to its terms. These agreements were rejected as of the Plan Effective Date.
As a holder of Old Common Stock, ARP received 76,951 shares of Common Stock
and 38,475 Class B Warrants under the Plan of Reorganization based on the amount
of shares of Old Common Stock beneficially owned by ARP according to the records
of the Company as of December 18, 1997. All of the Old Common Stock beneficially
owned by ARP was canceled on the Plan Effective Date.
As holders of Old Common Stock, certain affiliates of Morgens received
16,568 shares of Common Stock and 8,285 Class B Warrants under the Plan of
Reorganization based on the amount of Old Common Stock beneficially owned by
Morgens as reflected in the Schedule 13D filed by Morgens on February 13, 1998.
All of the Old 13 1/2% Notes and the Old Common Stock beneficially owned by
Morgens were canceled on the Plan Effective Date.
As a holder of Old Common Stock and of Old 10 1/4% Notes, Executive Life
Insurance Company of New York ("ELICNY"), a holder of greater than 5% of the Old
Common Stock, received 347,074 shares of Common Stock, 209,426 Class A Warrants
and 71,577 Class B Warrants pursuant to the first two distributions under the
Plan. ELICNY may receive additional shares of Common Stock, Class A Warrants and
Class B Warrants following the resolution of pending claims filed against the
Company during its Chapter 11 case. All of the Old 10 1/4% Notes and the Old
Common Stock beneficially owned by ELICNY were canceled on the Plan Effective
Date.
As a holder of Old Common Stock and of Old 10 1/4% Notes, certain investment
companies and accounts indirectly controlled by FMR (collectively, "Fidelity")
received 2,925,142 shares of Common Stock, 1,810,380 Class A Warrants and
581,184 Class B Warrants pursuant to the first two distributions under the Plan
of Reorganization. Fidelity may receive additional shares of Common Stock, Class
A Warrants and Class B Warrants following resolution of pending claims filed
against the Company during its Chapter 11 case. All of the Old 10 1/4% Notes and
the Old Common Stock beneficially owned by Fidelity were canceled on the Plan
Effective Date.
44
<PAGE>
As required by the BankBoston Facility and in partial exchange for its
administrative claim, pursuant to the Plan of Reorganization, the Surety
received (i) 228,639 Class C Warrants exercisable for the purchase of an
aggregate of 3,429,585 shares of Common Stock and (ii) 10 shares of Class B
Common Stock representing all of the authorized and outstanding Class B Common
Stock.
In connection with the Plan of Reorganization, the Company entered into a
Grant of Registration Rights in favor of Fidelity and the Surety, pursuant to
which, and subject to certain exceptions, the Company has agreed to file and
cause to remain effective a Registration Statement under the Securities Act
covering certain of the securities distributed under the Plan of Reorganization
until no such securities are outstanding. The Company is required to pay all
expenses (other than underwriting discounts and commissions) in connection with
all such registrations. In addition, the agreement provides for certain
"piggyback" registration rights. See "Description of Capital Stock --
Registration Rights."
The Company believes that, to the extent applicable, none of the
transactions described above were on terms less favorable to the Company than
those available from unaffiliated parties offering comparable goods and
services.
45
<PAGE>
SELLING SECURITY HOLDERS
The following table sets forth certain information, as of May 1, 1998,
regarding the Class A Warrants, the Class B Warrants, the Class C Warrants and
the shares of Common Stock held by the Selling Security Holders named below
(including shares issuable upon exercise of the Warrants), all of which are
being offered by this Prospectus. It is anticipated that the Selling Security
Holders will offer and sell the shares of Common Stock and/or Warrants offered
by them hereby as principals or through one or more brokers, dealers or agents
from time to time in one or more transactions. As of the date of this
Prospectus, to the knowledge of the Company, none of the Selling Security
Holders own any other shares of Common Stock or Warrants of the Company.
Each Class A Warrant and Class B Warrant is currently exercisable for the
purchase of one share of Common Stock at an exercise price per share of $.01.
Each Class C Warrant is currently exercisable for the purchase of 14 shares of
Common Stock at an exercise price of $1.25 per share and, on or after the first
date on which the Aggregate Equity Trading Value equals or exceeds $25 million,
1 share of Common Stock at an exercise price of $.01 per share.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF NUMBER OF
CLASS A NUMBER OF NUMBER OF NUMBER OF SHARES OF
COMMON CLASS A CLASS B CLASS C CLASS A
STOCK WARRANTS WARRANTS WARRANTS COMMON STOCK
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY UNDERLYING
SELLING HOLDER(1)(2): OWNED(3) OWNED(3) OWNED(3) OWNED(3) WARRANTS(3)
- ----------------------------------------------------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Fidelity Capital & Income Fund(4).................... 923,334 571,603 183,381 754,984
Fidelity Asset Manager(4)............................ 645,784 401,276 127,531 528,807
Fidelity Magellan Fund(4)............................ 433,431 269,324 85,594 354,918
Spartan High Income Fund(4).......................... 157,963 94,252 33,095 127,347
Fidelity Puritan Fund(4)............................. 152,242 94,251 30,236 124,487
Variable Insurance Products Fund II: Assets Manager
Portfolio(4)....................................... 138,678 86,171 27,387 113,558
Variable Insurance Products Fund: High Income
Portfolio(4)....................................... 108,776 67,341 21,602 88,943
Fidelity Advisor High Yield Fund(4).................. 108,776 67,341 21,602 88,943
General Motors Employees Domestic Group Pension
Trust(4)........................................... 79,608 49,285 15,809 65,094
Fidelity Asset Manager: Growth(4).................... 78,017 48,477 15,407 63,884
Illinois Municipal Retirement Fund Master Trust(4)... 59,119 36,600 11,741 48,341
Illinois State Board of Investments(4)............... 20,804 12,928 4,108 17,036
Pensions Reserves Investment Management Board(4)..... 8,647 5,354 1,717 7,071
Fidelity High Yield Bond Collective Trust(4)......... 5,631 3,485 1,118 4,603
Fidelity Global Asset Allocation Fund(4)............. 4,332 2,692 856 3,548
Specialty Investment I LLC........................... 228,639 3,429,585
----------- ----------- ----------- ----------- ------------
Total................................................ 2,925,142 1,810,380 581,184 228,639 5,821,149
</TABLE>
- ------------------------------
(1) The Company executed a Grant of Registration Rights in favor of the Selling
Security Holders (see "Description of Capital Stock--Registration Rights").
The Surety is the guarantor of the Company's Term Loan. No other
relationships currently exist between the Company, on the one hand, and the
Selling Security Holders, on the other hand. For a description of certain
relationships that existed between the Company and Fidelity prior to the
Plan Effective Date, see "Certain Transactions."
(2) For a description of the natural persons that beneficially own significant
and/or controlling interests in the Selling Security Holders, see "Principal
Stockholders."
(3) The numbers of shares of Common Stock and Warrants (and the shares issuable
upon the exercise of such Warrants) that are being offered by this
Prospectus correspond to the total numbers of such shares of Common Stock
and Warrants that were received by the Selling Security Holders pursuant to
the first two distributions under the Plan of Reorganization. The Company
contemplates effecting one or more additional distributions of Common Stock,
Class A Warrants and Class B Warrants following the resolution of pending
claims filed against the Company during its Chapter 11 case. The company
intends to file a post-effective amendment updating the amount of shares of
Common Stock and Warrants covered by this Prospectus after any such
distribution occurs.
(4) These investment companies and private investment accounts are indirectly
owned by FMR. See note 5 under "Principal Stockholders."
46
<PAGE>
PLAN OF DISTRIBUTION
It is anticipated that the Selling Security Holders will offer and sell the
shares of Common Stock and/ or Warrants offered by them hereby as principals or
through one or more brokers, dealers or agents from time to time in one or more
transactions (which may involve crosses or block transactions) (i) on any
exchange or in the over-the-counter market, or (ii) in transactions otherwise
than in the over-the-counter market. The Selling Security Holders may from time
to time offer such securities through brokers, dealers or agents who may receive
compensation in the form of underwriting discounts, concessions or commissions
from the Selling Security Holders and/or the purchasers of the securities
offered hereby for whom they may act as agent (which discounts, concessions or
commissions as to particular brokers, dealers or agents may be in excess of
those customary in the types of transactions involved). The Selling Security
Holders and any brokers, dealers or agents that participate in the distribution
of securities may be deemed to be an "underwriter" as that term is defined by
the Securities Act, and any profit on the sale of securities by them and any
discounts, concessions or commission received by any such brokers, dealers or
agents may be deemed to be underwriting discounts and commissions under the
Securities Act. However, the Company and such persons disclaim that any such
person is an underwriter of the Common Stock or Warrants. The Company is not
aware of any arrangements with any underwriters, brokers, dealers or agents with
respect to a sale of the securities offered hereby. At any time a particular
offer of Common Stock or Warrants is made, if required, a Prospectus Supplement
will be distributed that will set forth the aggregate amount of such securities
being offered and the terms of the offering, including the name or names of any
underwriters, dealers or agents, any discounts, commissions and other items
constituting compensation from the Selling Security Holders and any discounts,
commissions or concessions allowed or reallowed or paid to dealers. Such
Prospectus Supplement and, if necessary, a post-effective amendment to the
Registration Statement of which this Prospectus is a part will be filed with the
Commission to reflect the disclosure of additional information with respect to
the distribution of such securities.
No director, officer or agent of the Company is expected to be involved in
soliciting offers to purchase the securities offered hereby, and no such person
will be compensated by the Company for the sale of any of such securities.
Certain officers of the Company may assist representatives of the Selling
Security Holders in such efforts but will not be compensated therefor.
The securities offered hereby (other than the Common Stock issuable by the
Company upon exercise of the Warrants, which will be sold by the Company at the
exercise price of the Warrants) may be sold from time to time in one or more
transactions at a fixed offering price, which may be changed, or at varying
prices determined at the time of sale or at negotiated prices. Such prices will
be determined by the Selling Security Holders or by agreement between the
Selling Security Holders and underwriters or dealers.
To comply with the securities laws of certain jurisdictions, the securities
offered hereby will be offered or sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain jurisdictions
the securities offered hereby may not be offered or sold unless they have been
registered or qualified for sale in such jurisdictions or an exemption from
registration or qualification is available and is complied with.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company is 50,000,000 and consists of
39,999,990 shares of Common Stock, 10 shares of Class B Common Stock, and
10,000,000 shares of preferred stock, par value $.01 per share (the "Preferred
Stock").
All equity interests existing immediately prior to consummation of the Plan
of Reorganization were canceled and/or rejected pursuant to the Plan of
Reorganization, and the accumulated deficit relating to such equity interests
was eliminated under Fresh-Start Reporting.
COMMON STOCK
Each share of Common Stock entitles the holder thereof to one vote on all
matters on which holders are permitted to vote. No stockholder has any
preemptive right or other similar right to purchase or subscribe for any
additional securities issued by the Company, and no stockholder has any right to
convert Common Stock into other securities. No shares of Common Stock are
subject to redemption or to any sinking fund provisions. All of the outstanding
shares of Common Stock are, and all shares of Common Stock offered hereby will
be, when issued and paid for, fully paid and nonassessable.
Subject to the rights of holders of Preferred Stock, if any, the holders of
shares of Common Stock are entitled to dividends when, as and if declared by the
Board of Directors from funds legally available therefor and, upon liquidation,
to a pro rata share in any distribution to stockholders. The Company does not
anticipate declaring or paying any dividends on the Common Stock in the
foreseeable future. See "Risk Factors--Restrictions on Common Stock Dividends."
CLASS B COMMON STOCK
Except as set forth in the following paragraphs, the holders of Class B
Common Stock shall enjoy the same rights, privileges and preferences and be
subject to the same restrictions as the holders of the Common Stock.
Upon the affirmative vote of not less than three-fourths of the then
outstanding shares of the Class B Common Stock, (a) during the continuance of
any event described in Section 11(b) of the Loan Agreement (each, an "Event of
Default"), including, without limitation, nonpayment of principal and/or
interest, covenant defaults, breach of representations and warranties and
certain events of bankruptcy, in each case subject to applicable notice and cure
periods, and/or (b) upon acceleration of any of the loans under the Loan
Agreement and until such acceleration is rescinded or all amounts due under such
accelerated loan are paid in full, the Company shall (i) file a voluntary
petition under Chapter 11 of the Bankruptcy Code and (ii) oppose any motion to
dismiss the resulting bankruptcy case. Such right of the holders of the Class B
Common Stock will terminate upon satisfaction in full of all of the Company's
obligations in respect of the Term Loan, whereupon each share of Class B Common
Stock will automatically convert into one share of Common Stock. Such right of
the holders of the Class B Common Stock shall be coextensive with the right of
the Board of Directors at any time to cause such a filing to occur, and such
right shall not restrict the ability of the Board of Directors to otherwise
cause the Company to file a voluntary petition under the Bankruptcy Code or to
oppose any motion to dismiss any bankruptcy case. Subject to certain exceptions
set forth in the Company's Second Restated Certificate of Incorporation, shares
of Class B Common Stock are non-transferable.
As required under the BankBoston Facility, in consideration of the Surety's
guaranty of the Term Loan, on the Plan Effective Date the Surety was issued 10
shares of Class B Common Stock representing all of the authorized and
outstanding Class B Common Stock. See "Description of Certain Indebtedness."
48
<PAGE>
PREFERRED STOCK
The Second Restated Certificate of Incorporation of the Company provides for
the issuance of 10,000,000 shares of Preferred Stock. The Preferred Stock may be
issued in one or more classes or series, and the Board of Directors is
authorized to fix for each such class or series such voting powers, full or
limited, or no voting powers, and such distinctive designations, preferences and
relative, participating, optional or other special rights and such
qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions adopted by the Board of Directors
providing for the issuance of such class or series and as may be permitted by
the General Corporation Law of the State of Delaware, including, without
limitation, the authority to provide that any such class or series may be (a)
subject to redemption at such time or times and at such price or prices; (b)
entitled to receive dividends (which may be cumulative or non-cumulative) at
such rates, on such conditions, and at such times, and payable in preference to,
or in such relation to, the dividends payable on any other class or classes or
any other series; (c) entitled to such rights upon the dissolution of, or upon
any distribution of the assets of, the Company; or (d) convertible into, or
exchangeable for, shares of any other class or classes of stock, or of any other
series of the same or any other class or classes of stock, of the Company at
such price or prices or at such rates of exchange and with such adjustments; all
as may be stated in such resolution or resolutions. Because the Board of
Directors has the power to establish the preferences and rights attributable to
the Preferred Stock, it may afford the holders of any Preferred Stock
preferences, powers and rights (including voting rights) senior to the rights of
the holders of Common Stock. No shares of Preferred Stock are currently
outstanding. Although the Company has no present intention to issue shares of
Preferred Stock, the issuance of shares of Preferred Stock, or the issuance of
rights to purchase such shares, may have the effect of delaying, deferring or
preventing a change in control of the Company. See "Risk Factors-- Antitakeover
Effect of Blank Check Preferred Stock."
TRANSFER AGENT
The transfer agent and registrar for the Common Stock and the Warrants is
Norwest Bank, Minnesota, N.A.
REGISTRATION RIGHTS
In connection with the Plan of Reorganization, the Company executed and
delivered the Grant of Registration Rights in favor of Fidelity and the Surety
pursuant to which the Company agreed to file the Registration Statement of which
this Prospectus is a part. In addition, the Company has agreed to use reasonable
best efforts to cause this shelf registration to remain continuously effective
for a period ending on the date on which no securities registerable under the
Grant of Registration Rights are outstanding. The Company will pay all expenses
(other than underwriting fees, discounts or commissions) in connection with all
such registrations. The Grant of Registration Rights also provides for certain
piggyback registration rights. In the event such Registration Statement is not
effective within 45 days after the Plan Effective Date, or a stop order is
imposed prior to the effectiveness of the Registration Statement, or, except as
permitted by Section 5 of the Grant of Registration Rights, the effectiveness
thereof is suspended, or, in the case of a suspension permitted by such Section
5, such suspension exceeds the length of time permitted by such section, the
Company will be required to pay liquidated damages to the Selling Security
Holders. Such liquidated damages shall begin to accrue as set forth below and,
in each case, shall be in an amount equal to: (i) $.10 per 500 shares of Common
Stock (or, in the case of Warrants, per 500 shares issuable upon exercise of
such Warrants) per week for the first ninety (90) days; (ii) $.20 per 500 shares
of Common Stock (or, in the case of Warrants, per 500 shares issuable upon
exercise of such Warrants) per week for the next ninety (90) days; and (iii)
$.30 per 500 shares of Common Stock (or, in the case of Warrants, per 500 shares
issuable upon exercise of such Warrants) per week thereafter. The liquidated
damages shall begin to accrue on the date the Registration Statement is required
to become effective, on the date such stop order is imposed, in the case of
suspensions other than those permitted by Section 5 of the Grant of Registration
49
<PAGE>
Rights, on the date of such suspension and, in the case of suspensions permitted
by such Section 5, on the date on which such suspension failed to comply with
such section, as applicable.
The Company is currently incurring liquidated damages of approximately
$1,750 per week in the aggregate for failure by the Company to cause the
Registration Statement of which this Prospectus is a part to become effective
within 45 days after the Plan Effective Date. The amount of such damages will
increase to approximately $3,500 per week in the aggregate in the event such
Registration Statement is not effective on or before June 15, 1998 and will
further increase to approximately $5,250 per week in the aggregate in the event
such Registration Statement is not effective on or before September 13, 1998.
CLASS A WARRANTS AND CLASS B WARRANTS
Class A Warrants to purchase an aggregate of 2,203,320 shares of Common
Stock and Class B Warrants to purchase an aggregate of 800,237 shares of Common
Stock have been or will be issued by the Company in accordance with the Plan of
Reorganization pursuant to a Warrant Agreement (the "Class A/ B Warrant
Agreement") entered into between the Company and Norwest Bank Minnesota, N.A.,
as Warrant Agent. The Class A Warrants are exercisable, in whole or in part, on
the first date on which the Aggregate Equity Trading Value equals or exceeds $20
million and, if not previously exercised, expire on January 31, 2008. The Class
B Warrants are exercisable, in whole or in part, on the first date on which the
Aggregate Equity Trading Value equals or exceeds $25 million and, if not
previously exercised, expire on January 31, 2008. The exercise price for the
Class A Warrants and the Class B Warrants is $.01 per share.
The number and type of securities issuable upon exercise of the Class A
Warrants and the Class B Warrants and the exercise price payable upon exercise
thereof are subject to customary antidilution protection in the event of (a)
stock dividends, subdivisions, combinations, and reclassifications affecting the
Common Stock, (b) issuances of rights, options, or warrants to all holders of
Common Stock entitling them to subscribe for or purchase Common Stock (or
securities convertible into Common Stock) at a price per share of Common Stock
(or having a conversion price per share of Common Stock, if a security
convertible into Common Stock) less than the fair market value per share of
Common Stock, (c) distributions to all holders of Common Stock of evidences of
indebtedness or assets, including capital stock other than Common Stock, or
subscription rights, options or warrants (other than cash dividends or cash
distributions payable out of consolidated earnings or earned or capital surplus
or dividends payable in Common Stock); and (d) subject to certain exceptions,
issuances to any Affiliate (as defined in the Class A/B Warrant Agreement),
officer, director or employee of the Company of Common Stock or rights, options
or warrants to purchase Common Stock (or securities convertible into Common
Stock) at a price per share of Common Stock (or having a conversion price per
share of Common Stock, if a security convertible into Common Stock) less than
the Closing Price (as defined in the Class A/B Warrant Agreement) per share of
Common Stock on the date of issuance.
In addition to the foregoing provisions, if the Company at any time
consolidates with or merges with or into another corporation or the property of
the Company is sold substantially as an entirety, the holder of any outstanding
Class A Warrant or Class B Warrant would be entitled to receive, upon the
exercise thereof in accordance with its terms, the securities, property, or cash
to which the holder of the number of shares of Common Stock deliverable upon the
exercise of such Class A Warrant or Class B Warrant immediately prior to such
transaction would have been entitled upon such transaction.
CLASS C WARRANTS
254,043 Class C Warrants to purchase an aggregate of 3,810,645 shares of
Common Stock were issued by the Company in accordance with the Plan of
Reorganization pursuant to several Warrant Agreements (collectively, the "Class
C Warrant Agreements") entered into between the Company and the initial holders
of the Class C Warrants, and were distributed as follows: (i) 228,639 Class C
Warrants to purchase an aggregate of 3,429,585 shares of Common Stock were
distributed to the Surety as required under the
50
<PAGE>
BankBoston Facility and in consideration of the Surety's guaranty of the Term
Loan and in partial exchange for the Surety's administrative claim against the
Company's Chapter 11 estate; and (ii) 25,404 Class C Warrants to purchase an
aggregate of 381,060 shares of Common Stock were distributed to the holders of
Stock Options issued on the Plan Effective Date. The Class C Warrants are
exercisable, in whole or in part, as follows: (a) at any time until January 31,
2002, the Class C Warrants are exercisable for an aggregate of 3,556,602 shares
of Common Stock at an exercise price of $1.25 per share; and (b) at any time
after the first date on which the Aggregate Equity Trading Value equals or
exceeds $25 million and until January 31, 2008, the Class C Warrants are
exercisable for an aggregate of 254,043 additional shares of Common Stock at an
exercise price of $.01 per share; provided that the portion of each Class C
Warrant otherwise exercisable after the first date on which the Aggregate Equity
Trading Value equals or exceeds $25 million shall not be exercisable by any
holder thereof unless such holder has exercised in full such holder's portion of
such Class C Warrant that is currently exercisable.
The number and type of securities issuable upon exercise of the Class C
Warrants are subject to customary antidilution protection in the event of (a)
stock dividends, subdivisions and combinations; (b) subject to certain
exceptions, issuances to any person of Additional Stock (as defined) which is
common Stock (or Convertible Securities (as defined) convertible into common
Stock) at a price per share of such Stock (or having a conversion price per
share of such Stock, if a security convertible into such Stock) which is less
than (i) with respect to any such issuance incident to the consolidation or
merger of the Company with, or the sale, lease or transfer of all or
substantially all the Company's assets to, the Merger Party (as defined in the
Class C Warrant Agreements) (or in connection with a financing related to any
such transaction), the Fair Market Value of a share of common Stock, and (ii)
with respect to any other such issuance, (A) on or prior to the first date on
which the Aggregate Equity Trading Value equals or exceeds $20 million, the
greater of the exercise price and the Fair Market Value per share of common
Stock and (B) after the first date on which the Aggregate Equity Trading Value
equals or exceeds $20 million, the Fair Market Value per share of common Stock;
and (c) subject to certain exceptions, issuances to any person of Additional
Stock which is not subject to adjustments required under (b) above at a price
per share of such stock which is less than Fair Market Value per share of such
capital stock. If the Company consummates a consolidation or merger with, or the
sale, lease or transfer of all or substantially all its assets to, the Merger
Party within one year of the Plan Effective Date, the exercise price for each
share of Common Stock purchasable upon exercise of the Class C Warrants shall be
increased by 25% and the expiration date for such warrant shall be extended by
one year.
In addition to the foregoing provisions, if the Company at any time
consolidates with or merges with or into another corporation (whether or not
such corporation is the Merger Party) or the property of the Company is sold
substantially as an entirety, the holder of any outstanding Class C Warrant
would be entitled to receive, upon the exercise thereof in accordance with its
terms, the securities, property, or cash to which the holder of the number of
shares of Common Stock deliverable upon the exercise of such Class C Warrant
immediately prior to such transaction would have been entitled upon such
transaction.
GORDIAN WARRANTS
On June 1, 1998, as compensation to Gordian for investment banking services
rendered to the Company during the Company's Chapter 11 case, Gordian was issued
warrants exercisable for the purchase of 161,937 shares of Common Stock (subject
to adjustment upon the occurrence of certain events specified in the Warrant
Agreement, dated January 31, 1998, entered into between the Company and Gordian)
with an exercise price of $1.24 per share. The Gordian Warrants are currently
exercisable and, if not previously exercised, expire on June 1, 2003.
STOCK OPTIONS
The Stock Options granted pursuant to the Plan of Reorganization are
exercisable for the purchase of 1,333,728 shares of Common Stock and consist of:
(i) Base Options exercisable for the purchase of
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<PAGE>
1,000,000 shares of Common Stock with an exercise price of $1.00 per share; (ii)
to prevent dilution resulting from the issuance of the Class A Warrants,
Protective A Options exercisable for the purchase of an additional 244,813
shares of Common Stock with an exercise price of $0.01 per share, exercisable
only on or after the date on which the Class A Warrants become exercisable; and
(iii) to prevent dilution resulting from the issuance of the Class B Warrants,
Protective B Options exercisable for the purchase of an additional 88,915 shares
of Common Stock with an exercise price of $0.01 per share, exercisable only on
or after the date on which the Class B Warrants become exercisable. In addition,
to prevent dilution resulting from the issuance of the Class C Warrants to the
Surety, holders of such Stock Options were issued, on a pro rata basis and with
the same vesting schedule as each holder's respective Stock Options, Class C
Warrants exercisable for the purchase of an aggregate of 381,060 shares of
Common Stock (355,656 shares with an exercise price of $1.25 per share and
25,404 shares with an exercise price of $.01 per share).
The number of Protective Options that may be exercised by any holder shall
bear the same proportion (based on the total number of Protective Options
granted to such holder) to the number of Base Options that have been exercised
by such holder (based on the total number of Base Options granted to such
holder).
The Stock Options and the Class C Warrants are subject to adjustment to
prevent dilution upon the occurrence of certain specified events, excluding
exercise of the Stock Options, the Class A Warrants, the Class B Warrants, the
Class C Warrants, or the Gordian Warrants. The Stock Options granted on January
31, 1998 have a term of 10 years and vest as follows: 50% on the date of grant;
and 25% on each anniversary of the date of grant. The Stock Options are governed
by the Stock Option Plan, and the Class C Warrants issued in conjunction
therewith are governed by a warrant agreement in substantially the form of the
Class C Warrant Agreement between the Company and the Surety.
Under the terms of the Stock Option Plan, the Company has available, in
addition to the shares of Common Stock reserved for issuance upon exercise of
the Stock Options granted on the Plan Effective Date, an additional 375,000
shares (subject to adjustment to prevent dilution upon certain events, excluding
any exercise of Class A Warrants, Class B Warrants, Class C Warrants, or Stock
Options) of Common Stock for possible grants of additional stock options from
time to time after the Plan Effective Date if, and to the extent, the
Compensation Committee may determine that such additional grants would be in the
best interest of the Company. On February 26, 1998, the Compensation Committee
reserved 335,500 of the 375,000 shares of Common Stock available for issuance
upon exercise of Stock Options granted by the Compensation Committee on such
date to certain executive officers of the Company, the disinterested members of
the Board, and certain other senior and middle level managers of the Company.
Such Stock Options have a per share exercise price of $1.00, a term of 10 years
and vest as follows: 25% on the date of grant; and 25% on each annual
anniversary of the date of grant.
52
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
The Company has entered into the Loan Agreement, pursuant to which
BankBoston is providing Lamonts with up to a $42 million Revolver and Term Loan
on the terms and conditions set forth in the Loan Agreement. The BankBoston
Facility consists of: (i) a revolving line of credit with a maximum borrowing
capacity of $32 million; and (ii) a term loan in the amount of $10 million. The
Term Loan is guaranteed by the Surety. Pursuant to, and on the terms and
conditions set forth in the Loan Agreement, BankBoston is obligated to make
loans and advances to Lamonts on a revolving basis, and to issue letters of
credit to or for the account of Lamonts (with a sublimit for letters of credit
of $3 million) in an aggregate outstanding amount (net of repayments) not to
exceed the lesser of $32 million and a borrowing base approximately equal to 65%
(subject to adjustment and reserves as specified in the Loan Agreement) of the
book value of the Company's first quality finished goods inventory held for
sale. The Term Loan was fully disbursed during the Chapter 11 case and no
further amounts may be borrowed thereunder.
The Revolver will mature on January 31, 2000, subject to earlier maturity
(including, as a result of acceleration, mandatory prepayment or otherwise) of
the Term Loan. The Term Loan will mature on December 26, 1999, subject to
earlier maturity (including, as a result of acceleration, mandatory prepayment
or otherwise) of the Revolver. Lamonts will have the option to extend the
maturity date of the Term Loan for two additional one-year periods (subject to
earlier maturity upon maturity of the Revolver), on the terms and conditions set
forth in the Loan Agreement and upon payment of a fee equal to approximately 5%
of the outstanding amount of the Term Loan on the relevant extension date. There
are no extension options in respect of the Revolver.
Lamonts is required to make principal payments on the Term Loan of $25,000
per month commencing on October 31, 1998. A substantial portion of the principal
amount of the Term Loan is scheduled to be outstanding on the maturity date of
the Term Loan. See "Risk Factors--High Leverage."
Lamonts' borrowings under both the Revolver and the Term Loan bear interest
at a floating rate of 1.50% above the Base Rate or, at Lamonts' option, at 2.75%
above the Eurodollar Rate. The rates are subject to adjustment on June 1, 1998,
and annually thereafter, based upon Lamonts' financial results in accordance
with the criteria set forth in the Loan Agreement. See "Risk Factors--High
Leverage." The default rate of interest under the Revolver is 3% above the Base
Rate. The default rate of interest under the Term Loan prior to maturity is 7%
above the non-default rate otherwise applicable, and after maturity is 7% above
the non-default rate applicable to loans measured by the Base Rate.
A facility fee in respect of the Revolver in the amount of $336,000 was paid
on the Plan Effective Date and an additional fee in the amount of $224,000 is
payable on December 31, 1998. A letter of credit fee of 1.75% per annum will be
charged quarterly in arrears based on the average daily maximum aggregate amount
available to be drawn by beneficiaries under all outstanding letters of credit.
A commitment fee in the amount of 0.5% per annum will be payable monthly in
arrears based on the average daily unused amount of the maximum Revolver
facility. Both the letter of credit fee and the commitment fee are subject to
adjustment on June 1, 1998, and annually thereafter, based upon Lamonts'
financial results in accordance with the criteria set forth in the Loan
Agreement. In addition to the closing fee in the amount of $500,000 that Lamonts
paid at the closing of the Term Loan on September 26, 1997, an additional
closing fee in respect of the Term Loan, calculated at the rate of 5% per annum
applied to the average daily principal balance of the Term Loan outstanding
after September 26, 1998, is payable at the times and in the manner set forth in
the Loan Agreement. If the options to extend the maturity date of the Term Loan
are exercised, extension fees calculated at the rate of 5% per annum applied to
the average daily principal balance of the Term Loan outstanding during the
applicable extension period will be payable at the times and in the manner set
forth in the Loan Agreement.
Advances by BankBoston under the BankBoston Facility are secured by all real
and personal property, rights, and assets of Lamonts, including, without
limitation, real estate leasehold interests, but excluding any proceeds of
bankruptcy causes of action under sections 544 through 550 of the Bankruptcy
Code and
53
<PAGE>
proceeds from a special account established for unpaid professional fees. See
"Risk Factors--Assets of the Company Secure BankBoston Facility."
The BankBoston Facility required that, as of the Plan Effective Date, in
partial exchange for the BankBoston administrative claim against the Company's
Chapter 11 estate, and in consideration for the guaranty of the Term Loan, the
Surety received (i) 228,639 Class C Warrants exercisable for the purchase of an
aggregate of 3,429,585 shares of Common Stock, and (ii) 10 shares of Class B
Common Stock, representing all of the authorized and outstanding Class B Common
Stock. See "Description of Capital Stock--Class B Common Stock" for a
description of the special voting rights of the Class B Common Stock.
The Loan Agreement contains, among other things, certain covenants
restricting (a) the incurrence of indebtedness, other than (i) indebtedness
under the BankBoston Facility, (ii) current liabilities not incurred through the
borrowing of money, (iii) indebtedness in respect of taxes or other governmental
charges not yet due and payable or being contested in good faith by appropriate
proceeding, (iv) scheduled indebtedness not contemplated as being discharged by
the Plan of Reorganization, (v) certain purchase money indebtedness limited to
50% of permitted capital expenditures, and (vi) unsecured indebtedness in
respect of the limited recourse arrangements under the Alliance Agreement,
limited to 50% of the amount of cardholders' bad debts; (b) the creation of
liens, other than (i) liens securing the obligations under the BankBoston
Facility, (ii) scheduled liens not contemplated as being discharged by the Plan
of Reorganization, (iii) liens securing taxes or other governmental charges not
yet due, (iv) deposits or pledges made in connection with social security
obligations, (v) mechanics and similar liens less than 120 days old in respect
of obligations not yet due, (vi) immaterial easements and similar encumbrances,
(vii) statutory or common law landlord's liens, and (viii) purchase money
security interests to the extent the indebtedness is permitted under the Loan
Agreement; (c) the payment of dividends, other than (i) dividends payable solely
in shares of Common Stock, (ii) distributions by a wholly-owned subsidiary of
the Company to the Company and, (iii) dividends and/or distributions
contemplated by the Plan of Reorganization; (d) mergers, consolidations or
dispositions of assets, other than (i) sales of inventory in the ordinary
course, (ii) dispositions of leasehold improvements in connection with permitted
store closures, and (iii) dispositions of obsolete fixtures and equipment not to
exceed $100,000 in any 12 month period; (e) guarantees with respect to
indebtedness of other persons, other than the guarantee of lease payments in
respect of the Company's distribution center in Kent, Washington; and (f)
capital expenditures, other than capital expenditures of $2,500,000, $6,500,000,
$5,500,000 and $1,000,000 during Fiscal 1997, Fiscal 1998, Fiscal 1999 and the
period from February 6, 2000 to February 27, 2000, respectively. In addition to
the foregoing, the Company is required to maintain certain inventory levels
within a range of minimum and maximum book values and a debt service coverage
ratio, in each case measured on a quarterly basis as set forth in the Loan
Agreement. The Company is currently in compliance with all such covenants.
Any necessary waivers of or amendments to such covenants require, with
certain exceptions specified in the BankBoston Facility, the concurrence of both
BankBoston and the Surety. The Loan Agreement contains customary Events of
Default for credit facilities of its type. The Surety has the right, under
specified circumstances after a default, to direct BankBoston to declare
Lamonts' obligations under the BankBoston Facility immediately due and payable
and to cause the exercise of certain of BankBoston's rights and remedies under
the Loan Agreement.
To hedge the interest rate exposure from variable rate loans under the
BankBoston Facility, on March 24, 1998, the Company entered into the Swap
Agreement with BankBoston. The Swap Agreement is for a fixed rate of 5.73% plus
the margin from time to time applicable to the Eurodollar Loans on a notional
amount of $20 million for a period of two years beginning March 25, 1998.
BankBoston has the right to terminate the Swap Agreement on March 23, 1999 upon
five days prior notice.
54
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain Federal income tax considerations for
original purchasers of the Warrants and is for general information purposes
only. This summary is based on the Federal income tax law now in effect, which
is subject to change, possibly retroactively. This summary does not discuss all
aspects of Federal income taxation which may be important to particular holders
of the Warrants in light of their individual investment circumstances, including
holders subject to special tax rules (E.G., financial institutions,
broker-dealers, insurance companies, tax-exempt organizations, and foreign
taxpayers). In addition, this summary does not address state, local or foreign
tax consequences. This summary assumes that holders will hold their Warrants and
the Common Stock received upon the exercise of such Warrants, as "capital
assets" (generally, property held for investment) under the Code. Purchasers of
the Warrants are urged to consult their tax advisors regarding the specific
Federal, state, local, and foreign income and other tax consequences of
purchasing, exercising, and disposing of the Warrants.
CHARACTERIZATION OF THE WARRANTS. The Federal income tax consequences of
the purchase, exercise and disposition of the Warrants will depend, to some
extent, on whether or not they are viewed, for Federal income tax purposes, as
equivalent to common stock. There is no authority directly dealing with this
issue. Because of the nominal exercise price for the Class A Warrants and the
Class B Warrants, the Company believes that such Warrants should be treated as
issued and outstanding shares of Common Stock for Federal income tax purposes.
EXERCISE. Whether or not the Warrants are treated as stock for Federal
income tax purposes, upon the exercise of a Warrant, a holder will not recognize
gain or loss and will have a tax basis in the Common Stock received equal to the
tax basis in such holder's Warrant plus the exercise price thereof. A holder of
a Class C Warrant should consult his tax advisor regarding whether his tax basis
in such Warrant should be apportioned between the Initial Shares and the
Adjustment Shares upon the exercise of the Warrant for the Initial Shares or,
alternatively, upon the exercise of the Warrant for the Adjustment Shares. If
the Warrants are treated as warrants for Federal income tax purposes, the
holding period for the Common Stock acquired pursuant to the exercise of a
Warrant will begin on the day following the date of exercise and will not
include the period that the holder held his Warrant. If the Warrants are treated
as stock for Federal income tax purposes, the holding period for the Common
Stock acquired upon exercise of a Warrant will include the period during which
the Warrant was held by such holder.
DISPOSITION. Whether or not the Warrants are treated as stock for Federal
income tax purposes, upon a sale, exchange, or other disposition of a Warrant or
Common Stock, a holder will generally recognize a capital gain or loss in an
amount equal to the difference between (i) the sum of any cash and the fair
market value of any property received upon such sale, exchange or other
disposition and (ii) the holder's adjusted tax basis in the Warrant or in the
Common Stock. Under recently-enacted legislation, net capital gain (generally,
capital gain in excess of capital loss) recognized by an individual holder upon
the disposition of Warrants that have been held for more than 18 months will
generally be subject to tax at a rate not to exceed 20%. Net capital gain
recognized by an individual holder upon the disposition of Warrants that have
been held for more than 12 months but for not more than 18 months will continue
to be subject to tax at a rate not to exceed 28%, and net capital gain
recognized upon the disposition of Warrants that have been held for 12 months or
less will continue to be subject to tax at ordinary income tax rates. In
addition, capital gain recognized by a corporate holder will continue to be
subject to tax at the ordinary income tax rates applicable to corporations.
LAPSE OF WARRANTS. Whether or not the Warrants are treated as stock for
Federal income tax purposes, in the event that a Warrant lapses unexercised, a
holder will recognize a capital loss in an amount equal to his tax basis in the
Warrant. Such loss will be long-term if the holding period of the Warrant is
more than 18 months.
55
<PAGE>
ADJUSTMENT TO EXERCISE PRICE. If at any time the Company makes a
distribution of property to shareholders that would be taxable to such
shareholders as a dividend for Federal income tax purposes and, in accordance
with the antidilution provisions of the Warrants, the exercise price is
decreased, the amount of such decrease may be deemed to be the payment of a
taxable dividend to holders of the Warrants to the extent of the Company's
accumulated earnings and profits. For example, a decrease in the exercise price
in the event of distributions of cash or indebtedness of the Company will
generally result in deemed dividend treatment to holders, but generally a
decrease in the event of stock dividends or the distribution of rights to
subscribe for shares of Common Stock will not.
EXPERTS
The consolidated balance sheets as of January 31, 1998 and February 1, 1997
and the consolidated statements of operations, changes in stockholders equity
(deficit) and cash flows for the 52 weeks ended January 31, 1998, the 52 weeks
ended February 1, 1997 and the 53 weeks ended February 3, 1996 included in this
Prospectus have been included herein in reliance on the report, which includes
an explanatory paragraph that describes the Company's emergence from bankruptcy
and adoption of fresh-start reporting, of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
LEGAL MATTERS
The validity of the securities offered hereby has been passed upon for the
Company by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California.
56
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants.......................................................................... F-1
Consolidated Balance Sheets--January 31, 1998 and February 1, 1997......................................... F-2
Consolidated Statements of Operations for the 52 weeks ended January 31, 1998, 52 weeks ended February 1,
1997 and 53 weeks ended February 3, 1996................................................................. F-3
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the 52 weeks ended January 31,
1998, 52 weeks ended February 1, 1997 and 53 weeks ended February 3, 1996................................ F-4
Consolidated Statements of Cash Flows for the 52 weeks ended January 31, 1998, 52 weeks ended February 1,
1997 and 53 weeks ended February 3, 1996................................................................. F-5
Notes to Consolidated Financial Statements................................................................. F-6
</TABLE>
57
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors
Lamonts Apparel, Inc.
We have audited the accompanying consolidated balance sheets of Lamonts
Apparel, Inc. (the "Company") as of January 31, 1998 and February 1, 1997 and
the related consolidated statements of operations, changes in stockholders'
equity (deficit) and cash flows for the 52 weeks ended January 31, 1998 and
February 1, 1997 and the 53 weeks ended February 3, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company as of January 31, 1998 and February 1, 1997 and the consolidated
results of operations and cash flows for the 52 weeks ended January 31, 1998 and
February 1, 1997 and the 53 weeks ended February 3, 1996, in conformity with
generally accepted accounting principles.
On January 31, 1998, the Company emerged from bankruptcy. As discussed in
Note 2 to the consolidated financial statements, the Company adopted
"Fresh-Start Reporting" principles in accordance with the American Institute of
Certified Public Accountant's Statement of Position 90-7, "Financial Reporting
by Entities in Reorganization under the Bankruptcy Code." As a result of the
reorganization and the adoption of Fresh-Start Reporting, the Company's January
31, 1998 consolidated balance sheet is not comparable to the Company's February
1, 1997 consolidated balance sheet since it presents the consolidated financial
position of the reorganized entity.
COOPERS & LYBRAND L.L.P.
/s/ Coopers & Lybrand L.L.P.
Seattle, Washington
April 10, 1998
F-1
<PAGE>
LAMONTS APPAREL, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
<S> <C> <C>
Current Assets:
Cash........................................................................ $ 1,301 $ 2,066
Receivables................................................................. 1,703 1,595
Inventories................................................................. 38,617 37,559
Prepaid expenses and other.................................................. 1,500 1,528
Restricted cash and deposits................................................ 1,543 714
----------- -----------
Total current assets.................................................... 44,664 43,462
Property and equipment........................................................ 42,494 30,653
Leasehold interests........................................................... 8,281 3,477
Excess of cost over net assets acquired....................................... -- 11,591
Deferred financing costs...................................................... -- 1,989
Restricted cash and deposits.................................................. 1,130 1,142
Other assets.................................................................. 899 958
----------- -----------
Total assets............................................................ $ 97,468 $ 93,272
----------- -----------
----------- -----------
Liabilities not subject to settlement under reorganization proceedings:
Current Liabilities:
Borrowings under the Revolver............................................. $ 18,967 $ --
Borrowings under DIP Facility............................................. -- 23,141
Accounts payable.......................................................... 15,186 13,578
Accrued payroll and related costs......................................... 3,106 2,285
Accrued taxes............................................................. 865 812
Accrued interest.......................................................... 1,007 616
Accrued store closure costs............................................... -- 1,050
Accrued reorganization expenses........................................... 2,497 1,165
Other accrued expenses.................................................... 6,804 4,160
Current maturities of long-term debt...................................... 403 --
Current maturities of obligations under capital leases.................... 1,454 12
----------- -----------
Total current liabilities............................................... 50,289 46,819
Long-term debt, net of current maturities................................... 10,536 --
Obligations under capital leases, net of current maturities................. 13,835 2,846
Other....................................................................... 2,852 302
----------- -----------
Total liabilities not subject to settlement under reorganization
proceedings........................................................... 77,512 49,967
Liabilities subject to settlement under reorganization proceedings:
Related party............................................................... -- 67,600
Other....................................................................... -- 35,258
----------- -----------
Total liabilities subject to settlement under reorganization............ -- 102,858
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.01 par value, 10,000,000 shares authorized; no shares
issued and outstanding.................................................. -- --
Common stock, $.01 par value; 40,000,000 shares and 40,000,000 shares
authorized; 9,000,000 and 17,900,053 shares issued and outstanding,
respectively............................................................ 90 179
Additional paid-in-capital................................................ 19,866 62,972
Accumulated deficit....................................................... -- (122,704)
----------- -----------
Total stockholders' equity (deficit).................................... 19,956 (59,553)
----------- -----------
Total liabilities and stockholders' equity (deficit).................. $ 97,468 $ 93,272
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
LAMONTS APPAREL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
52 WEEKS 52 WEEKS 53 WEEKS
ENDED ENDED ENDED
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenues................................................................... $ 201,623 $ 203,602 $ 199,548
Cost of merchandise sold................................................... 131,700 130,480 131,677
----------- ----------- -----------
Gross profit......................................................... 69,923 73,122 67,871
----------- ----------- -----------
Operating and administrative expenses...................................... 67,844 67,173 71,372
Depreciation and amortization.............................................. 7,141 7,999 9,232
Impairment of long-lived assets............................................ -- 4,170 --
----------- ----------- -----------
Operating costs...................................................... 74,985 79,342 80,604
----------- ----------- -----------
Loss from operations before other income (expense), reorganization
expenses, fresh-start revaluation, and extraordinary item................ (5,062) (6,220) (12,733)
Other income (expense):
Interest expense:
Cash (contractual interest of $13.1 million, $13.7 million and $13.8
million, respectively)............................................... (5,900) (5,053) (5,098)
Other income (expense)................................................... 8 12 196
----------- ----------- -----------
Loss from operations before reorganization expenses, fresh-start
revaluation, and extraordinary item...................................... (10,954) (11,261) (17,635)
Reorganization expenses.................................................... (5,995) (6,037) (7,240)
Fresh-start revaluation.................................................... 70,495 -- --
----------- ----------- -----------
Income (loss) before extraordinary item.................................... 53,546 (17,298) (24,875)
Extraordinary item--gain on debt discharge................................. 69,158 -- --
----------- ----------- -----------
Net income (loss).......................................................... $ 122,704 $ (17,298) $ (24,875)
----------- ----------- -----------
----------- ----------- -----------
Basic and Diluted Earnings (Loss) per Common Share
Income (loss) from operations before extraordinary item.................. $ 3.00 $ (0.97) $ (1.39)
Extraordinary Item--gain on debt discharge............................... $ 3.86 $ 0.00 $ 0.00
Net income (loss)........................................................ $ 6.86 $ (0.97) $ (1.39)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
LAMONTS APPAREL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MINIMUM
ADDITIONAL PENSION
NUMBER OF COMMON PAID-IN LIABILITY ACCUMULATED
SHARES STOCK CAPITAL ADJUSTMENT DEFICIT TOTAL
----------- ----------- ----------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 28, 1995............. 17,900 $ 179 $ 62,843 $ -- $ (80,531) $ (17,509)
Net loss for the 53 weeks ended
February 3, 1996.................. -- -- -- -- (24,875) (24,875)
Compensation expense related to
stock option plan................. -- -- 78 -- -- 78
Minimum pension liability
adjustment........................ -- -- -- (250) -- (250)
----------- ----- ----------- ----- ------------ -----------
Balance, February 3, 1996............. 17,900 179 62,921 (250) (105,406) (42,556)
Net loss for the 52 weeks ended
February 1, 1997.................. -- -- -- -- (17,298) (17,298)
Compensation expense related to
stock option plan................. -- -- 51 -- -- 51
Minimum pension liability
adjustment........................ -- -- -- 250 -- 250
----------- ----- ----------- ----- ------------ -----------
Balance, February 1, 1997............. 17,900 179 62,972 -- (122,704) (59,553)
Net income for the 52 weeks ended
January 31, 1998.................. -- -- -- -- 122,704 122,704
Minimum pension liability
adjustment........................ -- -- -- (438) -- (438)
Compensation expense related to
stock option plan................. -- -- 38 -- -- 38
Cancellation of the former equity
and elimination of accumulated
deficit under the Plan............ (17,900) (179) (63,010) 438 -- (62,751)
Issuance of new equity under the
Plan.............................. 9,000 90 19,866 -- -- 19,956
----------- ----- ----------- ----- ------------ -----------
Balance, January 31, 1998............. 9,000 $ 90 $ 19,866 $ -- $ -- $ 19,956
----------- ----- ----------- ----- ------------ -----------
----------- ----- ----------- ----- ------------ -----------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
LAMONTS APPAREL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).............................................. $ 122,704 $ (17,298) $ (24,875)
Adjustments to reconcile net income (loss) to net cash used by
operating activities before reorganization items:
Depreciation and amortization................................ 7,141 7,999 9,232
Impairment of long-lived assets.............................. -- 4,170 --
Gain on sale of fixed asset.................................. (177) -- --
Non-cash interest, including interest paid-in-kind and
amortization of debt discount.............................. 321 -- --
Stock option expense......................................... 38 51 78
Net change in current assets and liabilities................. 3,900 (2,621) 4,895
Net realizable value adjustment to inventory................. -- -- 500
Decrease (increase) in long term restricted cash and
deposits................................................... 11 137 (1,022)
Other........................................................ (1,103) (562) (1,425)
Reorganization expenses...................................... 5,995 6,037 7,240
Fresh-start revaluation...................................... (70,495) -- --
Gain on debt discharge....................................... (69,158) -- --
--------------- --------------- ---------------
Net cash used by operating activities before reorganization
expenses................................................. (823) (2,087) (5,377)
--------------- --------------- ---------------
Operating cash flows used by reorganization expenses:
Payment for professional fees or other expenses related to
the Chapter 11 proceedings................................. (4,539) (3,241) (2,475)
--------------- --------------- ---------------
Net cash used by operating activities...................... (5,362) (5,328) (7,852)
--------------- --------------- ---------------
Cash flows from investing activities:
Capital expenditures........................................... (1,507) (699) (1,343)
Proceeds from sale of assets................................... 39 4,459 --
Other.......................................................... 257 90 (448)
--------------- --------------- ---------------
Net cash provided (used) by investing activities........... (1,211) 3,850 (1,791)
--------------- --------------- ---------------
Cash flows from financing activities:
Net post-petition (payments) borrowings under Revolver......... (4,174) 2,807 4,496
Proceeds from Term Loan........................................ 10,000 -- --
Assumption of liabilities subject to compromise................ 939 -- --
Principal payments on obligations under capital leases......... (900) (778) (1,183)
Other.......................................................... (57) (66) (61)
--------------- --------------- ---------------
Net cash provided by financing activities.................. 5,808 1,963 3,252
--------------- --------------- ---------------
Net increase (decrease) in cash.................................. (765) 485 (6,391)
Cash, beginning of period........................................ 2,066 1,581 7,972
--------------- --------------- ---------------
Cash, end of period.............................................. $ 1,301 $ 2,066 $ 1,581
--------------- --------------- ---------------
--------------- --------------- ---------------
Reconciliation of net change in current assets and liabilities:
(Increase) decrease in accounts receivable..................... $ (154) $ 818 $ 692
(Increase) decrease in inventory (excluding adjustment for net
realizable value)............................................ 118 (7,158) (2,692)
(Increase) decrease in prepaid expenses and other.............. (64) 548 2,018
Increase (decrease) in accounts payable........................ 1,607 5,161 6,663
Increase (decrease) in accrued payroll and related costs....... 821 (111) (517)
Increase (decrease) in accrued taxes........................... 53 (9) 288
Increase (decrease) in accrued interest........................ 547 409 (103)
Increase (decrease) in accrued store closure costs............. (1,050) (2,204) 303
Increase (decrease) in other accrued expenses.................. 2,022 (75) (1,757)
--------------- --------------- ---------------
$ 3,900 $ (2,621) $ 4,895
--------------- --------------- ---------------
--------------- --------------- ---------------
Supplemental Cash Flow Information:
Cash interest payments made.................................... $ 4,824 $ 4,783 $ 5,201
Non-cash transactions:
Capital lease relating to sale--leaseback of Alderwood
store...................................................... -- 2,835 --
Capital leases relating to equipment......................... 759
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JANUARY 31, 1998
NOTE 1--REORGANIZATION AND EMERGENCE FROM CHAPTER 11
Lamonts Apparel, Inc. (the "Company" or "Lamonts") is a Northwest-based
regional retailer with 38 stores in five states. The Company offers an
assortment of moderately priced fashion apparel, and home and fashion
accessories at competitive prices for the entire family.
On January 6, 1995 ("Petition Date"), the Company filed a voluntary petition
for relief under Chapter 11 ("Chapter 11") of title 11 of the United States Code
(the "Bankruptcy Code") in the United States Bankruptcy Court (the "Bankruptcy
Court") for the Western District of Washington at Seattle. The Company's
Modified and Restated Plan of Reorganization (the "Plan") was confirmed by the
Bankruptcy Court on December 18, 1997 and became effective on January 31, 1998
("Plan Effective Date").
The overall purpose of the Plan was to (i) alter the debt and capital
structure of Lamonts to permit it to emerge from Chapter 11 and (ii) settle,
compromise or otherwise dispose of certain claims on terms that Lamonts
considered to be reasonable.
The Plan resulted in an approximate $90 million net reduction in the total
indebtedness and liabilities subject to reorganization of the Company. The Plan
provided generally for, among other things, payment in full by the Company of
administrative expenses, certain other priority claims and secured claims, other
than the claim of BankBoston, N.A. ("BankBoston"), the agent and lender under
the Company's bank credit facility (the "BankBoston Facility"), (which was left
unimpaired), cancellation of certain indebtedness in exchange for new equity
securities of the Company, the discharge of certain other pre-petition claims,
the cancellation and/or rejection of existing equity securities of the Company
in exchange for new equity securities of the Company, the assumption or
rejection of executory contracts and unexpired leases and the designation of a
new board of directors. In addition, the Plan provided that the Company assume
all of the obligations under the BankBoston Facility, including any unpaid
accrued interest, fees, costs and charges.
Pursuant to the Plan:
(a) an aggregate of 8,800,000 shares of Class A Common Stock, par value
$0.01 per share, of the Company ("Common Stock"), 2,203,320 Class A Warrants
to purchase Common Stock ("Class A Warrants") and 700,237 Class B Warrants
to purchase Common Stock ("Class B Warrants") have been or will be issued to
the holders of pre-petition claims against Lamonts;
(b) an aggregate of 200,000 shares of Common Stock and 100,000 Class B
Warrants were issued to the former holders of Lamonts common stock (the "Old
Common Stock"); and
(c) 228,639 Class C Warrants to purchase Common Stock ("Class C
Warrants") and 10 shares of Class B Common Stock, par value $.01 per share,
of the Company ("Class B Common Stock"), were issued to Specialty Investment
I LLC (the "Surety").
All such securities were or will be issued in exchange for various
pre-petition claims and interests allowed by the Bankruptcy Court, except those
issued to the Surety which were issued as required under the BankBoston Facility
in consideration of the guaranty made by the Surety of a $10 million term loan
made to the Company prior to the Plan Effective Date and in partial exchange for
its administrative claim. All shares of Old Common Stock were canceled pursuant
to the Plan. As a result, holders of Old Common Stock lost substantially all of
their investment in the Company.
F-6
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 1--REORGANIZATION AND EMERGENCE FROM CHAPTER 11 (CONTINUED)
In addition, pursuant to the Plan, the Company granted options ("Stock
Options") for the purchase of Common Stock as follows:
(i) Stock Options exercisable for the purchase of 1,000,000 shares of
Common Stock with an exercise price of $1.00 per share ("Base Options");
(ii) to prevent dilution resulting from the issuance of the Class A
Warrants, Stock Options exercisable for the purchase of an additional
244,813 shares of Common Stock with an exercise price of $0.01 per share,
exercisable only on or after the date on which the Class A Warrants become
exercisable ("Protective A Options"); and
(iii) to prevent dilution resulting from the issuance of the Class B
Warrants, Stock Options exercisable for the purchase of an additional 88,915
shares of Common Stock with an exercise price of $0.01 per share,
exercisable only on or after the date on which the Class B Warrants become
exercisable ("Protective B Options" and, together with the Protective A
Options, the "Protective Options").
The number of Protective A Options and Protective B Options that may be
exercised is limited under certain circumstances. (See Note 12.)
In addition, to prevent dilution resulting from the issuance of the Class C
Warrants to the Surety, the holders of Stock Options issued on the Plan
Effective Date were issued Class C Warrants exercisable for the purchase of an
aggregate of 381,060 shares of Common Stock (355,656 shares with an exercise
price of $1.25 per share and for an aggregate of 25,404 shares with an exercise
price of $.01 per share). (See Note 12.)
As compensation to Gordian Group, L.P. ("Gordian") for investment banking
services rendered to the Company during the Company's Chapter 11 case, Gordian
will be issued, on the 120th day following the Plan Effective Date, warrants
(the "Gordian Warrants") exercisable for a number of shares of Common Stock
having a value equal to $200,000. The Company recorded compensation expense of
approximately $0.05 million in the Consolidated Statement of Operations to
reflect the fair value of these warrants as estimated using the Black Scholes
options pricing model. See Note 12 for a description of the terms of the Gordian
Warrants.
The 8,800,000 shares of Common Stock referred to in clause (a) above, the
200,000 shares of Common Stock referred to in clause (b) above and the 10 shares
of Class B Common Stock referred to in clause (c) above were issued pursuant to
the Plan, represent the total shares which were valued at $19,956,000 at the
Plan Effective Date and are reflected in stockholders' equity in the
Consolidated Balance Sheet. No values were assigned to the Class A Warrants and
Class B Warrants discussed above since their exercise is contingent upon the
Common Stock achieving certain levels of Aggregate Equity Trading Value (as
defined below). The Company recorded interest expense of approximately $0.5
million in the Consolidated Statement of Operations to reflect the fair value of
the Class C Warrants issued to the Surety as estimated using the Black Scholes
options pricing mode. No value was assigned to the Stock Options and the Class C
Warrants granted to management on the Plan Effective Date as the exercise price
was greater than the fair market value of the underlying stock at the Plan
Effective Date.
"Aggregate Equity Trading Value" means, as of any date, the product of (a)
either (i) if the Common Stock is listed on any national securities exchange or
quoted on a national quotation system, the average of
F-7
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 1--REORGANIZATION AND EMERGENCE FROM CHAPTER 11 (CONTINUED)
the daily closing prices of the Common Stock for the five (5) trading days
immediately preceding such date, or (ii) if the Common Stock is not so listed or
quoted, the fair market value per share of the Common Stock determined in good
faith by the Company's Board of Directors as of a date within 30 days of such
date, multiplied by (b) the total number of issued and outstanding shares of
Common Stock as of such date (assuming for purposes of determining such number
of shares the exercise in full of all in-the-money options outstanding on such
date to purchase shares of Common Stock and, and for purposes of determining
whether the Class B Warrants are exercisable, the exercise of all Class B
Warrants which are exercisable as of such date).
In connection with the Plan, the Company entered into a Grant of
Registration Rights in favor of certain holders of the Warrants and the Common
Stock, pursuant to which, subject to certain exceptions, the Company agreed to
file and cause to remain effective a Registration Statement under the Securities
Act of 1933, as amended, covering certain of the securities distributed under
the Plan. See Note 13 for a description of such registration rights. Also in
connection with the Plan, Alan R. Schlesinger and Loren R. Rothschild entered
into new employment agreements with the Company which amended and restated the
terms of their existing employment agreements.
The Plan was filed with the Bankruptcy Court on October 31, 1997. The
Disclosure Statement relating thereto, which was filed with the Bankruptcy Court
on October 31, 1997 and amended on November 21, 1997, was approved by the
Bankruptcy Court on November 24, 1997. The Plan was confirmed by the Bankruptcy
Court on December 18, 1997 and became effective on January 31, 1998.
With the exception of payments contemplated by the Plan to be made
subsequent to the Plan Effective Date, all payments and distributions required
under the Plan to be made in respect of pre-petition liabilities have been made
or otherwise provided for, and, other than as contemplated by the Plan, no
further recourse to the Company may be had by any person with respect of such
pre-petition claims.
The following sets forth the nature and amount of pre-petition liabilities
subject to settlement under reorganization proceedings:
<TABLE>
<CAPTION>
PRE-FRESH-START
JANUARY 31, FEBRUARY 1,
1998 1997
--------------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Accounts payable and accrued liabilities........................ $ 22,664 $ 23,121
Capital Lease obligations....................................... 10,313 11,216
10 1/4% Notes (including pre-petition accrued interest)......... 67,600 67,600
13 1/2% Notes (including pre-petition accrued interest)......... 838 838
Notes Payable................................................... 31 83
--------------- -----------
$ 101,446 $ 102,858
--------------- -----------
--------------- -----------
</TABLE>
F-8
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 1--REORGANIZATION AND EMERGENCE FROM CHAPTER 11 (CONTINUED)
Costs associated with the reorganization of the Company were expensed as
incurred. Such costs include certain expenses of the committees that represented
Lamonts' unsecured trade creditors, bondholders and equity holders (the
"Committees"). The amounts charged to reorganization expense by the Company are
as follows:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Write-off of property and equipment, net of obligations under
capital leases................................................. $ 2,362
Professional fees................................................ $ 2,344 $ 2,128 2,479
Lease related costs.............................................. 196 1,036 925
Payroll related costs............................................ 1,924 411 411
Store closure costs, administrative and other.................... 1,531 2,462 1,063
--------- --------- ---------
$ 5,995 $ 6,037 $ 7,240
--------- --------- ---------
--------- --------- ---------
</TABLE>
NOTE 2--BASIS OF PRESENTATION AND FRESH-START REPORTING
Pursuant to the guidance provided by the American Institute of Certified
Public Accountants in Statement 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7") (also referred to as
"Fresh-Start Reporting"), the Company adopted Fresh-Start Reporting for
financial reporting purposes as of January 31, 1998. Under Fresh-Start
Reporting, the reorganization value of the Company was allocated to the
reorganized Company's net assets on the basis of the purchase method of
accounting. This method required the adjustment of the Company's assets and
liabilities to reflect their estimated fair value at the Plan Effective Date.
In accordance with SOP 90-7, the Company's reorganization value was
determined as of the Plan Effective Date. The reorganization value was derived
by using various valuation methods, including discounted cash flow analyses
(utilizing the Company's projections), analyses of the market values of other
publicly traded companies whose businesses are reasonably comparable, and
analyses of the present value of the Company's equity. The reorganization value
of $97.5 million was determined to be the fair value of the Company before
considering liabilities and approximated the amount a willing buyer would have
paid for the assets of the Company immediately after restructuring.
The primary methodology used to determine the reorganization value was a
weighted average of the historical market guideline method, projected guideline
method, and the income approach using the discounted cash flow method. Under the
income approach, the terminal value was determined using the discounted cash
flow projected for the period from February 1, 1998 through February 3, 2002,
using a discount rate of 14.1% and a long-term growth rate of 3.5%, with a
capitalization rate at 10.6%.
The adjustments to reflect the consummation of the Plan and adoption of
Fresh-Start Reporting, including the adjustment to restate assets and
liabilities at their respective estimated fair values, the gain on debt
discharge for liabilities subject to settlement under reorganization proceedings
of $69.2 million, and the elimination of $122.7 million of the prior accumulated
deficit, are reflected in the accompanying consolidated financial statements at
January 31, 1998.
F-9
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 2--BASIS OF PRESENTATION AND FRESH-START REPORTING (CONTINUED)
Additionally, a black line is shown to separate the January 31, 1998
consolidated balance sheet from the prior year since it is not prepared on a
comparable basis. The effect of the reorganization on the Company's consolidated
balance sheet as of January 31, 1998 is as follows:
<TABLE>
<CAPTION>
PRE-FRESH-START FRESH-START
BALANCE SHEET BALANCE SHEET
JANUARY 31, DEBT FRESH-START JANUARY 31,
1998 DISCHARGE REPORTING 1998
--------------- --------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Current Assets:
Cash............................................ $ 1,301 $ 1,301
Receivables..................................... 1,703 1,703
Inventories..................................... 37,441 $ 1,176(a) 38,617
Prepaid expenses and other...................... 1,500 1,500
Restricted cash and deposits.................... 1,543 1,543
--------------- --------- ----------- -------------
Total current assets........................ 43,488 -- 1,176 44,664
Property and equipment............................ 27,255 15,239(b) 42,494
Leasehold interests............................... 3,049 5,232(b) 8,281
Excess of cost over net assets acquired........... 11,266 (11,266)(c) --
Deferred financing costs.......................... 1,266 $ (1,266)(d) --
Restricted cash and deposits...................... 1,130 1,130
Other assets...................................... 899 899
--------------- --------- ----------- -------------
Total assets................................ $ 88,353 $ (1,266) $ 10,381 $97,468
--------------- --------- ----------- -------------
--------------- --------- ----------- -------------
</TABLE>
F-10
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 2--BASIS OF PRESENTATION AND FRESH-START REPORTING (CONTINUED)
<TABLE>
<CAPTION>
PRE-FRESH-START FRESH-START
BALANCE SHEET BALANCE SHEET
JANUARY 31, DEBT FRESH-START JANUARY 31,
1998 DISCHARGE REPORTING 1998
--------------- --------- ----------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Liabilities not subject to settlement under
reorganization proceedings:
Current Liabilities:
Borrowings under the Revolver................. $ 18,967 $18,967
Accounts payable.............................. 15,186 15,186
Accrued payroll and related costs............. 3,106 3,106
Accrued taxes................................. 865 865
Accrued interest.............................. 1,163 $ (156)(e) 1,007
Accrued reorganization expenses............... 2,497 2,497
Other accrued expenses........................ 6,442 $ 362(f) 6,804
Current maturities of long-term debt.......... 403 403
Current maturities of obligations under
capital leases.............................. 177 1,277(e) 1,454
--------------- --------- ----------- -------------
Total current liabilities................... 48,806 362 1,121 50,289
Long-term debt, net of current maturities....... 10,536 10,536
Obligations under capital leases, net of current
maturities.................................... 3,444 10,391(e) 13,835
Other........................................... 1,023 835(f) 994(g) 2,852
--------------- --------- ----------- -------------
Total liabilities not subject to settlement
under reorganization proceedings.......... 63,809 1,197 12,506 77,512
--------------- --------- ----------- -------------
Liabilities subject to settlement under
reorganization proceedings:
Related party................................... 67,600 (67,600)(f) --
Other........................................... 33,846 (23,533)(f) (10,313)(e) --
--------------- --------- ----------- -------------
Total liabilities subject to settlement
under reorganization proceedings.......... 101,446 (91,133) (10,313) --
--------------- --------- ----------- -------------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.01 par value, 10,000,000
shares authorized, no shares issued or
outstanding................................... -- --
Common stock, $.01 par value; 40,000,000 shares
authorized, 9,000,000 shares issued and
outstanding................................... 179 88(h) (177)(h) 90
Additional paid-in-capital...................... 63,010 19,424(h) (62,568)(h) 19,866
Minimum pension liability adjustment............ (438) 438(g) --
Accumulated deficit............................. (139,653) 69,158(i) 70,495(j) --
--------------- --------- ----------- -------------
Total stockholders' equity (deficit).......... (76,902) 88,670 8,188 19,956
--------------- --------- ----------- -------------
Total liabilities and stockholders' equity
(deficit)................................. $ 88,353 $ (1,266) $ 10,381 $97,468
--------------- --------- ----------- -------------
--------------- --------- ----------- -------------
</TABLE>
F-11
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 2--BASIS OF PRESENTATION AND FRESH-START REPORTING (CONTINUED)
- ------------------------
(a) To adjust inventories to fair value.
(b) To allocate fair value to identifiable net assets in accordance with
purchase method accounting as follows: property and equipment, $15.2
million; and leasehold interests, $5.2 million.
(c) To write off the balance of excess of cost over net assets acquired.
(d) To write off the balance of deferred financing costs related to debt
discharged.
(e) To reclassify certain liabilities subject to settlement under reorganization
proceedings, where the obligation was assumed.
(f) To record the discharge of liabilities subject to settlement under
reorganization proceedings, and reclassify pre-petition priority claims and
cure amounts.
(g) To restate liabilities, including pension liabilities at fair value.
(h) To record cancellation of historical Stockholders' equity (deficit) and
record reorganization value of $20.0 million, $0.1 million of which is
classified as Class A Common Stock, $.01 par value. The remaining $19.9
million is classified as additional paid-in-capital.
(i) To record the extraordinary item--gain on debt discharge.
(j) To recognize the value of the reorganized Company.
F-12
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 2--BASIS OF PRESENTATION AND FRESH-START REPORTING (CONTINUED)
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
The following unaudited pro forma consolidated statement of operations
reflects the financial results of the Company during Fiscal 1997 as if the Plan
had been consummated on February 2, 1997. The pro forma information does not
purport to be indicative of the results of operations that would actually have
been reported had such transactions actually been consummated on such date or of
the results of operations that may be reported by the Company in the future.
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 31, JANUARY 31,
1998 ADJUSTMENTS 1998
-------------- ----------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Total revenue................................................ $ 201,623 $ 201,623
(1)(3)
Total cost of merchandise sold, operating expenses, and (4)(5)
depreciation and amortization and other income (expense)... 212,577 $ 470(6)(7) 212,107
-------------- --------------
Loss from operations before reorganization expenses,
fresh-start revaluation and extraordinary item............. (10,954) (10,484)
-------------- --------------
Reorganization expenses...................................... (5,995) 5,995(2) --
Fresh-start revaluation...................................... 70,495 (70,495)(8) --
-------------- --------------
Income (loss) before extraordinary item...................... 53,546 (10,484)
Extraordinary item........................................... 69,158 (69,158)(8) --
-------------- ----------- --------------
Net income (loss)............................................ $ 122,704 $(133,188) $ (10,484)
-------------- ----------- --------------
-------------- ----------- --------------
Basic and diluted loss per share............................. $ (1.16)
--------------
--------------
Weighted average number of shares............................ 9,000,000(9)
</TABLE>
- ------------------------
The unaudited pro forma statement of operations has been adjusted to reflect
the following:
(1) An increase in depreciation and amortization expense of approximately
$1.0 million due to the change in the fair value of identifiable assets,
property and equipment and leasehold interests.
(2) The elimination of approximately $6.0 million in reorganization costs.
(3) The elimination of approximately $0.4 million for amortization of excess
of cost over net assets acquired.
(4) The elimination of approximately $0.7 million for amortization of
deferred financing fees associated with outstanding warrants to purchase
Old Common Stock which were canceled on the Plan Effective Date.
(5) The amortization of approximately $0.5 million in facility fees in
respect of the working capital facility.
(6) The reduction in rent expense of approximately $0.2 million for several
stores where the landlord has agreed to concessions upon assumption of
the lease.
(7) An increase in interest expense of $0.1 million associated with debt
arising from deferred priority tax claims and deferred cure payments.
(8) The elimination of Fresh-Start Reporting adjustments totaling
approximately $70.5 million and extraordinary item--gain on debt
discharge of $69.2 million.
F-13
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 2--BASIS OF PRESENTATION AND FRESH-START REPORTING (CONTINUED)
(9) Pursuant to the Plan, the Company issued 9,000,000 shares of Common
Stock and granted warrants and options to purchase Common Stock. Such
warrants and options have not been included in the calculation of net
loss per common share because the effect of assuming their exercise would
be anti-dilutive.
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FRESH-START REPORTING
The Company adopted SOP 90-7, or Fresh-Start Reporting, for financial
reporting purposes as of January 31, 1998. Under Fresh-Start Reporting, the
Company's assets and liabilities were adjusted to reflect their fair values at
the Plan Effective Date. (See Note 2.)
CONSOLIDATION
The consolidated financial statements present the consolidated financial
position and results of operations of the Company and its subsidiaries. All
subsidiaries of the Company are inactive. All significant intercompany
transactions and account balances have been eliminated in consolidation.
CHANGE IN FISCAL YEAR
On March 9, 1995, the Company elected to change its fiscal year end from the
Saturday closest to October 31 to the Saturday closest to January 31 to enhance
the comparability of the Company's results of operations with other apparel
retailers.
CASH EQUIVALENTS
The Company considers all short term investments with original maturities of
three months or less to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of cost (using the retail last-in,
first-out ("LIFO") method) or net realizable value.
As part of Fresh-Start Reporting (See Note 2), the LIFO reserve was written
off and the base year inventory was restated to the January 31, 1998 value.
The carrying value of the Company's inventories as of February 1, 1997 and
February 3, 1996 exceeded the weighted average cost of inventories by $1.8
million and $2.1 million, respectively.
RESTRICTED CASH AND DEPOSITS
Current restricted cash and deposits include amounts deposited in restricted
operating accounts for the purpose of ensuring payment of employee payroll,
utilities, and certain taxes, including retail sales taxes. Noncurrent
restricted cash and deposits include $1.0 million as of January 31, 1998 and
$1.0 million as of February 1, 1997 held as a deposit by the Company's buying
service for the annual usage of international letters of credit.
F-14
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
The Company's adoption of Fresh-Start Reporting as of January 31, 1998,
required property and equipment to be adjusted to fair value. In prior periods,
property and equipment was recorded at cost less accumulated depreciation. The
adoption of Fresh-Start Reporting did not result in any material change in the
remaining useful lives of the Company's property and equipment.
Depreciation is determined using the remaining useful lives based on the
following original useful lives: buildings and improvements, 10-40 years;
furniture, fixtures and equipment, 3-10 years; and leasehold improvements and
property under capital leases, life of lease or useful life if shorter.
Depreciation is computed using primarily the straight-line method for financial
reporting purposes and accelerated depreciation methods for income tax purposes.
Upon sale or retirement of property and equipment, the related cost (or
restated value) and accumulated depreciation are removed from the accounts of
the Company and any gain or loss is reflected in the consolidated financial
statements in the period the sale or retirement occurred. Maintenance and repair
costs are expensed as incurred. Expenditures for renewals and improvements are
generally capitalized.
Software development costs incurred in connection with significant upgrades
of management information systems are capitalized. Amortization of capitalized
software development costs begins when the related software is placed in service
using the straight-line method over estimated useful lives of three to five
years.
LEASEHOLD INTERESTS
The excess of the fair rental value of leased facilities under operating
leases over the respective contractual rents was recorded as an asset at its
discounted net present value and is being amortized on a straight-line basis
over the respective remaining lease terms.
During Fiscal 1996, the Company wrote off approximately $0.6 million of
leasehold interests due to the adoption of SFAS No. 121 (defined below).
The accumulated amortization of leasehold interests approximated $1.7
million and $1.4 million at February 1, 1997 and February 3, 1996, respectively.
The adoption of Fresh-Start Reporting did not result in any significant change
in the remaining useful lives of the Company's leasehold interests. (See Note
2.)
IMPAIRMENT OF LONG-LIVED ASSETS
During the 52 weeks ended February 1, 1997 ("Fiscal 1996"), the Company
adopted Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("SFAS No. 121"). SFAS No. 121 requires that long-lived assets and certain
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. If impairment has occurred, an impairment loss must be recognized.
With the adoption of SFAS No. 121, assets are grouped and evaluated at the
lowest level for which there are identifiable cash flows that are largely
independent of the cash flows of other groups of assets.
F-15
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company has identified this lowest level as individual stores. The Company
considers historical performance and future estimated results in its evaluation
of potential impairment and then compares the carrying amount of the asset to
the estimated future cash flows expected to result from the use of the asset. If
the carrying amount of the asset exceeds estimated expected undiscounted future
cash flows, the Company measures the amount of the impairment by comparing the
carrying amount of the asset to its fair value. The estimation of fair value is
measured by discounting expected future cash flows at a rate commensurate with
the Company's borrowing rate.
During Fiscal 1996, the Company recognized a non-cash impairment loss of
$4.2 million. Of the total impairment loss, $2.3 million represented impairment
of property and equipment, $1.3 million related to excess of cost over net
assets acquired and $0.6 million pertained to leasehold interests. Considerable
management judgment is necessary to estimate discounted future cash flows.
Accordingly, actual results could vary significantly from such estimates.
EXCESS OF COST OVER NET ASSETS ACQUIRED
At January 31, 1998, the excess of cost over net assets acquired, net of
accumulated amortization of $11.3 million was written off under Fresh-Start
Reporting. Prior to the Plan Effective Date, the excess of cost over the fair
value of net assets acquired was being amortized on a straight-line basis over
40 years. The accumulated amortization approximated $1.4 million and $1.2
million at February 1, 1997 and February 3, 1996, respectively.
During Fiscal 1996, the Company wrote off approximately $1.3 million of the
excess of cost over net assets acquired due to the adoption of SFAS No. 121.
DEFERRED FINANCING COSTS
Costs incurred in connection with the issuance of the Company's debt were
amortized using the effective interest method over the term of the related
indebtedness. In connection with an amendment to the Company's 10 1/4% Senior
Subordinated Notes due 1999 (the "10 1/4% Notes") in June 1994, the Company
issued Warrants (the "1994 Warrants") initially to purchase up to an aggregate
of approximately 2.0 million shares of Old Common Stock to the holders of the
10 1/4% Notes. The issuance of the 1994 Warrants resulted in an increase of $2.2
million in deferred financing costs and additional paid-in capital.
At January 31, 1998, deferred financing costs, net of accumulated
amortization of $1.3 million related to the 10 1/4% Notes and 1994 Warrants was
written off and included in the gain on debt discharge. The accumulated
amortization of deferred financing costs approximated $2.8 million and $2.1
million at February 1, 1997 and February 3, 1996, respectively.
Financing costs incurred by the Company in connection with the BankBoston
Facility are amortized using the effective interest method over the term of the
related indebtedness. These costs are included in prepaid expenses and other
(current) and other assets (noncurrent).
ADVERTISING COSTS
The Company expenses the production costs of advertising as the associated
advertisement is run. Advertising expense approximated $13.2 million, $13.0
million and $12.6 million during the 52 weeks
F-16
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ended January 31, 1998 ("Fiscal 1997"), Fiscal 1996, and the 53 weeks ended
February 3, 1996 ("Fiscal 1995"), respectively.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Comprehensive Income" ("SFAS No. 130").
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements.
SFAS No. 130 is effective for fiscal years beginning after December 15, 1997 and
requires restatement of earlier periods presented. Management has determined
that the requirements of SFAS No. 130 do not impact the Company's financial
position and results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 establishes
annual and interim reporting standards for a Company's business segments and
related disclosures about its products, services, geographic areas and major
customers. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997, and requires the restatement of comparative information for earlier
periods. Management has determined that the requirements of SFAS No. 131 do not
impact the Company's financial position and results of operation.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" ("SFAS No. 132"). SFAS 132
significantly changes current financial statement disclosure requirements from
those that were required under Statement of Financial Accounting Standards No.
87, "Employers' Accounting for Pensions," Statement of Financial Accounting
Standards No. 88, "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits," and Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." SFAS No. 132 is effective for
fiscal years beginning after December 15, 1997, with earlier application
encouraged. Management has determined that the requirements of SFAS No. 132 have
no material impact on the Company's financial position and results of
operations.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior period amounts in the consolidated financial statements have
been reclassified to conform with the current year presentation.
F-17
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 4--EARNINGS (LOSS) PER COMMON SHARE
The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share" beginning with its fourth quarter of Fiscal 1997. All prior
period earnings per common share data have been restated to conform to the
provisions of this statement. Basic earnings per common share is computed using
the weighted average number of shares outstanding. Diluted earnings per common
share is computed using the weighted average number of shares outstanding
adjusted for the incremental shares attributed to outstanding options to
purchase common stock. Options to purchase 1.6 million shares of Common Stock in
Fiscal 1997 were not included in the computation of diluted earnings per common
share because the option price was greater than the average market price of the
Common Stock. (See Note 12.) Options to purchase 0.3 million shares and 0.4
million shares of common stock, with an exercise price of $0.01 per share, were
not included in Fiscal 1996 and Fiscal 1995, respectively, as they were
antidilutive.
Net loss per common share is computed by dividing net loss by the weighted
average number of common shares outstanding. The weighted average number of
shares outstanding for both basic and diluted calculations was 17,875,602,
17,899,906, and 17,893,675 for Fiscal 1997, Fiscal 1996, and Fiscal 1995,
respectively.
<TABLE>
<CAPTION>
EARNINGS (LOSS) PER COMMON SHARE FISCAL 1997 FISCAL 1996 FISCAL 1995
- ------------------------------------------------------------------ ----------- ----------- -----------
<S> <C> <C> <C>
Basic and diluted earnings (loss) per common share
Income (loss) from operations before extraordinary item......... $ 3.00 $ (0.97) $ (1.39)
Extraordinary item--gain on debt discharge...................... $ 3.86 -- --
Net income (loss)............................................... $ 6.86 $ (0.97) $ (1.39)
<CAPTION>
SHARES USED IN COMPUTING EARNINGS (LOSS) PER COMMON SHARE FISCAL 1997 FISCAL 1996 FISCAL 1995
- ------------------------------------------------------------------ ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Basic and Diluted................................................. 17,876 17,900 17,894
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
NOTE 5--PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
<CAPTION>
<S> <C> <C>
Buildings and equipment under capital leases.................................. $ 20,314 $ 17,605
Buildings and improvements.................................................... 1,989 2,193
Leasehold improvements........................................................ 11,241 15,012
Furniture, fixtures, and equipment............................................ 7,625 16,699
Deferred software costs....................................................... 1,325 6,650
----------- -----------
42,494 58,159
Less accumulated depreciation and amortization................................ (0) (27,506)
----------- -----------
$ 42,494 $ 30,653
----------- -----------
----------- -----------
</TABLE>
The adoption of Fresh-Start Reporting did not result in any significant
change in the remaining useful lives of the Company's property and equipment.
(See Note 2.)
F-18
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 5--PROPERTY AND EQUIPMENT (CONTINUED)
During Fiscal 1996, the Company wrote off approximately $2.3 million of
property and equipment due to the adoption of SFAS No. 121.
Accumulated amortization for buildings and equipment under capital leases
approximated $5.8 million and $4.6 million at February 1, 1997 and February 3,
1996, respectively.
In December 1996, the Company closed a total of four stores located in
Spokane, Washington, Twin Falls Idaho; Missoula, Montana and Hillsboro, Oregon.
The net book value of furniture, fixtures and equipment associated with these
four stores totaled $0.4 million as of February 1, 1997, and was included in the
store closure reserve. (See Note 8.)
On February 8, 1996, the Company entered into a sale-leaseback transaction
for the land and building at the Company's Alderwood store in Seattle,
Washington. The proceeds of approximately $5.0 million were used to repay
borrowings under the Company's bank credit facility. The Company concurrently
entered into a 20-year lease agreement with the purchaser.
NOTE 6--LEASES
All of the Company's stores are currently operated in facilities leased by
the Company, except one which is operated in a building owned by the Company,
subject to a ground lease, which expires in 2015. The Company also leases some
of its equipment and its office facility. Generally, store leases provide for
minimum rentals (which include payment of taxes and insurance in some cases) and
contingent rentals (which are based upon a percentage of sales in excess of a
stipulated minimum). The majority of lease agreements cover periods from 20 to
30 years, including three to six renewal options of five years each. Capital
lease obligations were revalued under Fresh-Start Reporting. (Note 2.)
Operating lease rental expense is summarized as follows:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Minimum rentals............................................................ $ 6,307 $ 7,095 $ 7,300
Contingent rentals......................................................... 616 660 496
Sublease rentals........................................................... (999) (959) (803)
--------- --------- ---------
$ 5,924 $ 6,796 $ 6,993
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company incurred capital lease contingent rental expense of
approximately $0.1 million and received sublease rentals of approximately $0.4
million during each of Fiscal 1997, Fiscal 1996 and Fiscal 1995. Capital lease
interest expense was $2.0 million, $2.1 million, and $2.0 million during Fiscal
1997, Fiscal 1996, and Fiscal 1995, respectively.
F-19
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 6--LEASES (CONTINUED)
Future minimum rental payments under capital and operating leases assumed in
accordance with the Plan are summarized as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
For the fiscal years ending:
1999............................................................................ $ 2,943 $ 6,596
2000............................................................................ 2,958 5,890
2001............................................................................ 2,850 5,101
2002............................................................................ 2,792 4,743
2003............................................................................ 1,984 4,132
Thereafter.................................................................... 11,891 21,475
--------- -----------
Total minimum rental payments............................................... 25,418 $ 47,937
-----------
-----------
Less amounts representing interest................................................ 10,128
---------
Present value of obligations...................................................... $ 15,290
---------
---------
</TABLE>
In addition, the Company guarantees an operating lease of a third party that
operates the Company's distribution center in Kent, Washington. The current
lease expires in February 2001 with one renewal option for a term of three
years. Minimum monthly lease payments guaranteed by the Company pursuant to such
lease approximate $21,000 per month.
NOTE 7--DEBT
REVOLVER AND TERM LOAN
The Company entered into the Amended and Restated Debtor-in-Possession and
Exit Financing Loan Agreement, dated as of September 26, 1997 (the "Loan
Agreement"), between the Company and BankBoston, pursuant to which BankBoston
provides Lamonts with (i) a revolving line of credit (the "Revolver") with a
maximum borrowing capacity of $32 million; and (ii) a term loan in the amount of
$10 million (the "Term Loan"). The Term Loan is guaranteed by the Surety.
Pursuant to, and on the terms and conditions set forth in the Loan Agreement,
BankBoston is obligated to make loans and advances to Lamonts on a revolving
basis, and to issue letters of credit to or for the account of Lamonts (with a
sublimit for letters of credit of $3 million) in an aggregate outstanding amount
(net of repayments) not to exceed the lesser of $32 million and a borrowing base
approximately equal to 65% (subject to adjustment and reserves as specified in
the Loan Agreement) of the book value of the Company's first quality finished
goods inventory held for sale. The Term Loan was fully disbursed during the
Chapter 11 case and no further amounts may be borrowed thereunder.
The Revolver will mature on January 31, 2000, subject to earlier maturity
(including, as a result of acceleration, mandatory prepayment or otherwise) of
the Term Loan. The Term Loan will mature on December 26, 1999, subject to
earlier maturity (including, as a result of acceleration, mandatory prepayment
or otherwise) of the Revolver. Lamonts will have the option to extend the
maturity date of the Term Loan for two additional one-year periods (subject to
earlier maturity upon maturity of the Revolver), on the terms and conditions set
forth in the Loan Agreement and upon payment of a fee equal to
F-20
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 7--DEBT (CONTINUED)
approximately 5% of the outstanding amount of the Term Loan on the relevant
extension date. There are no extension options in respect of the Revolver.
Lamonts is required to make principal payments on the Term Loan of $25,000
per month commencing on October 31, 1998. A substantial portion of the principal
amount of the Term Loan is scheduled to be outstanding on the maturity date of
the Term Loan.
Lamonts' borrowings under both the Revolver and the Term Loan bear interest
at a floating rate of 1.50% above the annual interest rate announced from time
to time by BankBoston as its "base rate" (the "Base Rate") or, at Lamonts'
option, at 2.75% above the rate (fully adjusted for applicable reserve
requirements) based on the rate offered dollar deposits in the interbank
eurodollar market (the "Eurodollar Rate"). The rates are subject to adjustment
on June 1, 1998, and annually thereafter, based upon Lamonts' financial results
in accordance with the criteria set forth in the Loan Agreement. The default
rate of interest under the Revolver is 3% above the Base Rate. The default rate
of interest under the Term Loan prior to maturity is 7% above the non-default
rate otherwise applicable, and after maturity is 7% above the non-default rate
applicable to loans measured by the Base Rate. For Fiscal 1997 and Fiscal 1996,
the weighted average interest rate for Base Rate loans was 10.0% and 9.75%,
respectively, and the weighted average interest rate for Eurodollar Rate loans
was 8.45% and 8.25%, respectively.
A facility fee in respect of the Revolver in the amount of $336,000 was paid
on the Plan Effective Date and an additional fee in the amount of $224,000 is
payable on December 31, 1998. A letter of credit fee of 1.75% per annum will be
charged quarterly in arrears based on the average daily maximum aggregate amount
available to be drawn by beneficiaries under all outstanding letters of credit.
A commitment fee in the amount of 0.5% per annum will be payable monthly in
arrears based on the average daily unused amount of the maximum Revolver
facility. Both the letter of credit fee and the commitment fee are subject to
adjustment on June 1, 1998, and annually thereafter, based upon Lamonts'
financial results in accordance with the criteria set forth in the Loan
Agreement. In addition to a closing fee in the amount of $500,000 that Lamonts
paid at the closing of the Term Loan on September 26, 1997, an additional
closing fee in respect of the Term Loan, calculated at the rate of 5% per annum
applied to the average daily principal balance of the Term Loan outstanding
after September 26, 1998, is payable at the times and in the manner set forth in
the Loan Agreement. If the options to extend the maturity date of the Term Loan
are exercised, extension fees calculated at the rate of 5% per annum applied to
the average daily principal balance of the Term Loan outstanding during the
applicable extension period will be payable at the times and in the manner set
forth in the Loan Agreement.
Advances by BankBoston under the BankBoston Facility are secured by all real
and personal property, rights, and assets of Lamonts, including, without
limitation, real estate leasehold interests, but excluding any proceeds of
bankruptcy causes of action under sections 544 through 550 of the Bankruptcy
Code and proceeds from a special account established for unpaid professional
fees.
The BankBoston Facility required that, as of the Plan Effective Date, in
partial exchange for the BankBoston administrative claim against the Company's
Chapter 11 estate, and in consideration for the guaranty of the Term Loan, the
Surety received (i) 228,639 Class C Warrants exercisable for the purchase of an
aggregate of 3,429,585 shares of Common Stock, and (ii) 10 shares of Class B
Common Stock, representing all of the authorized and outstanding Class B Common
Stock. (See Note 12.)
F-21
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 7--DEBT (CONTINUED)
The Loan Agreement contains, among other things, certain covenants
restricting (a) the incurrence of indebtedness, other than (i) indebtedness
under the BankBoston Facility, (ii) current liabilities not incurred through the
borrowing of money, (iii) indebtedness in respect of taxes or other governmental
charges not yet due and payable or being contested in good faith by appropriate
proceeding, (iv) scheduled indebtedness not contemplated as being discharged by
the Plan, (v) certain purchase money indebtedness limited to 50% of permitted
capital expenditures, and (vi) unsecured indebtedness in respect of the limited
recourse arrangements under a contractual arrangement relating to the Company's
charge card between the Company and Alliance Data Systems, limited to 50% of the
amount of cardholders' bad debts; (b) the creation of liens, other than (i)
liens securing the obligations under the BankBoston Facility, (ii) scheduled
liens not contemplated as being discharged by the Plan, (iii) liens securing
taxes or other governmental charges not yet due, (iv) deposits or pledges made
in connection with social security obligations, (v) mechanics and similar liens
less than 120 days old in respect of obligations not yet due, (vi) immaterial
easements and similar encumbrances, (vii) statutory or common law landlord's
liens, and (viii) purchase money security interests to the extent the
indebtedness is permitted under the Loan Agreement; (c) the payment of
dividends, other than (i) dividends payable solely in shares of Common Stock,
(ii) distributions by a wholly-owned subsidiary of the Company to the Company
and, (iii) dividends and/or distributions contemplated by the Plan; (d) mergers,
consolidations or dispositions of assets, other than (i) sales of inventory in
the ordinary course, (ii) dispositions of leasehold improvements in connection
with permitted store closures, and (iii) dispositions of obsolete fixtures and
equipment not to exceed $100,000 in any 12 month period; (e) guarantees with
respect to indebtedness of other persons, other than the guarantee of lease
payments in respect of the Company's distribution center in Kent, Washington;
and (f) capital expenditures, other than capital expenditures of $2,500,000,
$6,500,000, $5,500,000 and $1,000,000 during Fiscal 1997, Fiscal 1998, Fiscal
1999 and the period from February 6, 2000 to February 27, 2000, respectively. In
addition to the foregoing, the Company is required to maintain certain inventory
levels within a range of minimum and maximum book values and a debt service
coverage ratio, in each case measured on a quarterly basis as set forth in the
Loan Agreement. The Company is currently in compliance with all such covenants.
Any necessary waivers of or amendments to such covenants require, with
certain exceptions specified in the BankBoston Facility, the concurrence of both
BankBoston and the Surety. The Loan Agreement contains customary Events of
Default for credit facilities of its type. The Surety has the right, under
specified circumstances after a default, to direct BankBoston to declare
Lamonts' obligations under the BankBoston Facility immediately due and payable
and to cause the exercise of certain of BankBoston's rights and remedies under
the Loan Agreement.
As of January 31, 1998, the Company had $19.0 million of borrowings
outstanding under the Revolver (with additional borrowing capacity thereunder of
$4.3 million) and $10.0 million outstanding under the Term Loan.
To hedge the interest rate exposure from variable rate loans under the
BankBoston Facility, on March 24, 1998, the Company entered into a forward
interest rate swap letter agreement ("Swap Agreement") with BankBoston. The Swap
Agreement is for a fixed rate of 5.73% plus the margin from time to time
applicable to the Eurodollar Loans on a notional amount of $20 million for a
period of two years beginning March 25, 1998. BankBoston has the right to
terminate the Swap Agreement on March 23, 1999 upon five days prior notice.
F-22
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 7--DEBT (CONTINUED)
CERTAIN DEFERRED PRIORITY TAX OBLIGATIONS
Deferred priority tax obligations consist of $0.7 million (of which
approximately $0.3 million is included in current maturities of long-term debt)
in tax claims which were entitled to priority under the Bankruptcy Code. The
holders of these certain deferred priority tax claims will receive deferred cash
payments in principal amounts equal in the aggregate to the amount of such
claims over a period not exceeding six years from the date of assessment of the
tax on which the claim is based. The deferred cash payments are payable in
quarterly installments beginning April 30, 1998 through October 31, 2000,
together with interest at the prevailing statutory rates.
DEFERRED CURE PAYMENTS
Certain landlords agreed to accept approximately $0.2 million (of which
approximately $0.1 million is included in current maturities of long-term debt)
of deferred cure payments of lease arrearages required under the Plan subsequent
to the Plan Effective Date. The deferred cash payments, including principal plus
simple interest at the rate of 8% per annum, will be paid in equal principal
amounts beginning January 31, 1998 through October 31, 2000.
Maturities of long-term debt obligations are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS)
--------------------
<S> <C>
For fiscal years ending:
1999........................................................ $ 403
2000........................................................ 10,253
2001........................................................ 283
-------
$ 10,939
-------
-------
</TABLE>
LETTERS OF CREDIT
At January 31, 1998, the Company had no outstanding trade or stand-by
letters of credit.
NOTE 8--STORE CLOSURE COSTS
In January 1996, the Company received permission from the Bankruptcy Court
to close an underperforming store and the Company conducted a
going-out-of-business sale at this store through March 1996. The Company owned
the building subject to a ground lease and attempted to market the building. The
Company was unable to sell the building and, as a result, ownership of the
building reverted to the owner of the underlying land. The write-off of the net
book value of the building and leasehold improvements was included in the $3.0
million charge to reorganization expense recorded in Fiscal 1995 in connection
with the closure of this store. In October 1996, the Company received approval
by the Court to close four additional underperforming stores. The Company
conducted going-out-of-business sales at those stores through December 1996.
During Fiscal 1996, $3.1 million was charged to reorganization
F-23
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 8--STORE CLOSURE COSTS (CONTINUED)
expense in connection with the closure of these stores. There were no store
closure costs in Fiscal 1997. Store closure costs for Fiscal 1996 and Fiscal
1995 are as follows:
<TABLE>
<CAPTION>
STORE CLOSURE COSTS
--------------------
FISCAL FISCAL
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Write-off of property and equipment, net of obligations under capital
leases................................................................... $ -- $ 2,362
Adjustments to inventory carrying values................................... 1,866 450
Lease termination costs.................................................... 1,036 --
Other...................................................................... 186 238
--------- ---------
$ 3,088 $ 3,050
--------- ---------
--------- ---------
Amounts charged to reserve................................................. $ 5,292 $ 3,247
--------- ---------
--------- ---------
</TABLE>
Revenues associated with the closed stores totaled $13.9 million and $16.1
million in Fiscal 1996 and Fiscal 1995, respectively. Operating income (losses)
incurred from these stores, excluding the allocation of corporate expenses,
interest and reorganization expenses, were $1.4 million and $(0.9) million in
Fiscal 1996 and Fiscal 1995, respectively.
NOTE 9--INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Under SFAS No. 109, deferred tax assets and liabilities are recognized on
temporary differences between the financial statement and tax bases of assets
and liabilities using applicable enacted tax rates.
The Company has recorded a valuation allowance against net deferred tax
assets as the Company could not conclude that it was more likely than not that
the tax benefits from temporary differences and net operating loss carryforwards
would be realized. In subsequent periods, the Company may reduce the valuation
allowance, provided that the possibility of utilization of the deferred tax
assets is more likely than not. As defined by SFAS No. 109, any such reduction
in the valuation allowance in the near future will result in a corresponding
addition to paid-in-capital.
F-24
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 9--INCOME TAXES (CONTINUED)
Significant components of the Company's deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred income tax assets:
Net operating loss carryovers..................................... $ 13,909 $ 34,366
Accrued payroll and related costs................................. 1,190 954
Leasehold interests............................................... 889 2,667
Store closure expenses............................................ 4,731 5,209
Other............................................................. 2,043 2,418
Valuation allowance............................................... (20,716) (44,448)
----------- -----------
Total deferred income tax assets.................................... 2,046 1,166
----------- -----------
Deferred income tax liabilities:
Inventory......................................................... (576) (228)
Property and equipment............................................ (1,470) (938)
----------- -----------
Total deferred income tax liabilities............................... (2,046) (1,166)
----------- -----------
Net deferred income taxes........................................... $ 0 $ 0
----------- -----------
----------- -----------
</TABLE>
As of January 31, 1998, the Company had $40.9 million and $32.4 million of
regular tax and alternative minimum tax Net Operating Losses ("NOL"),
respectively, which will expire in years 2005 through 2013, and may be limited
under section 382, as discussed below.
The Company underwent an ownership change in reorganization under Chapter 11
which was approved by the Bankruptcy Court on December 18, 1997. Section 382 of
the Internal Revenue Code limits the use of NOLs when an ownership change
occurs. The annual limitation under section 382 with respect to such ownership
change could significantly limit the Company's ability to use it NOLs to offset
future taxable income. Section 382(l)(5) provides a more favorable treatment as
to the future utilization of NOLs for a corporation that is in a Title 11 case
when the ownership change occurs.
Under section 382(l)(5), if the Company experiences another ownership change
within two years of the first ownership change date, the Company will lose its
NOL carryforwards thereafter. For section 382 purposes, the Company would
experience an ownership change if one or more 5% shareholders increase their
interests in the aggregate by more than 50% of the total of the Company's Common
Stock.
NOTE 10--FAIR VALUE OF FINANCIAL INSTRUMENTS
In accordance with Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments", the following
assumptions were used by management of the Company in estimating its fair value
disclosures for the Company's financial instruments:
CASH AND RESTRICTED CASH
The carrying amount for cash approximates fair value because of the short
maturity of amounts therein.
F-25
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 10--FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
REVOLVER AND TERM LOAN
The fair value is estimated based on current rates offered for similar debt.
NOTE 11--COMMITMENTS, CONTINGENCIES AND OTHER
The Company is involved in various matters of litigation arising in the
ordinary course of business. In the opinion of management, the ultimate outcome
of all such matters should not have a material adverse effect on the financial
position of the Company, but, if decided adversely to the Company, could have a
material effect upon the Company's operating results during the period in which
the litigation is resolved.
In March 1995, the Company brought an action against one of its landlords,
Hickel Investment Company ("Hickel"), to recover overpayments of common area
maintenance and other charges made to Hickel. On February 20, 1998, the United
States District Court for the District of Alaska entered a final judgment
against Hickel for an amount in excess of $1.8 million. Hickel has since
appealed the judgment and posted a bond in the amount of $2.1 million to obtain
a stay pending appeal. There can be no assurance that the Company will be
successful on such appeal. As a result, no amounts related to this judgment have
been recorded in the consolidated financial statements.
CREDIT CARD PLAN AGREEMENT
The Company's proprietary charge card, administered and owned by Alliance
Data Systems ("ADS") (which purchased the charge accounts from National City
Bank of Columbus), provides for the option of paying in full within 30 days of
the billed date with no finance charge or with revolving credit terms. Terms of
the short-term revolving charge accounts require customers to make minimum
monthly payments in accordance with prescribed schedules. Through a contractual
arrangement, as amended (the "Alliance Agreement"), ADS owns the receivables
generated from purchases made by customers using the Lamonts charge card.
The Alliance Agreement provides that the Company will be charged a discount
fee of 1.95% of Net Sales, as that term is defined in the Alliance Agreement.
Additionally, the Alliance Agreement provides for a supplemental discount fee
equal to one-tenth of one percent (0.1%) of Net Sales for each one million
dollar increment that Net Sales for a subject year are less than $48.0 million
(the "Minimum Level") up to a maximum fee of 3% of the Net Sales for the subject
year. ADS waived the supplemental discount fee for Fiscal 1997. In the event of
store closures, the Alliance Agreement provides that the Minimum Level may be
decreased. Additionally, as of March 1, 1996, the Company is no longer
responsible for any net bad debt expense. The Alliance Agreement may be
terminated by either party after June 22, 1999 upon 180 days prior written
notice. The Company paid National City Bank of Columbus and ADS $0.1 million for
bad debt expense and $0.9 million in fees during Fiscal 1996. In Fiscal 1997,
discount fees totaled approximately $0.9 million.
YEAR 2000
The Company has established a compliance program to modify or replace
existing information technology systems so that such systems will not generate
invalid or incorrect results in connection with processing year dates for the
year 2000 and later years. The Company believes that it will achieve Year 2000
compliance by the middle of the 52 weeks ending January 29, 2000 ("Fiscal 1999")
and does not
F-26
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 11--COMMITMENTS, CONTINGENCIES AND OTHER (CONTINUED)
currently anticipate any material disruption in its operations as a result of
any failure by the Company to achieve compliance. The Company spent
approximately $324,000 in Fiscal 1997 and estimates it will spend approximately
$500,000 during the 52 weeks ending January 30, 1999 ("Fiscal 1998") and
$150,000 in Fiscal 1999 to make its computer systems Year 2000 compliant.
Additionally, suppliers of the Company and other third parties exchange
information with the Company or rely on the Company's merchandising systems for
certain sales and stock information. The Company currently does not have any
information concerning the compliance status of its suppliers or such other
third parties. However, because third-party failures could have a material
adverse impact on the Company's ability to conduct business, confirmations are
being requested from the Company's major suppliers to certify that plans are
being developed to address the Year 2000 issues.
NOTE 12--STOCKHOLDERS' EQUITY
As provided under the Plan, the authorized capital stock of the Company is
50,000,000 shares and consists of 39,999,990 shares of Common Stock, 10 shares
of Class B Common Stock, and 10,000,000 shares of preferred stock, par value
$.01 per share (the "Preferred Stock").
All equity interests existing immediately prior to consummation of the Plan
were canceled and/or rejected pursuant to the Plan, and the accumulated deficit
relating to such equity interests was eliminated under Fresh-Start Reporting.
COMMON STOCK
Each share of Common Stock entitles the holder thereof to one vote on all
matters on which holders are permitted to vote. No stockholder has any
preemptive right or other similar right to purchase or subscribe for any
additional securities issued by the Company, and no stockholder has any right to
convert Common Stock into other securities. No shares of Common Stock are
subject to redemption or to any sinking fund provisions. All of the outstanding
shares of Common Stock are fully paid and nonassessable.
Subject to the rights of holders of Preferred Stock, if any, the holders of
shares of Common Stock are entitled to dividends when, as and if declared by the
Board of Directors from funds legally available therefor and, upon liquidation,
to a pro rata share in any distribution to stockholders. The Company does not
anticipate declaring or paying any dividends on the Common Stock in the
foreseeable future.
CLASS B COMMON STOCK
Except as set forth in the following paragraphs, the holders of Class B
Common Stock shall enjoy the same rights, privileges and preferences and be
subject to the same restrictions as the holders of the Common Stock.
Upon the affirmative vote of not less than three-fourths of the then
outstanding shares of the Class B Common Stock, (a) during the continuance of
any event described in Section 11(b) of the Loan Agreement (each, an "Event of
Default"), including, without limitation, nonpayment of principal and/or
interest, covenant defaults, breach of representations and warranties and
certain events of bankruptcy, in each case subject to applicable notice and cure
periods, and/or (b) upon acceleration of any of the loans under the Loan
Agreement and until such acceleration is rescinded or all amounts due under such
accelerated loan
F-27
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED)
are paid in full, the Company shall (i) file a voluntary petition under Chapter
11 of the Bankruptcy Code and (ii) oppose any motion to dismiss the resulting
bankruptcy case. Such right of the holders of the Class B Common Stock will
terminate upon satisfaction in full of all of the Company's obligations in
respect of the Term Loan, whereupon each share of Class B Common Stock will
automatically convert into one share of Common Stock. Such right of the holders
of the Class B Common Stock shall be coextensive with the right of the Board of
Directors at any time to cause such a filing to occur, and such right shall not
restrict the ability of the Board of Directors to otherwise cause the Company to
file a voluntary petition under the Bankruptcy Code or to oppose any motion to
dismiss any bankruptcy case. Subject to certain exceptions set forth in the
Company's Second Restated Certificate of Incorporation, shares of Class B Common
Stock are non-transferable.
As required under the BankBoston Facility, in consideration of the Surety's
guaranty of the Term Loan, on the Plan Effective Date the Surety was issued 10
shares of Class B Common Stock representing all of the authorized and
outstanding Class B Common Stock.
PREFERRED STOCK
The Second Restated Certificate of Incorporation of the Company provides for
the issuance of 10,000,000 shares of Preferred Stock. The Preferred Stock may be
issued in one or more classes or series, and the Board of Directors is
authorized to fix for each such class or series such voting powers, full or
limited, or no voting powers, and such distinctive designations, preferences and
relative, participating, optional or other special rights and such
qualifications, limitations or restrictions thereof. Because the Board of
Directors has the power to establish the preferences and rights attributable to
the Preferred Stock, it may afford the holders of any Preferred Stock
preferences, powers and rights (including voting rights) senior to the rights of
the holders of Common Stock. No shares of Preferred Stock are currently
outstanding.
WARRANTS
Pursuant to the Plan, all outstanding warrants to purchase Old Common Stock
were rejected as of the Plan Effective Date.
CLASS A WARRANTS AND CLASS B WARRANTS
Class A Warrants to purchase an aggregate of 2,203,320 shares of Common
Stock and Class B Warrants to purchase an aggregate of 800,237 shares of Common
Stock have been or will be issued by the Company in accordance with the Plan
pursuant to a Warrant Agreement (the "Class A/B Warrant Agreement") entered into
between the Company and Norwest Bank Minnesota, N.A., as Warrant Agent. The
Class A Warrants are exercisable, in whole or in part, on the first date on
which the Aggregate Equity Trading Value (as defined below) equals or exceeds
$20 million and, if not previously exercised, expire on January 31, 2008. The
Class B Warrants are exercisable, in whole or in part, on the first date on
which the Aggregate Equity Trading Value equals or exceeds $25 million and, if
not previously exercised, expire on January 31, 2008. The exercise price for the
Class A Warrants and the Class B Warrants is $.01 per share. The number and type
of securities issuable upon exercise of the Class A Warrants and the Class B
Warrants and the exercise price payable upon exercise thereof are subject to
customary antidilution protection as described in the Class A/B Warrant
Agreement.
F-28
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED)
CLASS C WARRANTS
254,043 Class C Warrants to purchase an aggregate of 3,810,645 shares of
Common Stock were issued by the Company in accordance with the Plan pursuant to
several Warrant Agreements (collectively, the "Class C Warrant Agreements")
entered into between the Company and the initial holders of the Class C
Warrants, and were distributed as follows: (i) 228,639 Class C Warrants to
purchase an aggregate of 3,429,585 shares of Common Stock were distributed to
the Surety as required under the BankBoston Facility and in consideration of the
Surety's guaranty of the Term Loan and in partial exchange for the Surety's
administrative claim against the Company's Chapter 11 estate; and (ii) 25,404
Class C Warrants to purchase an aggregate of 381,060 shares of Common Stock were
distributed to the holders of Stock Options issued on the Plan Effective Date.
The Class C Warrants are exercisable, in whole or in part, as follows: (a) at
any time until January 31, 2002, the Class C Warrants are exercisable for an
aggregate of 3,556,602 shares of Common Stock at an exercise price of $1.25 per
share; and (b) at any time after the first date on which the Aggregate Equity
Trading Value equals or exceeds $25 million and until January 31, 2008, the
Class C Warrants are exercisable for an aggregate of 254,043 additional shares
of Common Stock at an exercise price of $.01 per share; provided that the
portion of each Class C Warrant otherwise exercisable after the first date on
which the Aggregate Equity Trading Value equals or exceeds $25 million shall not
be exercisable by any holder thereof unless such holder has exercised in full
such holder's portion of such Class C Warrant that is currently exercisable. The
number and type of securities issuable upon exercise of the Class C Warrants are
subject to customary antidilution protection as described in the Class C Warrant
Agreements.
GORDIAN WARRANTS
As part of the compensation to Gordian for investment banking services
rendered to the Company during the Company's Chapter 11 case, Gordian will be
issued, on the 120th calendar day following the Plan Effective Date, the Gordian
Warrants to purchase an aggregate number of shares of Common Stock equal to
200,000 divided by the Normalized Share Price (as defined below). The Gordian
Warrants are immediately exercisable upon issuance thereof and, if not
previously exercised, expire five (5) years from their issuance date. The
exercise price for the Gordian Warrants is the Normalized Share Price per share.
The "Normalized Share Price" is equal to the average of the "Closing Prices" of
the Common Stock for the 45 trading days commencing on the 45th calendar day
next following the Plan Effective Date. For purposes of determining the
Normalized Share Price, the Closing Price means (i) the closing sales price per
share on the national securities exchange on which the Common Stock is
principally traded, or (ii) if the shares are then traded in an over-the-counter
market, the average of the closing bid and asked prices on such market, or (iii)
if the shares are not then traded on a national securities exchange or in an
over-the-counter market, then such value as the Board of Directors of the
Company shall in good faith reasonably determine. If Gordian disagrees with such
determination, then an investment banking firm shall be mutually agreed upon,
engaged and compensated by the Company for a definitive determination of the
Normalized Share Price.
STOCK OPTIONS
The Stock Options granted pursuant to the Plan are exercisable for the
purchase of 1,333,728 shares of Common Stock and consist of: (i) Base Options
exercisable for the purchase of 1,000,000 shares of
F-29
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED)
Common Stock with an exercise price of $1.00 per share; (ii) to prevent dilution
resulting from the issuance of the Class A Warrants, Protective A Options
exercisable for the purchase of an additional 244,813 shares of Common Stock
with an exercise price of $0.01 per share, exercisable only on or after the date
on which the Class A Warrants become exercisable; and (iii) to prevent dilution
resulting from the issuance of the Class B Warrants, Protective B Options
exercisable for the purchase of an additional 88,915 shares of Common Stock with
an exercise price of $0.01 per share, exercisable only on or after the date on
which the Class B Warrants become exercisable. In addition, to prevent dilution
resulting from the issuance of the Class C Warrants to the Surety, holders of
such Stock Options were issued, on a pro rata basis and with the same vesting
schedule as each holder's respective Stock Options, Class C Warrants exercisable
for the purchase of an aggregate of 381,060 shares of Common Stock (355,656
shares with an exercise price of $1.25 per share and 25,404 shares with an
exercise price of $.01 per share).
The number of Protective Options that may be exercised by any holder shall
bear the same proportion (based on the total number of Protective Options
granted to such holder) to the number of Base Options that have been exercised
by such holder (based on the total number of Base Options granted to such
holder).
The Stock Options and the Class C Warrants are subject to adjustment to
prevent dilution upon the occurrence of certain specified events, excluding
exercise of the Stock Options, the Class A Warrants, the Class B Warrants, the
Class C Warrants, or the Gordian Warrants. The Stock Options granted on January
31, 1998 have a term of 10 years and vest as follows: 50% on the date of grant;
and 25% on each anniversary of the date of grant. The Stock Options are governed
by the Lamonts Apparel, Inc. 1998 Stock Option Plan (the "Stock Option Plan"),
and the Class C Warrants issued in conjunction therewith are governed by a
warrant agreement in substantially the form of the Class C Warrant Agreement
between the Company and the Surety.
Under the terms of the Stock Option Plan, the Company has available, in
addition to the shares of Common Stock reserved for issuance upon exercise of
the Stock Options granted on the Plan Effective Date, an additional 375,000
shares (subject to adjustment to prevent dilution upon certain events, excluding
any exercise of Class A Warrants, Class B Warrants, Class C Warrants, or Stock
Options) of Common Stock for possible grants of additional stock options from
time to time after the Plan Effective Date if, and to the extent, a committee
appointed by the Board of Directors ("Compensation Committee"), may determine
that such additional grants would be in the best interest of the Company. On
February 26, 1998, the Compensation Committee reserved 335,500 of the 375,000
shares of Common Stock available for issuance upon exercise of Stock Options
granted by the Compensation Committee on such date to certain executive officers
of the Company, the disinterested members of the Board, and certain other senior
and middle level managers of the Company. Such Stock Options have a per share
exercise price of $1.00, a term of 10 years and vest as follows: 25% on the date
of grant; and 25% on each annual anniversary of the date of grant.
The following summarizes the Stock Options granted under the Stock Option
Plan during Fiscal 1997:
<TABLE>
<S> <C>
Granted.................................................. 1,333,728
Exercised................................................ 0
---------
Balance, January 31, 1998................................ 1,333,728
---------
---------
</TABLE>
F-30
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED)
The Company has elected to follow Accounting Principles Board No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") in accounting for its
employee stock options. Under APB No. 25, because the exercise price of the
Company's employee options is greater than the market price of the underlying
stock on the date of grant, no compensation expense is recognized in the
consolidated financial statements.
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). This information is required to be
determined as if the Company has accounted for its employee stock options
granted subsequent to January 31, 1995, under the fair value method of that
statement.
The fair value of the options was estimated at the date of grant using the
Black-Scholes options pricing model with the following weighted average
assumptions for Fiscal 1997: risk free interest rate of 5.7%; a stock price
volatility factor of 45%; and expected option life of 10 years following
vesting; and no dividend during the expected term.
For purposes of pro forma disclosures required by SFAS No. 123, the
Company's income and earnings per share ("EPS") would have reflected
compensation cost determined based on the estimated fair value of the options at
the date of grant. There are no pro forma adjustments for Fiscal 1996 and Fiscal
1995 because no options were granted during these periods. The Company's pro
forma information is as follows:
Pro Forma Income and EPS from Operations Before Extraordinary Item:
<TABLE>
<CAPTION>
FISCAL 1997
-------------------
(DOLLARS IN
THOUSANDS
EXCEPT SHARE DATA)
<S> <C>
Income from operations before extraordinary item:
As reported.................................................. $ 53,546
Pro forma net income......................................... $ 52,952
Basic and Diluted EPS from operations before extraordinary
item:
As reported.................................................. $ 3.00
Pro forma net income per share............................... $ 2.96
</TABLE>
F-31
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 12--STOCKHOLDERS' EQUITY (CONTINUED)
1992 STOCK OPTION PLAN
Pursuant to the Plan, the Company's previous Nonstatutory Stock Option Plan
(the "1992 Stock Option Plan") and all employee stock options outstanding under
the 1992 Stock Option Plan were rejected on the Plan Effective Date. The
following table summarizes the 1992 Stock Option Plan activity prior to the
Effective Date:
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS
-----------
<S> <C>
Balance, January 28, 1995.............................................. 374,740
Granted.............................................................. 0
Exercised............................................................ (11,774)
Canceled............................................................. (43,902)
-----------
Balance, February 3, 1996.............................................. 319,064
Granted.............................................................. 0
Exercised............................................................ (504)
Canceled............................................................. (43,109)
-----------
Balance, February 1, 1997.............................................. 275,451
Rejection of options................................................. (275,451)
-----------
Balance, January 31, 1998.............................................. 0
-----------
-----------
</TABLE>
NOTE 13 - RELATED PARTY TRANSACTIONS
In connection with a recapitalization of the Company in October 1992 (the
"Recapitalization"), pursuant to which, among other things, the Company issued
an aggregate of $75 million in principal amount of its Old 10 1/4% Notes,
certain of the Company's post-Recapitalization stockholders, representing an
aggregate of approximately 8,717,000 shares or 98% of the Old Common Stock
outstanding immediately following the Recapitalization, entered into that
certain Voting Agreement dated as of October 30, 1992 (the "Voting Agreement").
The Voting Agreement provided, among other things, that (i) Apollo Retail
Partners ("ARP"), a holder of greater than 5% of the Old Common Stock, could
designate six persons to the Board of Directors, and (ii) a majority of certain
former holders of the Company's 13 1/2% Senior Subordinated Notes which were due
February 1995 (the "Old 13 1/2% Notes"), which notes were exchanged for Old
Common Stock pursuant to the Recapitalization, could designate two persons to
the Board of Directors. Lamonts' obligations under the Voting Agreement were
rejected as of the Plan Effective Date.
In connection with the Recapitalization, the parties to the agreement
effecting the Recapitalization (and/or their permitted assignees) entered into
an equity registration rights agreement and a debt registration rights
agreement. Under certain circumstances, the holders of at least 10% of the
aggregate principal amount of the then outstanding Securities (as defined
therein) covered by such agreements could exercise up to two demand
registrations with respect to such Securities. The Company was required to pay
all expenses (other than underwriting discounts and commissions) in connection
with all such registrations. The agreements also provided for certain piggyback
registration rights. The Old Common Stock held by ARP and Morgens Waterfall
Vintiadis & Company, Inc. ("Morgens"), a holder of greater than 5% of the
F-32
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 13 - RELATED PARTY TRANSACTIONS (CONTINUED)
Old Common Stock, was covered by the equity registration rights agreement
pursuant to its terms. These agreements were rejected as of the Plan Effective
Date.
As a holder of Old Common Stock, ARP received 76,951 shares of Common Stock
and 38,475 Class B Warrants under the Plan based on the amount of shares of Old
Common Stock beneficially owned by ARP. All of the Old Common Stock beneficially
owned by ARP was canceled on the Plan Effective Date.
As holders of Old Common Stock, certain affiliates of Morgens received
16,568 shares of Common Stock and 8,285 Class B Warrants under the Plan based on
the amount of Old Common Stock beneficially owned by Morgens as reflected in the
Schedule 13D filed by Morgens on February 13, 1998. All of the Old 13 1/2% Notes
and the Old Common Stock beneficially owned by Morgens were canceled on the Plan
Effective Date.
As a holder of Old Common Stock and of Old 10 1/4% Notes, Executive Life
Insurance Company of New York ("ELICNY"), a holder of greater than 5% of the Old
Common Stock, received 347,074 shares of Common Stock, 209,426 Class A Warrants
and 71,577 Class B Warrants pursuant to the first two distributions under the
Plan. ELICNY may receive additional shares of Common Stock, Class A Warrants and
Class B Warrants following the resolution of pending claims filed against the
Company during its Chapter 11 case. All of the Old 10 1/4% Notes and the Old
Common Stock beneficially owned by ELICNY were canceled on the Plan Effective
Date.
As a holder of Old Common Stock and of Old 10 1/4% Notes, certain investment
companies and accounts indirectly controlled by FMR Corp. (collectively
"Fidelity") received 2,925,142 shares of Common Stock, 1,810,380 Class A
Warrants and 581,184 Class B Warrants pursuant to the first two distributions
under the Plan. Fidelity may receive additional shares of Common Stock, Class A
Warrants and Class B Warrants following resolution of pending claims filed
against the Company during its Chapter 11 case. All of the Old 10 1/4% Notes and
the Old Common Stock beneficially owned by Fidelity were canceled on the Plan
Effective Date.
As required by the BankBoston Facility and in partial exchange for its
administrative claim, pursuant to the Plan, the Surety received (i) 228,639
Class C Warrants exercisable for the purchase of an aggregate of 3,429,585
shares of Common Stock and (ii) 10 shares of Class B Common Stock representing
all of the authorized and outstanding Class B Common Stock.
In connection with the Plan, the Company entered into a Grant of
Registration Rights in favor of Fidelity and the Surety, pursuant to which, and
subject to certain exceptions, the Company has agreed to file and cause to
remain effective a Registration Statement under the Securities Act of 1933, as
amended, covering certain of the securities distributed under the Plan until no
such securities are outstanding. The Company is required to pay all expenses
(other than underwriting discounts and commissions) in connection with all such
registrations. In addition, the agreement provides for certain "piggyback"
registration rights.
NOTE 14 - BENEFIT PLANS
PENSION PLAN
On January 1, 1986, the Company established the Lamonts Apparel, Inc.
Employees Retirement Trust (the "Pension Plan"). The Pension Plan is a
noncontributory defined benefit pension plan for employees of
F-33
<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 14 - BENEFIT PLANS (CONTINUED)
the Company who are not eligible for pension benefits from another pension plan
pursuant to collective bargaining agreements. Participant benefits are based on
years of service and compensation during later years of employment. It is the
Company's policy to make contributions to the Pension Plan in amounts which
comply with the minimum regulatory funding requirements. On February 26, 1998,
the Board approved an amendment to the Pension Plan which provides that,
effective April 1, 1998, benefits under the Pension Plan will cease to accrue
and prohibits the entry of any new participants. Participants that are not yet
vested will continue to accrue vesting service after April 1, 1998.
The following table sets forth the Company's funded plan status and amounts
recognized in the Company's consolidated balance sheets:
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
----------- ----------- -----------
(DOLLARS IN THOUSANDS, EXCEPT
PERCENTS)
<S> <C> <C> <C>
Actuarial present value of accumulated benefit obligations, Including
vested benefits of $7,215, $5,345 and $5,462 at January 31, 1998,
February 1, 1997, and February 3, 1996, respectively $ 7,428 $ 5,598 $ 5,651
----------- ----------- -----------
----------- ----------- -----------
Projected benefit obligation............................................... $ 8,422 $ 6,513 $ 6,639
Pension Plan assets at value, primarily money market funds and guaranteed
investment contracts 6,528 6,045 5,143
----------- ----------- -----------
Projected benefit obligation in excess of Pension Plan assets.............. 1,894 468 1,496
Unrecognized net loss from past experience different from that assumed..... -- (347) (1,238)
----------- ----------- -----------
Accrued pension cost....................................................... 1,894 121 258
Charge to equity to recognize minimum liability............................ -- -- 250
----------- ----------- -----------
Total accrued pension cost................................................. $ 1,894 $ 121 $ 508
----------- ----------- -----------
----------- ----------- -----------
Discount rate.............................................................. 7.00% 7.75% 7.25%
Rate of increase in future compensation levels............................. 3.5% 3.5% 3.5%
Expected long term rate of return on assets................................ 9.0% 9.0% 9.0%
</TABLE>
Amounts charged to expense under the Pension Plan were as follows:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost, benefits earned during the period.................. $ 336 $ 404 $ 414
Interest cost on projected benefit obligation.................... 527 461 483
Actual return on assets.......................................... (777) (635) (883)
Other, including deferred recognition of asset gain.............. 255 213 559
--------- --------- ---------
Net pension cost................................................. $ 341 $ 443 $ 573
--------- --------- ---------
--------- --------- ---------
</TABLE>
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<PAGE>
LAMONTS APPAREL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JANUARY 31, 1998
NOTE 14 - BENEFIT PLANS (CONTINUED)
During Fiscal 1995, a claim was filed against the Company by the Pension
Benefit Guaranty Corporation ("PBGC") in the amount of $2.8 million based upon
PBGC's assumption that one of the Company's qualified employee retirement plans
would be terminated. The Company believes that even if the plan were terminated,
unfunded plan benefit liabilities would not be material. The Company disputed
the claim. PBGC withdrew its claim without prejudice.
LAMONTS 401(k) PLAN
The Lamonts Apparel, Inc. Tax Relief Investments Protection Plan, as amended
and restated effective January 1, 1994 (the "401(k) Plan") provides participants
the opportunity to elect to defer an amount from 1% to 15% of their
compensation, in increments of 1%. Under the 401(k) Plan, the Company matches
contributions equal to 50% of each participant's deferred pay contributions
(such contribution not to exceed one percent of the participant's compensation).
Effective April 1, 1998, the Company increased its matching contribution to 50%
of the first 4% of each participant's deferred pay contributions. The Company
contributed $0.12 million, $0.14 million, and $0.15 million during Fiscal 1997,
Fiscal 1996, and Fiscal 1995, respectively.
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