-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, DW29BK/ESNaXbSxNefVWGziu4FD9mbF8KFaT+LuE7eogBl+Rse0+m1RqgZgGtJJb qvp5DiQEFm4LhwQ2vJ4uCQ== 0000950123-94-000387.txt : 19940218 0000950123-94-000387.hdr.sgml : 19940218 ACCESSION NUMBER: 0000950123-94-000387 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940217 ITEM INFORMATION: 7 FILED AS OF DATE: 19940217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANOVER DIRECT INC /DE// CENTRAL INDEX KEY: 0000320333 STANDARD INDUSTRIAL CLASSIFICATION: 5961 IRS NUMBER: 138053260 STATE OF INCORPORATION: NV FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 8-K SEC ACT: 34 SEC FILE NUMBER: 001-08056 FILM NUMBER: 94510496 BUSINESS ADDRESS: STREET 1: 1500 HARBOR BLVD CITY: WEEHAWKEN STATE: NJ ZIP: 07087 BUSINESS PHONE: 2018653800 FORMER COMPANY: FORMER CONFORMED NAME: HORN & HARDART CO /NV/ DATE OF NAME CHANGE: 19920703 8-K 1 8-K, HANOVER DIRECT, INC. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------------------- FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported) February 17, 1994 ----------------- HANOVER DIRECT, INC. ----------------------------------------------------- (Exact name of registrant as specified in its charter) 1-12082 ----------------------- (Commission File Number) Delaware 13-0853260 ------------------------------- ----------- (State or other jurisdiction (I.R.S. Employer of incorporation) identification number) 1500 Harbor Boulevard, Weehawken, New Jersey 07087 ----------------------- -------------------------- (Address of principal (Zip Code) executive offices) Registrant's telephone number, including area code (201) 865-3800 -------------- ------------------------------------------------------------ (Former name or former address, if changed since last report) 2 Item 7. Financial Statements and Exhibits. (a) Financial Statements of Businesses Acquired: (i) Audited consolidated balance sheets of Gump's, Inc. for the years ended February 27, 1993, February 29, 1992 and February 23, 1991, and the related consolidated statements of operations, stockholder's deficit and cash flows. (ii) Unaudited consolidated balance sheet of Gump's, Inc. as of May 29, 1993 and the related consolidated statements of operations and cash flows for the three month periods ended May 30, 1992 and May 29, 1993. (iii) Audited consolidated balance sheets of Company Store Holdings, Inc. and Subsidiaries (Debtors-in-Possession) as of August 1, 1992 and July 27, 1991, and the related consolidated statements of operations, shareholders' investment (deficit), and cash flows for each of the three years in the period ended August 1, 1992. (iv) Unaudited consolidated balance sheet of Company Store Holdings, Inc. and Subsidiaries (Debtors-in-Possession) as of July 3, 1993, and the related consolidated statements of operations and cash flows for the eleven months ended June 27, 1992 and July 3, 1993. (v) Audited balance sheets of Tweeds, Inc. as of January 31, 1993, February 2, 1992, June 30, 1991 and July 1, 1990, and the related statements of operations, stockholders' equity (deficit) and cash flows. (vi) Unaudited consolidated balance sheet of Tweeds, Inc. as of September 26, 1993, and the unaudited consolidated statements of operations and cash flows for the eight month periods ended September 27, 1992 and September 26, 1993. (b) Pro Forma Financial Information: Pro Forma Unaudited Consolidated Condensed Financial Information of the Registrant. - Unaudited Condensed Pro Forma Balance Sheet as of September 25, 1993. - Unaudited Condensed Pro Forma Income Statement for the Twelve Months Ended December 26, 1992. - Unaudited Condensed Pro Forma Income Statement for the Nine Months Ended September 25, 1993. -2- 3 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. HANOVER DIRECT, INC. --------------------- (Registrant) February 17, 1994 /s/ Wayne P. Garten ------------------------------------- Name: Wayne P. Garten Title: Executive Vice President & Chief Financial Officer -3- 4 Item 7(a)(i) Consolidated Financial Statements Gump's, Inc. Years ended February 27, 1993 and February 29, 1992 with Report of Independent Auditors 5 Gump's, Inc. Consolidated Financial Statements Years ended February 27, 1993 and February 29, 1992 CONTENTS Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . 1 Audited Consolidated Financial Statements Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . 2 Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . 4 Consolidated Statements of Stockholder's Deficit . . . . . . . . . . . . . . 5 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . 6 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . 8
6 REPORT OF INDEPENDENT AUDITORS Board of Directors Gump's, Inc. We have audited the accompanying consolidated balance sheets of Gump's, Inc. as of February 27, 1993 and February 29, 1992, and the related consolidated statements of operations, stockholder's deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gump's, Inc. at February 27, 1993 and February 29, 1992, and the consolidated results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that Gump's, Inc. will continue as a going concern. As more fully described in Note 1, the Company has incurred recurring operating losses, has a working capital deficiency, and has generated negative cash flows from operating activities. The Company has agreed to sell substantially all of the assets and certain liabilities to a third party. The amounts which may be realized from disposal of the remaining assets and the amounts required to settle the remaining liabilities are not presently determinable. The operations, current financial condition, and the asset purchase agreement of Gump's, Inc. raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. ERNST & YOUNG San Francisco, California June 11, 1993, except for Note 1 as to which the date is July 15, 1993 7 Gump's, Inc. Consolidated Balance Sheets
February 27, February 29, 1993 1992 --------------------- -------------------- (In thousands) ASSETS Current assets: Cash and cash equivalents $ 1,638 $ 2,897 Accounts receivable, less allowance of $107 in 1993 and $142 in 1992 2,475 3,232 Inventories 10,310 12,310 Prepaid expenses 1,241 1,222 Other receivables and other assets 855 1,045 ------------- -------------- Total current assets 16,519 20,706 Property and equipment: Leasehold improvements 5,710 5,801 Equipment under capital lease 1,041 1,047 Furniture and fixtures 869 889 Computer system 497 253 Construction in progress - 78 Automobiles 33 33 ------------- -------------- 8,150 8,101 Accumulated depreciation and amortization 2,883 1,939 ------------- -------------- 5,267 6,162 Goodwill 1,650 1,650 ------------- -------------- 1,650 1,650 ------------- -------------- Total assets $ 23,436 $ 28,518 ============= ==============
-2- 8 (in Thousands)
February 27, February 29, 1993 1992 ------------ ------------ LIABILITIES AND STOCKHOLDER'S DEFICIT Current liabilities: Notes payable to bank, in default $27,000 $27,000 Trade accounts payable 2,011 2,011 Accrued expenses 2,142 2,605 Accrued interest 3,342 883 Outstanding gift certificates and customer deposits 795 837 Accrued payroll and compensation 744 956 Current portion of capital lease obligations 200 180 Subordinated debt due to stockholder $ 7,935 $7,852 ------- ------ Total current liabilities 44,169 42,314 Capital lease obligations, less current portion 532 737 Long-term deferred rent 4,388 3,570 Other liabilities 2,078 939 Redeemable, convertible Preferred Stock, $100 par value 12,000 12,000 (120,000 shares authorized and issued) Stockholder's deficit: CommonStock, $.01 par value: Authorized shares--200,000; issued and outstanding shares-- 75,714 in 1993 and 78,214 in 1992 1 1 Additional paid-in capital 11,635 11,675 Retained-earnings deficit (51,367) (42,718) ------- ------ Total stockholder's deficit (39,731) (31,042) ------- ------- Total liabilities and stockholder's deficit $23,436 $28,518 ======= =======
See accompanying notes. -3- 9 Gump's, Inc. Consolidated Statements of Operations
FEBRUARY 27, FEBRUARY 29, 1993 1992 ----------------- ----------------- (In Thousands) Net sales $ 45,361 $ 53,715 Cost of sales 24,313 28,998 ----------- ----------- Gross margin 21,048 24,717 Direct selling expenses 21,783 24,651 ----------- ----------- (735) 66 General and administrative expenses 5,263 8,174 Interest expense 2,651 2,836 ----------- ----------- Loss before special items (8,649) (10,944) Special items: Writeoff of goodwill and deferred loan fees -- (20,245) Gain on sale of trademark and product development division -- 2,734 ------------- ------------ Net loss $(8,649) $(28,455) ============= ===========
See accompanying notes. -4- 10 Gump's, Inc. Consolidated Statements of Stockholder's Deficit (In Thousands)
Additional Retained- Common Paid-in Earnings Stock Capital Deficit Total ------- ---------- --------- ----- Balance at February 23, 1991 $ 1 $11,675 $(14,263) $(2,587) Net loss -- -- (28,455) (28,455) ------------------------------------------------------------------- Balance at February 29, 1992 1 11,675 (42,718) (31,042) Repurchase of management shares -- (40) -- (40) Net loss -- -- (8,649) (8,649) ------------------------------------------------------------------- Balance at February 27, 1993 $ 1 $11,635 $(51,367) $(39,731) ===================================================================
See accompanying notes. -5- 11 Gump's, Inc. Consolidated Statements of Cash Flows
February 27, February 29, 1993 1992 ------------ ------------ OPERATING ACTIVITIES Net loss $ (8,649) $ (28,455) Adjustments to reconcile net loss to net cash used by operating activities Depreciation 944 1,532 Provision for bad debts (34) 139 Intangible assets -- 20,164 Reimbursement of product development expenses -- (356) Gain on sale of trademark and product development -- (2,734) Changes in operating assets and liabilities: Accounts receivable 792 668 Inventories 2,001 7,682 Prepaid expenses, other receivables and other assets 170 191 Trade accounts payable 10 (2,593) Accrued expenses and other liabilities 3,780 (5,533) Other -- (4) ----------- ---------- Net cash flows used by operating activities (986) (9,299) INVESTING ACTIVITIES Purchases of property and equipment (628) (3,801) Proceeds from disposal of property and equipment 579 1,020 Proceeds from sale of trademark and product development -- 3,688 ----------- ----------- Net cash flows used by investing activities (49) 907 FINANCING ACTIVITIES Proceeds from notes payable to bank -- 12,993 Principal payments on notes payable to bank -- (8,400) Proceeds from subordinated debt due to stockholder -- 2,250 Principal payments on capital leases (184) (130) Proceeds from capital leases -- 1,047 Proceeds from landlord for tenant improvements -- 3,500 Redemption of Common Stock (40) -- ----------- -----------
-6- 12
FEBRUARY 27, FEBRUARY 29, 1993 1992 ----------------- ----------------- (In Thousands) Net cash flows provided by financing (224) 11,260 activities Net (decrease)/increase in cash and cash equivalents (1,259) 2,868 Cash and cash equivalents at beginning of year 2,897 29 ----------- ----------- Cash and cash equivalents at end of year $ 1,638 $ 2,897 =========== =========== Supplemental disclosure of cash paid during the year for interest $ 170 $ 2,080 =========== ===========
See accompanying notes. -7- 13 Gump's, Inc. Notes to Consolidated Financial Statements FEBRUARY 27, 1993 ACCOUNTING POLICIES 1. BASIS OF PRESENTATION On July 10, 1989, GMP Acquisition Corp. ("Company") acquired all of the outstanding stock of Gump's, Inc., a California corporation and Gump's, Inc., a Texas corporation for approximately $32.75 million. The transaction was accounted for by the purchase method and the consolidated assets and liabilities were recorded at fair values at July 10, 1989. Since acquisition, the Company has incurred substantial operating losses, has a working capital deficiency, and has generated negative cash flow. During fiscal 1993, the Company, its sole shareholder and its senior lender initiated negotiations with third party investors to pursue alternative financing arrangements which would retire all or a portion of the outstanding debt. In May 1993, a third party investor agreed to purchase substantially all of the Company's assets and to assume certain liabilities at their net asset value as defined in the agreement and to pay $1.75 million for goodwill and certain intangibles. The liabilities assumed in the purchase agreement do not include the amounts of principal and interest due to the bank and the sole stockholder. While the amount of the proceeds from the sale of certain net assets to Horn & Hardart and the amount realizable from disposal of the remaining assets are not presently determinable, nor is it determinable the amounts that the creditors will agree to accept in settlement of the obligations due to them, it is reasonable to assume that such proceeds will not be sufficient to repay the principal and interest. No adjustments have been made in the financial statements to reflect the realizable value of the remaining assets or liabilities after the sale of the business to Horn & Hardart. Such amounts may differ materially from the amounts shown in the accompanying financial statements. The Company utilizes the 52-53 week fiscal year convention with its fiscal year ending on a Saturday near the end of February. The accounts included in this report reflect activity for the 52-week period ended February 27, 1993 and for the 53-week period ended February 29, 1992. -8- 14 Gump's, Inc. Notes to Consolidated Financial Statements (continued) ACCOUNTING POLICIES (CONTINUED) 1. BASIS OF PRESENTATION (CONTINUED) All significant intercompany accounts and transactions have been eliminated in consolidation. ACCOUNTS RECEIVABLE Trade accounts receivable include installment accounts receivable maturing more than twelve months from the balance sheet date in accordance with usual industry practice. It is the Company's policy to write off receivables having amounts over 120 days past due. INVENTORIES The Company uses the retail inventory method, which approximates the lower of cost or market, to value inventory. PROPERTY AND EQUIPMENT Property and equipment are stated on the basis of cost. Depreciation and amortization are computed by the straight-line method using a five-year life for furniture and fixtures, a three-year life for automobiles and the remaining lease term for leasehold improvements and equipment under capital leases. INTANGIBLE ASSETS Since the acquisition in 1989, the Company has incurred substantial operating losses and generated negative cash flow. At February 27, 1993, substantially all of the Company's debt was in default and, while the Company recognized that the value of goodwill recorded pursuant to the acquisition was impaired, the amount of the write down could not be determined. Accordingly, the 1992 financial statements were not finalized or separately issued until the resolution of certain issues as described below. In May 1993, the Company agreed to sell substantially all of the assets, certain liabilities and the business of Gump's, Inc. to subsidiaries of the Horn & Hardart Company ("Horn & Hardart") for the net book value of these specified assets and liabilities at -9- 15 Gump's, Inc. Notes to Consolidated Financial Statements (continued) ACCOUNTING POLICIES (CONTINUED) INTANGIBLE ASSETS (CONTINUED) July 12, 1993 plus $1,750,001 for the business and all related intangibles. Because the 1993 sale of substantially all of the business provided evidence of the amount of the impairment of goodwill at February 29, 1992, the write-down of goodwill has been recorded in the 1992 financial statements. No amortization was recognized in the year ended February 27, 1993, as goodwill was written down to its net realizable value. SOFTWARE COSTS The Company expenses all costs associated with developing and implementing software for internal use. CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. 2. DEBT IN DEFAULT The Company has three notes due to its senior bank lender aggregating $27 million. The loan agreement requires the Company to comply with certain financial covenants. The Company has not complied with these covenants during the two years ended February 27, 1993. The bank has not waived compliance with these covenants and the entire long-term note payable has been classified as current in the financial statements. Two of these bank loans totaling $25 million are secured by a pledge of all assets of the Company and bear interest at the bank's prime rate plus .75% or LIBOR plus 1.75% at the Company's option. The third note payable in the amount of $2 million accrues interest at the Fed Funds rate plus 1.75%. The Company has a standby letter of credit for $1.7 million expiring on September 9, 1994 which has been established in favor of the lessor of a store and provides for an annual fee rate of 1%. -10- 16 Gump's, Inc. Notes to Consolidated Financial Statements (continued) 2. DEBT IN DEFAULT (CONTINUED) At February 27, 1993, the Company had not made scheduled principal payments of $3.4 million on the debt and had not made scheduled interest payments on the debt or standby letter of credit of $2.6 million. At February 27, 1993 and February 29, 1992, the Company had three subordinated notes payable to the sole stockholder totalling $7,152,000. The notes were all due in 1992 and accrue interest at prime plus .5% or 7.5%. No interest was paid during 1993 or 1992 and the Company signed additional notes, representing accrued interest, totaling $782,280 and $709,366 at February 27, 1993 and February 29, 1992, respectively. These notes are due December 31, 1998 and accrue interest at 10%. 3. INCOME TAXES The Company has net operating loss carryforwards of approximately $30 million and $31 million for financial reporting purposes and federal income tax purposes, respectively. The net operating loss for federal tax purposes expires primarily in 2004. The utilization of the net operating losses may be limited under Section 352 of the Internal Revenue Code. The principal differences between the book and tax net operating losses relate to timing differences in the recognition of certain expenses for book and tax purposes. The Company has adopted Financial Accounting Standard No. 96 for financial reporting purposes. In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Companies are required to adopt this new method of accounting for income taxes no later than fiscal years beginning after December 15, 1992. The Company does not expect the adoption of this statement to have a material effect on the Company's financial position. 4. EMPLOYEE BENEFIT PLANS The Company has a defined benefit pension plan (Plan) that covers all hourly employees of the Company who are members of Department Store Employees' Union, Local 1100, who joined the Company on or -11- 17 Gump's, Inc. Notes to Consolidated Financial Statements (continued) 4. EMPLOYEE BENEFIT PLANS (CONTINUED) before their sixtieth birthday and who do not participate in any other retirement plan to which the Company makes contributions. It is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). Upon normal retirement at age 65, participants are entitled to monthly benefits for life based on credited years of service as determined under the Plan. Participants are fully vested in these benefits after five years of service. The Company's current funding policy is to make annual contributions to the Plan based on the actuarial determined amount necessary to fund current service costs and to amortize the past service liability over a 30-year period. The minimum funding requirements as established by ERISA have been met by the Plan. The Plan invests primarily in money market and bond and stock funds. The money market fund consists primarily of investments made by the trustee, Wells Fargo Bank, in variable demand notes, commercial paper, treasury bills, and certificates of deposit. Cost approximates market on these investments. All other investments are accounted for at fair values as measured by market prices determined by Wells Fargo Bank. The following table sets forth the funded status and amounts recognized in the financial statements:
1993 1992 Accumulated benefit obligation $ (787,479) $ (712,454) =========== =========== Projected benefit obligation for service rendered to date $ (787,479) $ (712,454) Plan assets at fair value, primarily listed stocks and U.S. bonds 1,150,061 1,109,585 --------- --------- Plan assets in excess of projected benefit obligation 362,582 397,131 Unrecognized net (gain) loss from past experience different from that assumed and effects of changes in assumptions 67,236 3,779 Prior service cost not yet recognized in net periodic pension cost 35,299 39,538 Unrecognized net obligation (asset) (221,695) (243,864) --------- --------- Prepaid pension cost included in other assets $243,422 $ 196,584 ======== ==========
-12- 18 Gump's, Inc. Notes to Consolidated Financial Statements (continued) 4. EMPLOYEE BENEFIT PLANS (CONTINUED) Net periodic pension cost (income) included the following components:
1993 1992 ---- ---- Service cost--benefits earned during the period $ 18,504 $ 17,763 Interest cost on projected benefit obligation 61,729 62,628 Actual return on plan assets (102,077) (109,299) Net amortization and deferral (17,930) (17,930) -------- -------- Net periodic pension cost (income) $(39,774) $(46,838) ========= =========
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation for both years presented was 8%. The expected long-term rate of return on plan assets for both years presented was 9%. This plan will be terminated effective July 12, 1993. Effective June 1, 1991, the Company terminated its defined contribution profit sharing plan for executive employees of the Company which covered all salaried employees of the Company who had a job classification of assistant department manager or above, who had completed one year of service and who were not members of a collective bargaining unit. No contributions were made to the plan during fiscal years ended 1993 and 1992. 5. SALE OF TRADEMARK AND PRODUCT DEVELOPMENT DIVISION During fiscal year 1992, the Company sold its product development division to its sole stockholder, including the related assets of the division, for $688,140. In addition, the Company sold the right to exclusive use of the "Gump's" trademark in the Greater Asian Territory for $3,000,000. The gain recognized from these transactions was $2,734,000. 6. REDEEMABLE, CONVERTIBLE PREFERRED STOCK The Preferred Stock has a 10% dividend rate which will accumulate and not be payable until a future date to be determined by the stockholder. The Preferred Stock is redeemable at any time at the option of the Board of Directors with mandatory redemption on December 31, 1998. The redemption price equals $100 per share plus accrued dividends. The Preferred Stock is also convertible into Common Stock at any time at the option of the holders of Preferred Stock. The conversion factor is based on a Common Stock value of $169.70 per share adjusted for future issues or sales of Common Stock. -13- 19 Gump's, Inc. Notes to Consolidated Financial Statements (continued) 7. STORE CLOSURE During fiscal year 1992, the Company closed its two retail stores located in Dallas and Houston, Texas. The closures had been anticipated at the acquisition date in July 1989 and appropriate reserves provided. The Company secured releases for all obligations under its real estate leases for the two properties from its landlords. During fiscal year 1993, the Company closed its retail store located in Beverly Hills, California. The Company was unable to secure a release for all obligations under its real estate leases from its landlord. The Company is negotiating with its landlord and has established an accrual for estimated rental and common area maintenance expenses. 8. LEASE COMMITMENTS The Company leases computer equipment and an automobile under capital leases. In addition, the Company leases its store and other facilities under separate operating lease agreements. All store lease agreements require the payment of contingent rentals based upon sales of the specific store in addition to minimum rentals. The Company also has operating leases for equipment. The minimum payments, under capital leases and noncancelable operating lease obligations with initial or remaining terms of one year or more, some of which contain renewal options and escalation clauses, consist of the following:
OPERATING CAPITAL LEASES LEASES ------------------------------------------------- (In Thousands) 1994 $ 2,826,368 271,976 1995 1,772,931 271,976 1996 1,588,058 271,976 1997 1,588,397 55,616 1998 1,758,868 Thereafter 13,252,855 ----------- ------------ Total minimum lease payments 22,787,477 871,544 Amounts representing interest - 139,092 ----------- ----------- Present value of net minimum lease payments $ 22,787,477 $ 732,452 =============================================
The operating lease commitments include annual rental commitments related to the Beverly Hills store which the Company has vacated. -14- 20 Gump's, Inc. Notes to Consolidated Financial Statements (continued) 8. LEASE COMMITMENTS (CONTINUED) Rent expense consisted of the following:
1993 1992 --------------------------------------------- (In Thousands) Minimum rentals under operating leases $ 2,748 $ 2,509 Contingent Rentals 392 908 --------------------------------------------- $ 3,140 $ 3,417 =============================================
Amortization of assets held under capital leases is included in depreciation and amortization expense. 9. CONTINGENCIES The Company is defending various claims and legal actions arising in its normal operations. In the opinion of management, the ultimate resolution of these actions individually or in the aggregate, will not have a material effect on the Company's financial position. -15- 21 Consolidated Financial Statements Gump's, Inc. Year ended February 23, 1991 with Report of Independent Auditors -16- 22 Gump's, Inc. Consolidated Financial Statements Year ended February 23, 1991 CONTENTS Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Audited Consolidated Financial Statements Consolidated Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Consolidated Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Consolidated Statement of Stockholders' Deficit . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
23 REPORT OF INDEPENDENT AUDITORS Board of Directors Gump's, Inc. We have audited the accompanying consolidated balance sheet of Gump's, Inc. as of February 23, 1991 and the related consolidated statement of operations, stockholders' equity, and cash flows for the year ended February 23, 1991. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Gump's, Inc. at February 23, 1991 and the consolidated results of their operations and their cash flows for the year ended February 23, 1991 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that Gump's, Inc. will continue as a going concern. As more fully described in Note 9, the Company has incurred recurring operating losses and negative cash flows from operating activities and is currently negotiating with one of its principal shareholders and senior lenders to change the capitalization of the Company. The operations and current financial condition of Gump's, Inc. raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. ERNST & YOUNG San Francisco, California June 17, 1991, except for Note B as to which the date is August 7, 1991 24 Gump's, Inc. Consolidated Balance Sheet February 23, 1991 (In Thousands, except for share amounts) ASSETS Current assets: Cash $ 29 Trade accounts receivable, less allowance for doubtful accounts of $365 and $197, respectively 4,039 Inventories 19,992 Prepaid expenses 1,399 Other receivables and other assets 1,059 ------------ Total current assets 26,518 Property and equipment: Leasehold improvements 3,594 Furniture and fixtures 976 Automobiles 51 Computer system 1,124 ------------ 5,745 Less accumulated depreciation and amortization (1,294) ------------ 4,451 Intangible assets: Goodwill, less accumulated amortization of $953 and $249, respectively 21,741 Deferred loan fees and organization costs, less accumulated amortization of $162 and $55, respectively 702 ------------ 22,443 ------------ Total assets $ 53,412 ============
-2- 25 LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Trade accounts payable $ 4,594 Accrued expenses 7,428 Accrued interest 245 Outstanding gift certificates and customer deposits 1,231 Accrued payroll and compensation 1,205 Revolving line of credit with bank 7,050 ------------ Total current liabilities 21,753 Long-term debt: Note payable to bank 17,250 Subordinated debt due to stockholders 3,644 ------------ 20,894 Other liabilities 1,352 Redeemable, convertible Preferred Stock, $100 par value (120,000 shares authorized and issued) 12,000 Stockholders' deficit: Common Stock, $.01 par value (authorized: 1991-200,000 shares; issued and outstanding: 1991-78,214 shares) 1 Additional paid-in capital 11,675 Retained-earnings deficit (14,263) ------------ (2,587) ------------ Total liabilities and stockholders' deficit $ 53,412 ============
See accompanying notes. -3- 26 Gump's, Inc. Consolidated Statements of Operations Year ended February 23, 1991 (In Thousands) Net sales $ 62,138 Cost of sales 31,694 -------------- Gross margin 30,444 Direct selling expenses 26,794 -------------- 3,650 General and administrative expenses 10,070 -------------- Loss before interest expense (6,420) Interest expense 3,231 -------------- Net loss $ (9,651) ==============
See accompanying notes. -4- 27 Gump's, Inc. Consolidated Statement of Stockholders' Deficit
Additional Retained- Common Paid-in Earnings Stock Capital Deficit Total ------- ----------- -------------- ------------- Balance at February 24, 1990 $ 393 $ 6,675,482 $ (4,611,619) $ 2,064,256 Common Stock issued 389 4,999,746 $ - 5,000,135 Net loss - - $ (9,650,902) (9,650,902) ------- ------------- -------------- ------------ Balance at February 23, 1991 $ 782 $ 11,675,228 $ (14,262,521) $ (2,586,511) ======= ============= ============== ============
See accompanying notes. -5- 28 Gump's, Inc. Consolidated Statement of Cash Flows Year ended February 23, 1991 (In Thousands) OPERATING ACTIVITIES Net loss $ (9,651) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,818 Provision for bad debts 281 Changes in operating assets and liabilities: Trade accounts receivable 744 Inventories (712) Prepaid expenses, other assets and other receivables 3,303 Intangibles (4,491) Trade accounts payable 646 Accrued expenses and other current liabilities 2,052 ---------- Net cash used in operating activities 6,010 INVESTING ACTIVITIES Purchases of property and equipment (2,024) Writeoff of leasehold improvements 278 ---------- Net cash used in investing activities (1,746) FINANCING ACTIVITIES Proceeds from revolving line of credit 22,600 Principal payments on revolving line of credit (19,100) Proceeds from subordinated debt due to stockholder 3,000 Principal payments on note payable to bank (3,750) Proceeds from issuance of Common Stock 5,000 ---------- Net cash provided by financing activities 7,750 ---------- Net decrease in cash (6) Cash at beginning of year 35 ---------- Cash at end of year $ 29 ========== SUPPLEMENTAL DISCLOSURE OF CASH PAID DURING THE YEAR FOR INTEREST $ 3,084 ==========
See accompanying notes. -6- 29 Gump's, Inc. Notes to Consolidated Financial Statements FEBRUARY 23, 1991 1. ACCOUNTING POLICIES BASIS OF PRESENTATION On July 10, 1989, GMP Acquisition Corp. (referred to herein as Gump's, Inc. or the Company) acquired all of the outstanding stock of Gump's, Inc., a California corporation and Gump's, Inc., a Texas corporation for approximately $32.75 million. The transaction was accounted for by the purchase method and the consolidated assets and liabilities were recorded at fair values at July 10, 1989. The Company utilizes the 52-53 week fiscal year convention with its fiscal year ending on a Saturday near the end of February. The accounts included in this report reflect activity for the 52-week period ended February 23, 1991. All significant intercompany accounts and transactions have been eliminated in consolidation. TRADE ACCOUNTS RECEIVABLE Trade accounts receivable include installment accounts receivable maturing more than twelve months from the balance sheet date in accordance with usual industry practice. It is the Company's policy to write off receivables having amounts over 120 days past due. INVENTORIES The Company uses the retail inventory method, which approximates the lower of cost or market, to value inventory. PROPERTY AND EQUIPMENT Property and equipment are stated on the basis of cost. Depreciation and amortization are computed by the straight-line method which assigns a five-year life to furniture and fixtures, a three-year life for automobiles and uses the remaining lease term for leasehold improvements. -7- 30 Gump's, Inc. Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) INTANGIBLE ASSETS Goodwill is the excess of the acquisition costs over the fair value of the net assets acquired. Goodwill is being amortized on a straight-line basis over 40 years. The deferred loan fees are being amortized over the life of the related loans. Organization costs are being amortized over 5 years. SOFTWARE COSTS The Company expenses all costs associated with developing and implementing software for internal use. 2. DEBT FINANCING The Company has a $25 million loan agreement with a bank which provides a short-term revolving line of credit of up to $7.75 million and a long-term note payable of $17.25 million. The bank loans are secured by a pledge of all assets of the Company and bear interest at the bank's prime rate plus .75% or LIBOR plus 1.75%, at the Company's option. The loan agreement requires the Company to maintain certain financial covenants, some of which the Company was not in compliance with at February 23, 1991. In August 1991, the bank waived compliance with these covenants through the year ending February 1992. The maturities of long-term debt for fiscal years subsequent to February 23, 1991 are: 1993 $ 1,400,000 1994 2,300,000 1995 2,300,000 1996 2,300,000 1997 2,700,000 Thereafter 6,250,000 ---------- $17,250,000 ===========
-8- 31 Gump's, Inc. Notes to Consolidated Financial Statements (continued) 3. INCOME TAXES The Company has net operating loss carryforwards of $20 million and $14 million for financial reporting purposes and federal income tax purposes, respectively. The net operating loss for federal tax purposes expires in 2002. The principal differences between the book and tax net operating losses relate to the recognition for tax purposes of certain expenses at the time paid. 4. EMPLOYEE BENEFIT PLANS The Company has a defined benefit pension plan (Plan) that covers all hourly employees of the Company who are members of Department Store Employees' Union, Local 1100, who joined the Company on or before their sixtieth birthday and who do not participate in any other retirement plan to which the Company makes contributions. It is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA). Upon normal retirement at age 65, participants are entitled to monthly benefits for life based on credited years of service as determined under the Plan. Participants are fully vested in these benefits after five years of service. The Company's current funding policy is to make annual contributions to the Plan based on the actuarial determined amount necessary to fund current service costs and to amortize the past service liability over a 30-year period. The minimum funding requirements as established by ERISA have been met by the Plan. The Plan invests primarily in money market and bond and stock funds. The money market fund consists primarily of investments made by the trustee, Wells Fargo Bank, in variable demand notes, commercial paper, treasury bills, and certificates of deposit. Cost approximates market on these investments. All other investments are accounted for at fair values as measured by market prices determined by Wells Fargo Bank. -9- 32 Gump's, Inc. Notes to Consolidated Financial Statements (continued) 4. EMPLOYEE BENEFIT PLANS (CONTINUED) The following table sets forth the funded status and amounts recognized in the financial statements:
1991 ----------- Accumulated benefit obligation $ (694,339) =========== Projected benefit obligation for service rendered to date $ (694,339) Plan assets at fair value, primarily listed stocks and U.S. bonds 1,031,044 ----------- Plan assets in excess of projected benefit obligation 336,665 Unrecognized net (gain) loss from past experience different from that assumed and effects of changes in assumptions 41,289 Prior service cost not yet recognized in net periodic pension cost 43,777 Unrecognized net obligation at year end (245,590) ----------- Prepaid pension cost included in other assets $ 176,141 =========== Net periodic pension cost (income) included the following components: Service cost--benefits earned during the period $ 17,493 Interest cost on projected benefit obligation 61,042 Actual return on plan assets (101,491) Net amortization and deferral (17,930) ----------- Net periodic pension income $ (40,886) ===========
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 9%. The expected long-term rate of return on plan assets was 10%. The Company also maintains a defined contribution profit-sharing plan for executive employees of Gump's, Inc. which covers all salaried employees of the Company who have a job classification of assistant department manager or above, who have completed one year of service and who are not members of a collective bargaining unit. No contribution was made to the plan for the current year. Subsequent to February 23, 1991, the Company's Board of Directors adopted a resolution to terminate this plan effective June 1, 1991. -10- 33 Gump's, Inc. Notes to Consolidated Financial Statements (continued) 5. RELATED PARTY TRANSACTIONS At February 23, 1991, the Company had a subordinated note payable to one of its principal stockholders. At February 23, 1991, this note had an outstanding principal balance of $3,000,000. This note accrues interest at prime rate plus .5% and is due July 13, 1992. The remaining note, representing accrued interest, has a principal balance of $643,416 at February 23, 1991. This note is due December 31, 1998 and accrues interest at 10%. A Company executive has options, which expire in July 1994, to purchase additional shares of Common Stock at $169.70 per share to bring his ownership interest up to 10 percent of the then outstanding Common Stock. During the year ended February 23, 1991, the Company's stockholders exercised warrants to purchase 36,964 shares of Common Stock. 6. LEASE COMMITMENTS The Company leases all of its stores and other facilities under separate lease agreements. All store lease agreements require the payment of contingent rentals based upon sales of the specific store in addition to minimum rentals. The Company also has operating leases for equipment, furniture and fixtures. The minimum payments, by year and in the aggregate, under leases obligations with initial or remaining terms of one year or more, some of which contain renewal options, consist of the following:
Equipment and Buildings Furniture Total -------------------------------------------------- 1992 $1,856,327 $165,629 $2,021,956 1993 2,399,705 155,647 2,555,352 1994 2,887,569 73,869 2,961,438 1995 2,296,863 14,666 2,311,529 1996 2,122,841 5,246 2,128,087 Thereafter 16,344,884 - 16,344,884 -------------------------------------------------- $27,908,189 $415,057 $28,323,246 ==================================================
Total rent expense for the period ended February 23, 1991 amounted to $3,292,826 of which $968,246 was contingent rent. -11- 34 Gump's, Inc. Notes to Consolidated Financial Statements (continued) 7. STORE CLOSURE COSTS Subsequent to February 23, 1991, the Company closed the two retail stores located in Dallas and Houston, Texas. The closures had been anticipated at the acquisition date in July 1989. The Company secured releases for all obligations under its real estate leases for the two properties (from its landlords). During 1991, the Company revised its estimate of the reserve for store closure costs and increased goodwill by $3,638,000. The reserves were established to provide for markdowns to dispose of the inventories at the two locations, severance costs and costs relating to the termination of real estate leases. 8. RECAPITALIZATION OF STOCKHOLDERS' EQUITY In July 1990, $12,000,000 of subordinated notes payable held by the principal stockholders were exchanged for 120,000 shares of $100 par value Preferred Stock. The Preferred Stock has a 10% dividend rate which will accumulate and not be payable until a future date to be determined by the stockholders. The Preferred Stock is redeemable at any time at the option of the Board of Directors with mandatory redemption on December 31, 1998. The redemption price equals $100 per share plus accrued dividends. The Preferred Stock is also convertible into Common Stock at any time at the option of the holders of Preferred Stock. The conversion factor is based on a Common Stock value of $169.70 per share adjusted for future issue or sales of Common Stock. One principal stockholder also purchased an additional 29,664 shares of Common Stock for $5,000,000 and advanced the Company $3,000,000 in exchange for a subordinated promissory note. 9. PROPOSED FINANCIAL RESTRUCTURING Since its inception in July 1989, the Company has incurred substantial operating losses and negative cash flow. The July 1990 recapitalization discussed in Note 8 was the first of the steps taken by management to recapitalize the Company and to provide the Company with a solid financial structure. Management is negotiating with its senior lender and one of its principal stockholders to convert some of the existing debt to equity and to provide additional financing through an equity infusion, a larger revolving line of credit, and restructuring interest and principal repayment schedules and various restrictive covenants in the existing senior loan agreement. Management believes that the resulting financial structure will significantly strengthen the Company. -12- 35 GUMP'S, INC. ITEM 7(A)(II) CONSOLIDATED BALANCE SHEET (UNAUDITED) AS OF MAY 29, 1993 (IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents $ 2,677 Accounts receivable, net 4,244 Inventories, net 8,357 Other current assets 1,348 --------- Total Current Assets 16,626 --------- Net Property 4,946 Other Assets 1,650 --------- Total Assets $ 23,222 ========= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current Liabilities Current portion of long term debt and capital leases $ 18,303 Accrued liabilities 11,337 --------- Total Current Liabilities 29,640 --------- Noncurrent liabilities: Long-term debt 16,632 Other 5,788 --------- Total Noncurrent Liabilities 22,420 --------- Total Liabilities 52,060 --------- Common and Other Shareholder's Equity (Deficit) Preferred Stock 12,000 Common Stock 1 Capital in excess of par 11,635 Accumulated deficit (52,474) --------- Common and Other Shareholder's Equity (Deficit) (28,838) --------- Total Liabilities and Shareholder's Equity (Deficit) $ 23,222 =========
-1- 36 GUMP'S, INC. CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED) (IN THOUSANDS)
FOR THE THREE MONTHS ENDED -------------------------- May 30, May 29, 1992 1993 --------- --------- Net sales $ 12,139 $ 12,254 Operating costs and expenses: Costs of sales and operating expenses 6,576 6,509 Selling expenses 1,371 1,273 General and administrative expenses 6,333 4,872 -------- -------- Income (loss) from operations (2,141) (400) Interest and other income (expenses): (561) ($707) Net (loss) $(2,702) $(1,107) ======== ========
-2- 37 GUMP'S, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
FOR THE THREE MONTHS ENDED -------------------------- MAY 30, MAY 29, 1992 1993 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (loss) ($2,702) ($1,107) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 466 484 Changes in operating assets and liabilities: Accounts receivable (892) ( 1,658) Inventories 2,352 2,035 Prepaid expenses and other 170 638 Accounts payable (632) (80) Accrued expenses 723 545 Other 706 182 -------- -------- Net cash provided (used) by operating activities 191 1,039 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of property (342) - Other (1) - -------- --------- Net cash provided (used) by investing activities (343) - -------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (152) 1,039 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 3,916 1,638 -------- -------- CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $3,764 $2,677 ======== ========
-3- 38 GUMP'S, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements. 1. Basis of presentation - In the opinion of management, the accompanying unaudited interim financial statements contain all material adjustments, consisting of normal recurring accruals, necessary to present fairly the financial condition as of May 29, 1993 and the results of operations for the three month periods ended May 30, 1992 and May 29, 1993 of Gump's, Inc. and its consolidated subsidiaries for the interim periods. Operating results for interim periods are not necessarily indicative of the results that may be expected for the entire year. 2. Subsequent event - On May 21, 1993, Hanover Direct, Inc. and GSF Acquisition Corp. ("GSF"), a wholly owned indirect subsidiary of Hanover Direct, Inc., entered into an asset purchase agreement with Gump's, Inc., pursuant to which GSF agreed to acquire certain of the retail assets of Gump's, Inc., Hanover Direct, Inc. and Gump's by Mail, Inc. ("Gump's by Mail"), a wholly owned indirect subsidiary of Hanover Direct, Inc., also entered into an asset purchase agreement with Gump's pursuant to which Gump's by Mail agreed to acquire substantially all of the mail order assets of Gump's, Inc. The aggregate purchase price for the retail assets and the mail order assets was $1,750,001 plus an amount equal to the net asset value of cash, inventories, accounts receivable and certain prepaid items as of July 12, 1993, the closing date of the transactions. The purchase price was payable $1,500,001 plus one-half of Gump's net asset value in cash, with the balance in shares of Hanover Direct, Inc.'s Common Stock. Hanover Direct, Inc. paid Gump's $6.9 million in cash and issued 1,327,330 shares of Common Stock valued at $4.78 per share. -4- 39 Item 7(a)(iii) COMPANY STORE HOLDINGS, INC. AND SUBSIDIARIES (Debtors-in-Possession) Consolidated Financial Statements as of August 1, 1992 and July 27, 1991 Together With Report of Independent Public Accountants 40 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Shareholders and Directors of Company Store Holdings, Inc. (Debtor-in-Possession): We have audited the accompanying consolidated balance sheets of Company Store Holdings, Inc. (a Delaware corporation) and Subsidiaries (Debtors-in-Possession) as of August 1, 1992 and July 27, 1991 and the related consolidated statements of operations, shareholders' investment (deficit), and cash flows for each of the three years in the period ended August 1, 1992. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Company Store Holdings, Inc. and Subsidiaries as of August 1, 1992 and July 27, 1991, and the results of their operations and their cash flows for each of the three years in the period ended August 1, 1992, in conformity with generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, Company Store Holdings, Inc., together with all of its subsidiaries, filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court on May 22, 1992. Although the Company and its subsidiaries are currently operating their businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court, the continuation of their businesses as going concerns is contingent upon, among other things, the ability to formulate a Plan of Reorganization which will gain approval of the creditors and confirmation by the Bankruptcy Court, and the ability to generate sufficient cash from operations and financing sources to meet obligations as they become due. In addition, as discussed in Note 4, the Company is not in compliance with certain covenants of the post-petition financing agreement. These factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements have been prepared assuming the Company and its subsidiaries will continue as going concerns and do not include any adjustments relating to the recoverability and classification of reported asset -1- 41 amounts or the amount and classification of liabilities that might be necessary should the Company or its subsidiaries be unable to continue as going concerns. The consolidated financial statements also do not include any adjustments relating to the recoverability and classification of reported asset amounts or adjustments to the establishment, settlement and classification of liabilities that may be required in connection with restructuring the Company and its subsidiaries as they reorganize under Chapter 11 of the United States Bankruptcy Code. ARTHUR ANDERSEN & CO. Minneapolis, Minnesota, September 30, 1992 42 COMPANY STORE HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Consolidated Balance Sheets As of August 1, 1992 and July 27, 1991 (In Thousands, Except Per Share Amounts)
1992 1991 ------- ------- ASSETS CURRENT ASSETS: $ 401 $ 637 Cash 1,296 1,479 Receivables, net 17,612 21,365 Inventories 2,993 2,787 -------- ------- Prepaid expenses 22,302 26,268 -------- ------- Total current assets PROPERTY AND EQUIPMENT, at cost: Land and buildings 5,272 5,149 Machinery, equipment and furniture 9,426 8,985 Less - Accumulated depreciation (6,865) (4,489) ------- ------ Net property and equipment 7,833 9,645 -------- ------- OTHER ASSETS, net (Note 3) 21,114 21,474 -------- ------- $ 51,249 $57,387 ======== ======= LIABILITIES AND SHAREHOLDERS' INVESTMENT (DEFICIT) LIABILITIES NOT SUBJECT TO COMPROMISE: Current liabilities - Short-term borrowings $ 14,348 $15,956 Accounts payable 1,409 7,490 Accrued liabilities 1,079 2,603 Current portion of long-term debt 603 2,717 -------- ------- Total current liabilities not subject to compromise 17,439 28,766 Long-term debt - 23,320 Other long-term liabilities - 4,382 -------- ------- Total liabilities not subject to compromise 17,439 56,468 LIABILITIES SUBJECT TO COMPROMISE 39,439 - COMMITMENTS AND CONTINGENCIES (Notes 2, 9, 13 and 14) SHAREHOLDERS' INVESTMENT (DEFICIT): Series A Convertible Preferred Stock, par value $.01 1,000 1,000 Common stock and paid-in capital, par value $.01 9,294 9,294 Accumulated deficit (15,923) (9,375) ------- ------ Total shareholders' investment (deficit) (5,629) 919 ------- ------- $ 51,249 $57,387 ======== =======
The accompanying notes are an integral part of these consolidated balance sheets. -3- 43 COMPANY STORE HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Consolidated Statements of Operations For the Fiscal Years Ended August 1, 1992, July 27, 1991 and July 28, 1990 (In Thousands, Except Share and Per Share Data)
1992 1991 1990 ------------ ----------- ------------ NET SALES $ 83,713 $ 85,421 $ 67,277 COST OF SALES 46,321 47,126 36,981 ------ ---------- ------------- Gross profit 37,392 38,295 30,296 SELLING AND ADMINISTRATIVE EXPENSES 38,030 37,537 29,890 ------------ ---------- ------------- Income (loss) from operations (638) 758 406 OTHER EXPENSE: Interest expense, net 4,347 4,064 3,335 Amortization of intangible assets 657 672 1,956 Other, net 204 282 230 ------------ ---------- ------------- NET LOSS BEFORE REORGANIZATION ITEMS (5,846) (4,260) (5,115) REORGANIZATION ITEMS (702) - - ------------ ---------- ------------- NET LOSS $(6,548) $ (4,260) $ (5,115) ======== ========== ============ NET LOSS PER SHARE $ (2,326.11) $(1,721.91) $ (2,130.36) ============ =========== ============== WEIGHTED AVERAGE SHARES 2,815 2,474 2,401 ===== ===== =====
The accompanying notes are an integral part of these consolidated financial statements. -4- 44 COMPANY STORE HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Consolidated Statements of Shareholders' Investment (Deficit) For the Fiscal Years Ended August 1, 1992, July 27, 1991 and July 28, 1990 (In Thousands, Except Share Amounts)
Series A Common Stock Convertible and Paid-In Preferred Stock Capital (10,000 (5,000 Shares Shares Authorized) Authorized) ------------------------ ----------------------- Accumulated Shares Amount Shares Amount Deficit Total ---------- ---------- --------- --------- -------------- ----------- BALANCE, August 11, 1989 - $ - 2,400 $ 8,042 $ - $ 8,042 Shares issued - - 12 37 - 37 Net loss - - - - (5,115) (5,115) ---------- ---------- --------- ----------- ---------- ----------- BALANCE, July 28, 1990 - - 2,412 8,079 (5,115) 2,964 Shares issued 1,000 1,000 403 1,215 - 2,215 Net loss - - - - (4,260) (4,260) ---------- ---------- --------- ----------- ---------- ----------- BALANCE, July 27, 1991 1,000 1,000 2,815 9,294 (9,375) 919 Net loss - - - - (6,548) (6,548) ---------- ---------- --------- ----------- ---------- ----------- BALANCE, August 1, 1992 1,000 $ 1,000 2,815 $ 9,294 $ (15,923) $ (5,629) ========== ========== ========= =========== ========= ==========
The accompanying notes are an integral part of these consolidated financial statements. -5- 45 COMPANY STORE HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Consolidated Statements of Cash Flows For the Fiscal Years Ended August 1, 1992, July 27, 1991 and July 28, 1990 (In Thousands)
1992 1991 1990 -------- -------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(6,548) $(4,260) $(5,115) Adjustments to reconcile net loss to net cash used in operating activities before reorganization items - Depreciation and amortization 3,041 2,969 4,226 Noncash interest 1,678 2,584 2,288 Reorganization items 702 - - Changes in operating items: Receivables 183 (332) (66) Inventories 3,753 (5,266) (1,637) Prepaid expenses (206) (1,682) (66) Accounts payable and accrued liabilities 4,024 (742) (918) Other long-term liabilities (129) (191) (1,553) Liabilities subject to compromise (3,803) - - ------- -------- ------- Net cash provided by (used in) operating activities before reorganization items 2,695 (6,920) (2,841) Operating cash flows from reorganization items - Professional fees paid for services rendered in connection with the Chapter 11 proceeding (598) - - ------ -------- -------- Net cash provided by (used in) operating activities 2,097 (6,920) (2,841) ------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, net (572) (517) (306) Acquisition, net of cash acquired - (662) - Other - (42) 20 --------- -------- -------- Net cash used in investing activities (572) (1,221) (286) --------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings (repayments) under revolving credit agreements (1,608) 7,272 3,379 Repayment of long-term debt (153) - - Sale of common stock - 1,215 37 --------- ------ ------- Net cash provided by (used in) financing activities (1,761) 8,487 3,416 --------- ------ ------- Net increase (decrease) in cash (236) 346 289 CASH: Beginning of year 637 291 2 --------- ------- ------- End of year $ 401 $ 637 $ 291 ========= ======= ========
The accompanying notes are an integral part of these consolidated financial statements. -6- 46 COMPANY STORE HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) Notes to Consolidated Financial Statements August 1, 1992 and July 27, 1991 1. ORGANIZATION AND NATURE OF BUSINESS: In August 1989, an investor group formed Company Store Holdings, Inc. (the "Company") which acquired all of the outstanding common stock of Company Store, Inc. ("The Company Store") on August 11, 1989. In June 1991, a wholly owned subsidiary of the Company acquired all of the assets and assumed certain liabilities of Scandia Down Corporation ("Scandia"). Consideration for the acquisition of Scandia was $25,000 in cash and 1,000 shares of the Company's Series A Convertible Preferred Stock. In connection with the acquisition of Scandia, the Company issued shares of its common stock to certain existing shareholders for total proceeds of approximately $1,200,000. The acquisitions described above have been accounted for using the purchase method whereby assets and liabilities are stated at their fair market values at the date of acquisition and operations of the acquired companies are included in the consolidated results from the date of acquisition. The excess purchase price over the net assets acquired is included in other assets. The Company Store and Scandia market down and natural fiber home furnishing products and outerwear nationally through direct mail catalogs, national advertising and retail stores. Substantially all of the home furnishings products are designed and manufactured by The Company Store. Other products are designed by The Company Store and manufactured by domestic and international suppliers for exclusive resale. 2. PETITION FOR RELIEF UNDER CHAPTER 11: On May 22, 1992 (the petition date), the Company and all of its subsidiaries (the "Debtors") filed petitions for relief under Chapter 11 of the United States Bankruptcy Code ("Chapter 11") in the United States Bankruptcy Court for the Western District of Wisconsin (the "Bankruptcy Court") and are currently operating their respective businesses as debtors-in-possession, subject to the supervision of the Bankruptcy Court. The Chapter 11 filing was the result of a sales and cash shortfall and failed negotiations with the Company's lenders. As of the petition date, prepetition indebtedness and other contractual obligations may not be enforced against the Debtors and litigation is stayed. In addition, prepetition executory contracts and lease obligations may be rejected and parties affected by these rejections may file claims with the Bankruptcy Court. Substantially all claims against the Debtors which existed at the petition date are reflected in the August 1, 1992 consolidated balance sheet as -7- 47 liabilities subject to compromise. It is expected that all claims against the Debtors as of the petition date will be dealt with in accordance with a plan of reorganization to be voted upon by all classes of creditors and subject to approval by the Bankruptcy Court. Management expects to file a proposed reorganization plan by December 15, 1992. There can be no assurances the plan will be approved by the creditors or the Bankruptcy Court. A creditors' committee has been established by the Bankruptcy Court which has the right to review transactions that are not in the ordinary course of business. This committee will also participate in the formulation of any plan or plans of reorganization. The accompanying consolidated financial statements have been prepared on a going-concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Chapter 11 filings, such realization of assets and liquidation of liabilities are subject to uncertainty. While under the protection of Chapter 11, in the normal course of business, the Company may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the consolidated financial statements. The plan of reorganization could materially change the amounts and classifications reported in the historical consolidated financial statements, which do not give effect to any adjustments to the carrying value of assets or amounts of liabilities that might be necessary as a consequence of a plan of reorganization. The appropriateness of using the going-concern basis is dependent upon, among other things, confirmation of a plan of reorganization, and the debtors' ability to comply with the debtors-in- possession and other financing agreements. As discussed in Notes 4 and 5, the Company is not in compliance with certain covenants of its post-petition financing agreement and long-term debt agreements. In addition, unaudited interim financial statements indicate that the Company continues to incur net losses. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: FISCAL YEAR The fiscal year is the 52/53-week period ending on the Saturday closest to July 31. Fiscal year 1992 represents a 53-week period. Fiscal year 1991 represents a 52-week period. Fiscal year 1990 represents the 50-week period from acquisition (August 11, 1989) through July 28, 1990. CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. -8- 48 REVENUE RECOGNITION Revenue is recognized at the time of shipment. Liabilities have been established for unfilled cash orders, and the estimated gross profit attributable to returns under the Company's "unconditional satisfaction guarantee" policy. RECEIVABLES Receivables are net of allowances for doubtful accounts of $341,000 at August 1, 1992 and $138,000 at July 27, 1991. INVENTORIES Inventories are stated at the lower of first-in, first-out (FIFO) cost or market, and include material, labor and overhead for manufactured products. Inventories consist of the following (in thousands):
1992 1991 ----------- ----------- Raw materials $ 5,330 $ 7,877 Work in process 264 578 Finished goods 12,018 12,910 ----------- ----------- $ 17,612 $ 21,365 =========== ===========
ADVERTISING EXPENSES Direct mail catalog costs are deferred and amortized over the estimated periods that the related revenues are expected to be generated. These deferred costs of $2,490,000 at August 1, 1992 and $2,623,000 at July 27, 1991 are included in prepaid expenses in the accompanying consolidated balance sheets. All other advertising costs are charged to expense as incurred. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Betterment and renewals that extend the life of an asset are capitalized. Repairs and maintenance are charged to expense as incurred. Depreciation and amortization are provided using the straight-line method over the following estimated useful lives: Buildings and improvements 5-31 years Machines, equipment and furniture 3-10 years -9- 49 OTHER ASSETS Other assets consist primarily of goodwill and franchise rights, recorded in connection with the acquisitions described in Note 1, amortized over 25 to 40 years. Accumulated amortization of other assets was $ 2,948,000 at August 1, 1992 and $2,450,000 at July 27, 1991. SUPPLEMENTAL CASH FLOW INFORMATION Interest paid was $2,350,000 in 1992, $1,341,000 in 1991 and $1,323,000 in 1990. There were no income taxes paid in 1992, 1991 or 1990. EARNINGS PER SHARE Net loss per share has been computed based on the weighted average number of common shares outstanding during each year. The impact of outstanding stock options and warrants is not included as there is no dilutive effect in 1992, 1991 or 1990. RECLASSIFICATIONS Certain amounts previously reported in the 1991 and 1990 consolidated financial statements have been reclassified to conform to the 1992 presentation. These reclassifications had no effect on previously reported net loss or shareholders' investment. 4. FINANCING ARRANGEMENTS: SHORT-TERM BORROWINGS AND DEBTORS-IN-POSSESSION FINANCING Prior to the petition date, The Company Store had a loan agreement with a commercial lender which provided for a revolving credit facility (the pre-petition revolving credit agreement) with borrowings and international letters of credit of up to $20,000,000 based upon qualified inventory and receivable balances. Interest was payable monthly at prime plus 2 1/2%. The revolving credit facility was to expire in August 1992 with automatic renewals for successive one-year periods unless terminated by The Company Store or the lender. The loan agreement also provided for a working capital loan which was to expire in August 1992. Under the terms of the working capital loan, The Company Store was eligible to borrow up to specified amounts throughout the term of the agreement. Interest on the working capital loan was payable monthly at rates ranging from prime plus 3% to prime plus 4%, based upon the amounts outstanding. Borrowings under the revolving credit facility and working capital loan were collateralized by a first security interest in all inventories and receivables and a second security interest in substantially all other assets. The loan agreement contained restrictive covenants which required, among other matters that The Company Store maintain minimum working capital and financial ratios. In addition, the agreement also imposed limitations on additional indebtedness, sale of its authorized but unissued shares of stock and creation of liens. -10- 50 As a result of the Chapter 11 filing discussed in Note 2, advances and repayments under the above agreement ceased as of the petition date. At that time, the Bankruptcy Court approved an interim debtors-in-possession financing agreement between the Company and certain of its shareholders to provide the Debtors with $1,500,000 of borrowings bearing interest at prime plus 2 1/2% to allow the Debtors to continue to operate their businesses. On July 8, 1992, the Bankruptcy Court approved the repayment of all borrowings under the interim debtors-in-possession financing agreement. In addition, the Bankruptcy Court approved an increase in the amount of available borrowings under The Company Store's pre-petition revolving credit agreement to $25,000,000. The terms of this agreement (the post-petition financing agreement) are substantially the same as the pre- petition revolving credit agreement, with the exception of certain covenants related to cumulative gross sales demand; earnings before interest, taxes, amortization and depreciation; working capital; current ratios and levels of slow-moving inventory. The post-petition financing agreement is to expire on March 31, 1994 and has been approved by the Bankruptcy Court through March 31, 1993. In addition, post-petition borrowings under this agreement were granted a priority security interest over all claims against the Debtors, with the exception of certain professional fees. The Bankruptcy Court approved the application of funds received from the sale of inventory or collection of accounts receivable against the pre-petition balance outstanding under the revolving credit agreement. Short-term borrowings in the accompanying 1992 consolidated balance sheet include $8,509,000 of pre-petition borrowings. Subsequent to August 1, 1992, all pre-petition obligations under the revolving credit agreement were repaid; therefore, the balance at August 1, 1992 is presented as a current liability not subject to compromise in the accompanying consolidated balance sheet. In connection with the post-petition financing agreement, the Debtors agreed to make payments aggregating $660,000 through January 1993 to the holders of the secured and mortgage notes payable (see Note 5). As of August 1, 1992, $57,000 had been paid on this obligation and has been reflected as a reduction in the balances outstanding under these notes. Subsequent to August 1, 1992, The Company Store was not in compliance with certain covenants of the post-petition financing agreement as a result of a shortfall in sales. Accordingly, the lender under this agreement has the right to lift the automatic stay imposed by the Bankruptcy Court and may exercise its security interest in the post-petition financing agreement's collateral. As of September 30, 1992, the lender has not exercised its right to lift the automatic stay. Information related to short-term borrowings under the above credit agreements as of August 1, 1992 and July 27, 1991 is as follows (in thousands): -11- 51
1992 1991 ------------ ----------- Balance outstanding at end of year $ 14,348 $ 15,956 ============ =========== Weighted average balance outstanding during the year $ 16,039 $ 11,196 ============ =========== Maximum balance outstanding $ 19,964 $ 16,018 ============ =========== Weighted average interest rate 10.1% 12.3% ============ ===========
5. LONG-TERM DEBT: Long-term debt consisted of the following at July 27, 1991 (in thousands): Collateralized note payable with interest at 11.5%, due in annual installments from July 1992 through March 1996 $13,037 Collateralized note payable with interest at 11.25%, due in quarterly installments from September 1991 through June 1998 6,904 Mortgage note payable with interest at 10.7% , due in quarterly installments from September 1991 through September 2002 6,096 ------- 26,037 Less - Current portion 2,717 ------- $23,320 =======
As a result of the Chapter 11 filing discussed in Note 2, the ultimate payments to settle the above obligations may be different than the balances reflected in the accompanying 1992 consolidated balance sheet. Therefore, the amounts outstanding under the above notes as of August 1, 1992 are reflected as liabilities subject to compromise on the accompanying 1992 consolidated balance sheet. Interest on all long-term debt was payable during fiscal 1992 and 1991 only if cash flow, as defined, exceeded certain minimum levels as provided in the loan agreements. As a result of not meeting these cash flow requirements, as defined, no interest was due for fiscal 1992 or 1991. Accordingly, 1991 interest accrued of $2,584,000 was included in 1991 balances shown above. Interest of $1,678,000 for the year ended August 1, 1992 is included in liabilities subject to compromise in the accompanying consolidated balance sheet. Contractual interest of $585,000 incurred subsequent to the petition date has not been recognized by the Company. -12- 52 The collateralized and mortgage notes payable have first security interests in all land, buildings, machinery, equipment and intangible assets and a second security interest in the Company's inventories and receivables. The collateralized and mortgages notes payable debt agreements contained certain restrictive covenants. The Company was not in compliance with the terms of these loan agreements as of August 1, 1992. 6. LIABILITIES SUBJECT TO COMPROMISE: Under Chapter 11 of the Bankruptcy Code, certain claims against the Debtors in existence prior to the petition date were stayed while the Debtors continued conducting business as debtors-in-possession. These claims are reflected in the August 31, 1992 consolidated balance sheet as liabilities subject to compromise. Liabilities subject to compromise consisted of the following at August 1, 1992 (in thousands): Collateralized note payable, 11.5%, due 1996 $ 12,950 Collateralized note payable, 11.25%, due 1998 5,814 Mortgage note payable, 10.7%, due 2002 6,517 Trade accounts payable 8,035 Other accrued liabilities 3,745 Interest 1,678 Other 700 --------- Liabilities subject to compromise $ 39,439 =========
7. REORGANIZATION ITEMS: Reorganization items are incremental expenses and/or losses that have been realized or incurred by the Debtors as a result of the reorganization process. Such items consisted of the following at August 1, 1992 (in thousands): Legal fees $ 314 Professional fees 284 Provision for rejected executory contracts 104 --------- $ 702 =========
8. INCOME TAXES: The Company accounts for income taxes under the liability method, as prescribed by Statement of Financial Accounting Standards No. 109, whereby deferred income tax assets and liabilities arise from differences between the tax basis of an asset or liability and the amount reported in the consolidated financial statements. Deferred tax balances are determined by using the tax rate expected to be in effect when the taxes will actually be paid -13- 53 or refunds received. As of August 1, 1992, the Company had a net operating loss carryforward of approximately $21.5 million which expires from 2005 through 2007. The Company has provided a valuation allowance for the net benefit of these carryforwards as their realization is not assured. 9. EMPLOYEE BENEFIT PLANS: UNION RETIREMENT FUND AND PROFIT SHARING Under the terms of The Company Store union agreement, The Company Store is required to contribute 9.0% of all union employee wages to a union-sponsored multiemployer retirement plan. Contributions to this retirement plan were $316,000, $347,000 and $300,000 in fiscal 1992, 1991 and 1990, respectively. The Company Store is also required to pay up to 5% of the union employee wages as profit sharing based on net income, as defined. No payments to the profit sharing plan were required for 1992 and 1991. RETIREMENT AND SAVINGS PLAN The Company has a retirement and savings plan that covers all nonunion employees. The Company matches a portion of the participants' contributions to the plan. Matching contributions under the plan were $65,000, $56,000 and $18,000 in 1992, 1991 and 1990, respectively. POSTRETIREMENT BENEFITS In December 1990, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 106 (SFAS No. 106), "Employers' Accounting for Postretirement Benefits Other Than Pensions," which requires companies to accrue for postretirement benefits such as health care and life insurance for employees during the years the employee renders the necessary services to be eligible to receive such benefits. The Company is required to adopt the provisions of SFAS No. 106 not later than fiscal 1996. The Company anticipates adopting SFAS No. 106 in the year it is required to do so. The Company has not yet determined the impact of adopting SFAS No. 106 on future financial statements; however, the impact is not expected to be material. 10. SHAREHOLDERS' INVESTMENT: SERIES A CONVERTIBLE PREFERRED STOCK The Company has issued 1,000 shares of its Series A Convertible Preferred Stock (Preferred Stock). The Preferred Stock has preference as to dividends and distributions upon liquidation. The holders can convert the Preferred Stock into Common Stock of the Company at the rate of 5.4 shares of Preferred Stock for every share of Common Stock to be issued. The conversion rate is subject to adjustment if the Company declares any stock dividends, splits or combinations, as defined. -14- 54 STOCK OPTIONS The Company maintains an Incentive Stock Option Plan which provides for the granting of stock options, at the discretion of the Board of Directors, to certain key employees and officers to purchase shares of the Company's common stock at the fair market value at the date of grant ($3,005-$3,125 per share for all outstanding options). Stock option transactions were as follows for the years ended August 1, 1992, July 27, 1991 and July 28, 1990:
Shares --------- Outstanding at August 11, 1989 - Granted 354 Exercised - Expired (12) --------- Outstanding at July 28, 1990 342 Granted 203 Exercised - Expired (156) --------- Outstanding at July 27, 1991 389 Granted 7 Exercised - Expired - --------- Outstanding at August 1, 1992 396 =========
11. WARRANTS TO PURCHASE COMMON STOCK On June 7, 1991, The Company Store issued warrants to its commercial lenders enabling the lender to purchase up to 18 newly issued shares of The Company Store's common stock, as defined, for $25 per share. These warrants replaced warrants previously issued to the same lender. The newly issued warrants expire in August 1999, and are exercisable at any time. In addition, the holder of the warrants may require The Company Store to repurchase the warrants beginning in August 1994. The repurchase price will be based upon the fair market value of The Company Store, as defined, at the date of repurchase. The Company Store may, at its option, retire the warrants anytime after August 1995 upon repayment in full of all amounts due the lender. The repurchase price under this option is 110% of the fair market value of the common stock at the date of repurchase. 12. RELATED-PARTY TRANSACTIONS: The Company Store purchased approximately $10,515,000, $10,644,000 and $10,150,000 of raw materials from a shareholder during 1992, 1991 and 1990, respectively. Liabilities -15- 55 subject to compromise include approximately $791,000 of amounts due to this vendor at August 1, 1992. Approximately $716,000 was due to this vendor at July 27, 1991. The Company Store had two employment agreements prior to the petition date. Annual compensation under these agreements was approximately $144,000 for fiscal 1992 and 1991 and $98,000 for fiscal 1990. The agreements were rejected in conjunction with the Chapter 11 filing. The resulting obligation of $382,000 is included in liabilities subject to compromise in the accompanying 1992 consolidated balance sheet. The Company Store paid $232,000 and $276,000 of consulting fees to shareholders during 1991 and 1990. During 1992, the Company paid $98,000 of such fees and accrued an additional $132,000 which is included within liabilities subject to compromise. 13. NONCOMPETE AGREEMENT: In July 1990, The Company Store filed a suit against its former principal shareholder for breach of a noncompete and consultancy agreement. As a result, in January 1991, The Company Store and its former principal shareholder agreed to a revised noncompete agreement. Under the terms of the revised agreement, the former principal shareholder was to receive annual compensation of approximately $200,000 through June 1995 and agreed not to compete with The Company Store through 1998. In addition, both parties agreed to dismiss all lawsuits related to the alleged breach of the original agreement. This contract has been rejected in conjunction with the Chapter 11 filing. Liabilities subject to compromise in the accompanying 1992 consolidated balance sheet include $617,000 related to this agreement. 14. COMMITMENTS AND CONTINGENCIES: OPERATING LEASES The Company is committed under operating leases for distribution and retail store space, and various computer, production and office equipment. The retail store leases provide for contingent rentals based on sales performance in excess of specified minimums. In addition to rent, the Company is also responsible for real estate taxes, insurance, maintenance and other operating costs associated with the leased facilities. Total rental expense under all operating leases was $2,136,000 in 1992, $2,331,000 in 1991 and $2,298,000 in 1990. In connection with the Chapter 11 filing, the Company rejected certain of its lease agreements. The resulting obligation of $198,000 is included in liabilities subject to compromise in the accompanying 1992 consolidated balance sheet. Future minimum lease payments under the Company's remaining leases with initial or remaining terms of more than one year are as follows (in thousands): -16- 56 1993 $1,079 1994 621 1995 449 1996 336 1997 309 Thereafter 404 Total minimum lease payments $3,198 LETTERS OF CREDIT The Company Store had approximately $528,000 in outstanding letters of credit as of July 27, 1991 related to international purchases of merchandise and raw material. There were no outstanding letters of credit as of August 1, 1992. Subsequent to August 1, 1992, the Company entered into an agreement with a bank allowing for the issuance of letters of credit up to a total of $3,000,000. These letters of credit are to be fully secured by a cash collateral account located at the bank at the time of the issuance of any letters of credit. -17- 57 Item 7(a)(iv) COMPANY STORE HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) CONSOLIDATED BALANCE SHEET (UNAUDITED) AS OF JULY 3, 1993 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ASSETS Current Assets: Cash and cash equivalents $ 573 Accounts receivable, net 868 Inventories 7,392 Other current assets 924 --------- Total Current Assets 9,757 --------- Property and equipment, at cost 14,613 Less-accumulated depreciation 8,137 --------- Net property and equipment 6,476 Other Assets, net 20,557 --------- Total Assets $ 36,790 ========= LIABILITIES AND SHAREHOLDERS' INVESTMENT (DEFICIT) Current Liabilities: Notes payable 7,603 Accounts payable and accrued liabilities 659 --------- Total Current Liabilities 8,262 Noncurrent liabilities: Liabilities subject to compromise 38,773 --------- Total Liabilities 47,035 --------- Shareholders' Investment (Deficit): Series A convertible preferred stock par value $0.01 1,000 Common stock and paid-in capital, par value $0.01 9,294 Accumulated deficit (20,539) --------- Total Shareholders' Investment (Deficit) (10,245) ========= Total Liabilities and Shareholders' Investment (Deficit) $ 36,790 =========
-1- 58 COMPANY STORE HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS)
FOR THE ELEVEN MONTHS ENDED --------------------------- JUNE 27, JULY 3, 1992 1993 --------- --------- Net Sales $ 79,235 $ 68,086 Operating costs and expenses: Costs of sales and operating expenses 43,293 41,611 Selling expenses 29,551 23,177 General and administrative expenses 6,970 6,682 --------- ---------- Loss from operations (579) (3,384) --------- ---------- Interest and other income (expense): Interest expense (4,260) (1,171) Other, net (183) (60) --------- ---------- (4,443) (1,231) --------- ---------- Net (loss) $ (5,022) $ (4,615) ========= ==========
-2- 59 COMPANY STORE HOLDINGS, INC. AND SUBSIDIARIES (DEBTORS-IN-POSSESSION) CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
FOR THE ELEVEN MONTHS ENDED --------------------------- JUNE 27, JULY 3, 1992 1993 -------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) ($5,022) ($4,615) Adjustments to reconcile net (loss) to net cash provided (used) by operating activities: Depreciation and amortization 2,743 1,829 Changes in operating assets and liabilities: Accounts receivable (204) 429 Inventories 4,125 10,220 Prepaid expenses and other (372) 2,067 Accounts payable and accrued expenses 2,215 ( 1,829) Other (222) - -------- -------- Net cash provided by operating activities 3,263 8,101 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of property (561) 85 Other 54 (666) -------- -------- Net cash provided (used) by investing activities (507) (581) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under revolving credit facilities (1,891) (6,745) Payments of long term debt (63) (603) -------- -------- Net cash provided (used) by financing activities (1,954) (7,348) -------- -------- NET INCREASE IN CASH AND CASH EQUIVALENTS 802 172 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 637 401 -------- -------- CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $1,439 $573 ====== ========
-3- 60 COMPANY STORE HOLDINGS, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements: 1. Basis of presentation - In the opinion of management, the accompanying unaudited interim financial statements contain all material adjustments, consisting of normal recurring accruals, necessary to present fairly the financial condition as of July 3, 1993 and the results of operations for the eleven month periods ended June 27, 1992 and July 3, 1993 of Company Store Holdings, Inc. and subsidiaries. Operating results for interim periods are not necessarily indicative of the results that may be expected for the entire year. 2. Subsequent event - On August 25, 1993, Hanover Direct, Inc. acquired certain assets of Company Store Holdings, Inc. ("CSH"), The Company Store, Inc., Scandia Down Corporation and Southern California Comfort Corporations (collectively, "The Company Store"), pursuant to the Order Confirming Sale entered by the United States Bankruptcy Court on August 20, 1993. Hanover Direct, Inc. purchased substantially all of the Company Store's assets, including accounts receivable, inventories, equipment, real estate consisting of an office building and a manufacturing complex, including an interest in certain adjacent land, and all intangibles, trademarks, tradenames, licenses and mailing lists, and all other assets of CSH, and its subsidiaries, other than cash used in the normal course of its business. Hanover Direct, Inc. also extended through April 1994 substantially all of the franchise agreements of which Scandia Down Corporation was the franchisor. -4- 61 Item 7(a)(v) Independent Auditors' Report Board of Directors Tweeds, Inc. : We have audited the accompanying balance sheets of Tweeds, Inc. as of January 31, 1993 and February 2, 1992, and the related statements of operations, stockholders' equity and cash flows for the year ended January 31, 1993, and the period from July 1, 1991 to February 2, 1992. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tweeds, Inc. as of January 31, 1993 and February 2, 1992, and the results of its operations and its cash flows for the year ended January 31, 1993, and the period from July 1, 1991 to February 2, 1992, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK Roanoke, Virginia March 12, 1993 62 TWEEDS, INC. Financial Statements January 31, 1993 63 TWEEDS, INC. Balance Sheet January 31, 1993 Assets - ------ Current assets (note 5): Cash $ 5,562 Accounts receivable 349,391 Inventories (note 4) 2,977,701 Prepaid catalog costs 1,417,113 Prepaid expenses and other current assets 449,537 ----------- Total current assets 5,199,304 ----------- Property, plant and equipment, at cost (notes 5 and 10): Furniture, fixtures and equipment 3,605,759 Leasehold improvements 595,345 Equipment under capital lease 942,502 Land 61,719 ---------- 5,205,325 Less accumulated depreciation and amortization 2,142,244 --------- Property, plant and equipment, net 3,063,081 --------- Deferred financing costs, less accumulated amortization of $103,158 374,383 ----------- $ 8,636,768 ===========
See accompanying notes to financial statements. -2- 64 Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Note payable to bank (note 5) $ 1,608,824 Current installments of long-term debt (note 5) 1,271,169 Current installments of obligation under capital lease (note 10) 121,028 Accounts payable 2,142,632 Accrued expenses 1,213,863 ------------ Total current liabilities 6,357,516 ------------ Long-term debt, excluding current installments (note 5) 1,710,121 Obligation under capital lease, excluding current installments (note 10) 109,949 ------------ Total liabilities 8,177,586 ------------ Stockholders' equity (notes 6 and 9): Cumulative, nonvoting preferred stock, $.01 par value; 2,004,479 shares authorized, issued and outstanding 20,045 Common stock, $.01 par value; authorized 6,000,000 shares; issued and outstanding 4,986,368 shares 49,864 Additional paid-in capital 26,744,455 Accumulated deficit (26,355,182) ------------ Total stockholders' equity 459,182 ------------ Commitments (notes 9, 10 and 11) --------------- --------------- $ 8,636,768 ===============
See accompanying notes to financial statements. -3- 65 TWEEDS, INC. Statement of Operations Year Ended January 31, 1993 Net sales $ 34,563,529 Cost of sales 18,504,955 ------------ Gross profit 16,058,574 ------------ Operating expenses (income): Selling 8,489,924 Fulfillment operations 5,050,535 General and administrative 2,630,845 Customer list rental income (507,401) ------------ Total operating expenses, net 15,663,903 ------------ Income from operations 394,671 ------------ Other income (expense): Interest income 13,613 Interest expense (1,397,673) Amortization of deferred financing costs (103,158) Gain on conversion of capital lease to operating lease (note 10) 355,445 Other, net (52,643) ------------ Other expense, net (1,184,416) ------------ Net loss $ (789,745) ============
See accompanying notes to financial statements. -4- 66 TWEEDS, INC. Statement of Stockholders' Equity Year Ended January 31, 1993
Series "A" Series "B" Cumulative, Redeemable Redeemable Nonvoting Preferred Stock Preferred Stock Preferred Stock ----------------------- --------------------- ------------------ Shares Amount Shares Amount Shares Amount ------------------------------------------------------------------------ Balance, February 2, 1992 119,048 $ 9,794,332 857,144 $ 14,947,508 - $ - Conversion of preferred stock and reverse split of common stock (note 6) (119,048) (9,794,332) (857,144) (14,947,508) - - Issuance of common stock (note 6) - - - - - - Conversion of investors' notes payable to preferred stock - - - - 2,004,479 20,045 Net loss - - - - - - --------- ------------ ----------------------------------------------- Balance, January 31, 1993 - $ - - $ - 2,004,479 $20,045 ========= =========== ========================= ====================
Common Stock Additional Total -------------------- Paid-in Accumulated Stockholders' Shares Amount Capital Deficit Equity ----------------------------------------------------------------- Balance, February 2, 1992 1,818,149 $ 18,181 $ - $(25,565,437) (805,416) Conversion of preferred stock and reverse split of common stock (note 6) (1,818,149) (18,181) 24,760,021 - - Issuance of common stock (note 6) 4,986,368 49,864 - - 49,864 Conversion of investors' notes payable to preferred stock - - 1,984,434 - 2,004,479 Net loss - - - (789,745) (789,745) ----------------------------------------------------------------- Balance, January 31, 1993 4,986,368 $ 49,864 $ 26,744,455 $ (26,355,182) $ 459,182 =================================================================
See accompanying notes to financial statements. -5- 67 TWEEDS, INC. Statement of Cash Flows Year Ended January 31, 1993 Cash flows from operating activities: Cash received from customers $ 34,835,566 Cash paid to suppliers and employees (37,339,028) Interest received 13,613 Interest paid (1,354,682) ------------- Net cash used in operating activities (3,844,531) ------------- Cash flows from investing activities: Purchases of property, plant and equipment (67,148) Proceeds from sale of property, plant and equipment 2,651 Increase in deferred financing costs (477,541) ------------- Net cash used in investing activities (542,038) ------------- Cash flows from financing activities: Increase in notes payable to bank, net 1,444,533 Payments on capitalized lease obligations and long-term debt (751,230) Proceeds from issuance of notes payable to investors (subsequently converted to preferred stock) 1,961,488 Proceeds from issuance of common stock 49,864 ------------- Net cash provided by financing activities 2,704,655 ------------- Net decrease in cash and cash equivalents (1,681,914) Cash and cash equivalents, beginning of year 1,687,476 ------------- Cash, end of year $ 5,562 =============
(Continued) -6- 68 TWEEDS, INC. Statement of Cash Flows (Continued) Reconciliation of net loss to net cash used in operating activities: Net loss $ (789,745) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,036,150 Gain on conversion of capital lease to operating lease (355,445) Loss on sale of assets 494 Accrued interest payable converted to preferred stock 42,991 Decrease in accounts receivable 336,037 Decrease in inventories 1,844,785 Increase in prepaid catalog costs (628,334) Decrease in prepaid expenses and other current assets 559,996 Decrease in accounts payable (4,388,444) Decrease in accrued expenses (1,503,016) ------------- Net cash used in operating activities $ (3,844,531) ================
Noncash Investing and Financing Activitie Building under capital lease in the net amount of $6,204,735, and the related obligation under capital lease, in the amount of $6,560,180, were eliminated during the year ended January 31, 1993 when the lease was renegotiated. The new lease agreement is accounted for as an operating lease. (See note 10). Computer equipment under capital lease and the related obligation under capital lease were increased by $38,570 during the year ended January 31, 1993, upon the renegotiation of the lease. (See note 10). Notes payable to investors in the amount of $2,004,479, including accrued interest of $42,991, were converted to cumulative, nonvoting preferred stock during the year ended January 31, 1993. (See note 6). See accompanying notes to financial statements. -7- 69 TWEEDS, INC. Notes to Financial Statements January 31, 1993 (1) Description of Company Tweeds, Inc. (the "Company") is a "private label" men's and women's apparel direct mail catalog business. The Company, through its Tweeds catalog, offers distinct lines of clothing to customers throughout the United States. The Company's fiscal year ends on the Sunday nearest to January 31. (2) Significant Accounting Policies (a) Inventories Inventories are valued at the lower of cost (first-in, first-out method) or market. To the extent market is less then cost, valuation reserves are established to reduce inventories to their estimated market value. (b) Prepaid Catalog Costs The cost of catalogs is deferred and recorded as prepaid expense. These costs are amortized based on the estimated future net revenues over the catalog's estimated useful life averaging approximately seven months. (c) Property, Plant and Equipment Property, plant and equipment is recorded at cost, or in the case of assets under capital leases, the lower of fair market value or the present value of minimum lease payments at the inception of the lease. Depreciation of property, plant and equipment is computed using the straight-line method over the estimated useful lives of the assets. Property, plant and equipment held under capital leases and leasehold improvements are amortized straight- line over the shorter of the lease term or estimated life of the asset. (d) Deferred Financing Costs The cost of financing is deferred and recorded as a noncurrent asset. These costs are amortized straight-line over the life of the related loan. -8- 70 (e) Revenue Recognition Catalog merchandise sales are recognized when the merchandise is prepared for shipment, generally the same day shipment occurs. Advance payments from customers received with orders are classified as customer deposits and are included in accrued expenses. Sales returns and customer refunds are included in accrued expenses. (f) Income Taxes Deferred income taxes are recognized for income and expense items that are reported in different years for financial reporting purposes and income tax purposes. These deferred income taxes originate principally from differences in the recognition of depreciation of property, plant and equipment and inventories valuation. (g) Statement of Cash Flows For the purposes of the statement of cash flows, cash and cash equivalents include cash on deposit and highly liquid financial instruments with original maturities of three months or less. (3) Management Plans and Intentions The Company has incurred operating losses since its inception which have led to a working capital deficiency. During the current year, management of the Company implemented a business plan which reduced losses, improved operating cash flow and is intended to direct the Company toward profitable operations. This plan included a substantial reduction in the number of employees and management overhead as well as a reduction of catalog mailings. During 1992, the Company obtained a $6,500,000 asset-based line of credit to finance its working capital needs (see note 5), amended the lease on its fulfillment center (see note 10) and reestablished trade credit with major vendors. Also during 1992, the principal investors contributed an additional $2,000,000 of equity and provided a $2,500,000 collateralized guarantee of the line of credit (see note 5). The Company has prepared operating and cash flow projections for 1993 and 1994 which indicate the Company has adequate working capital facilities to meet its current operating and cash flow requirements while beginning to profitably grow the business without additional equity contributions or new credit sources. -9- 71 TWEEDS, INC. Notes to Financial Statements (4) Inventories Inventories consist of the following at January 31, 1993: Merchandise $ 3,653,324 Piece goods 116,280 Supplies 181,315 ------------ Total inventories, at cost 3,950,919 Valuation reserves 973,218 ------------ Total inventories, at lower of cost or market $ 2,977,701 ============
(5) Note Payable to Bank and Long-term Debt During 1992, the Company obtained a $6,500,000 asset-based, revolving line of credit to finance its purchases of inventories. The line of credit, which expires in May 1995, bears interest at the lender's prime rate plus 3 percent (9 percent at January 31, 1993) and is secured by virtually all of the Company's assets and a $2,500,000 collateralized guarantee of the stockholders. Availability of funds under the line is calculated at 35 percent to 50 percent of eligible inventory, depending on product classification, plus $2,000,000. The line of credit contains various covenants pertaining to maintenance of working capital and equity and limitations on the acquisition of property, plant and equipment, issuance of additional debt, and dividend distributions. All available cash of the Company is applied daily to the line of credit to reduce the outstanding balance. The principal outstanding under the line of credit at January 31, 1993 was $1,608,824. During 1992, the Company agreed with its catalog printer to convert $3,581,756 of accounts payable to a term loan. Monthly payments ranging from $50,000 to $138,557 began in March 1992 and continue through February 15,1995. The loan includes interest at a rate of prime (as determined by First National Bank of Chicago) plus 3 percent (9 percent at January 31, 1993). The loan is secured by a second position lien on all of the Company's assets. The outstanding balance of the loan at January 31, 1993 was $2,981,290. -10- 72 TWEEDS, INC. Notes to Financial Statements The aggregate maturities under this term loan for each year subsequent to January 31, 1993 are $1,271,169 in 1994, $1,572,595 in 1995 and $137,526 in 1996. (6) Stockholder's Equity Effective May 29, 1992, all shares of outstanding Series A Preferred Stock and Series B Preferred Stock were converted to common stock by the preferred stockholders and all accumulated but unpaid dividends were waived by the preferred stockholders at the time of conversion. The Company then effected a reverse common stock split resulting in only fractional shares. As the Corporation's by-laws prohibit fractional shares, the recorded amount of the common and preferred stock was transferred to additional paid-in capital. Subsequent to the conversion and reverse split described above, 4,986,368 shares of new common stock were issued at a par value of $.01 per share. Effective January 31, 1993, notes payable issued to investors during 1992 in the amount of $2,004,479, including accrued interest of $42,991, were converted to 2,004,479 shares of cumulative, nonvoting preferred stock with a par value of $.01 per share. The holder of each share of the preferred stock is entitled to receive dividends at a rate of $.10 per share per year. The dividends are cumulative from the effective date of January 31,1993 and are payable when and if declared by the Board of Directors of the Company. The Company has the option to redeem, at any date, all or part of the preferred stock for the redemption price of $1.00 per share plus an amount per share equal to any accrued but unpaid dividends. The Company has an agreement with its Chief Executive Officer wherein a certain number of shares of common stock held by him are subject to repurchase by the Company in the event of his termination. The number of shares subject to repurchase, at a price of $.01 per share, declines monthly over a twenty-three month period which began on April 1, 1992. At January 31, 1993, there were 227,461 shares of common stock subject to repurchase. (7) Income Taxes At January 31, 1993, the Company had available, to offset future taxable income, net operating loss carryforwards of approximately $26,300,000 for book -11- 73 TWEEDS, INC. Notes to Financial Statements purposes and $25,865,000 for tax purposes. The carryforwards for tax purposes are scheduled to expire as follows:
Tax Years Ending ---------------- 2002 $ 613,000 2003 3,610,000 2004 1,392,000 2005 720,000 2006 11,023,000 2007 7,990,000 2008 517,000 ------------ $ 25,865,000 ============
The principal differences between book and tax net operating loss carryforwards resulted from the acceleration of depreciation on equipment and amortization of capital leases, and capitalization of certain costs in inventory for tax purposes. Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes, was issued by the Financial Accounting Standards Board in February 1992. Statement 109 requires a change from the deferred method under APB Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of Statement 109, deferred income taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under Statement 109, the effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. Statement 109 must be adopted in fiscal year beginning February 1, 1993. Upon adoption, the provisions of the Statement may be applied without restating prior years' financial statements or may be applied retroactively by restating any number of consecutive prior years' financial statements. Upon adoption in fiscal year beginning February 1, 1993, the Company plans to apply the provisions of the Statement without restating prior years' financial -12- 74 TWEEDS, INC. Notes to Financial Statements statements. It is anticipated the effect of adopting Statement 109 will not be significant. (8) Employee Benefit Plan Prior to July 31, 1992, the Company sponsored a 401(k) Salary Deferral Plan. The Company elected to match 25 percent of the first 5 percent of qualified compensation contributed by participants. Company contributions to the Plan for the year ended January 31, 1993 were $2,032. Effective July 31, 1992, the Board of Directors terminated the Plan. (9) Stock Options The Company has an Incentive Stock Option Plan (the Plan) under which options are granted to key employees to purchase shares of common stock at a price not less than the fair market value at the date of grant. The options granted vest over a four-year period in increments of 25 percent per year. Options granted under the Plan prior to May 1992 were terminated in May 1992 concurrent with the recapitalization. (See note 6). At January 31, 1993, there are no outstanding options under the Plan, however, the Company has reserved 262,349 shares of common stock under the Plan. Options to purchase 75,000 shares of common stock at $1.00 per share have been issued to a former board member. These options expire in 1995. During December 1992, options to purchase 13,384 shares of common stock at $.01 per share were issued to a board member. The options vest over a two-year period in increments of 50 percent per year. These options expire in 2002. Warrants to purchase common stock were issued in connection with certain loans from stockholders in fiscal 1990. The warrants were terminated in May 1992 concurrent with the recapitalization. (See note 6). (10) Leases In December 1989, the Company entered into a capital lease agreement to lease computer equipment for a 60-month period. During the year ended January 31, 1993, the monthly payments under the terms of the lease were amended. The amended lease requires monthly payments of $11,507 through December 1995. -13- 75 TWEEDS, INC. Notes to Financial Statements In October 1989, the Company entered into in agreement to lease a fulfillment center in Virginia. The original agreement included a lease term of 25 years from January 1, 1991, and a base rent of $920,688 per annum. During the year ended January 31, 1993, the lease was renegotiated. Effective January 1, 1993, the lease term was reduced to a seven-year period beginning January 1, 1991. The base rent under the amended lease is $600,000 per annum. On January 1, 1994, and on each January 1 thereafter during the term of the lease, rent per annum is subject to an increase of the greater of (a) the rent then in effect multiplied by 110 percent, or (b) $600,000 plus 1-1/2 percent of the excess of net sales for the fiscal year which ends in the year for which the new rent becomes effective over $32,700,000. The original agreement was accounted for as a capital lease. As a result of the modification of the terms of the lease, the new agreement is accounted for as an operating lease. The change in the accounting for the lease from capital to operating resulted in a gain of $355,445. In addition, the Company leases offices, operating facilities and machinery under various operating leases. The future minimum annual rent required for each of the next five years and thereafter under the above agreements are as follows:
Capital Operating Fiscal Year Lease Leases ----------- -------------------------- 1993 $ 138,749 1,165,662 1994 115,074 1,176,967 1995 - 1,198,933 1996 - 1,214,176 1997 - 1,209,837 After 1997 - 692,664 ---------- ---------- Total minimum lease payments 253,823 $ 6,658,239 ========= Less amounts representing interest (at a rate of 10%) 22,846 -------- Present value of future minimum payments on capital lease 230,977
-14- 76 TWEEDS, INC. Notes to Financial Statements Less current installments 121,028 ------------ Obligation under capital lease, excluding current installments $ 109,949 ============ Rent expense under operating leases was $576,333 for the year ended January 31, 1993. Amortization of the capital leases was $433,587 for the year ended January 31, 1993. Accumulated amortization was $566,557 at January 31, 1993. (11) Commitments At January 31, 1993, outstanding letters of credit related to purchases of inventories amounted to $241,494. -15- 77 TWEEDS, INC. Financial Statements February 2, 1992 78 TWEEDS, INC. Balance Sheet February 2, 1992 Assets - ------ Current assets (note 5): Cash (including overnight repurchase agreements of $234,000) (note 12) $ 1,687,476 Accounts receivable 685,428 Inventories (note 4) 4,822,486 Prepaid expenses and other current assets 1,798,312 ----------- Total current assets 8,993,702 ----------- Property, plant and equipment, at cost (notes 5, 10 and 11): Building under capital lease 6,745,250 Furniture, fixtures and equipment 3,063,086 Leasehold improvements 1,077,514 Equipment under capital lease 903,752 Land 61,519 ----------- 11,851,121 Less accumulated depreciation and amortization 1,752,886 ----------- Property, plant and equipment, net 10,098,235 ----------- $ 19,091,937 ================
See accompanying notes to financial statements. -2- 79 Liabilities and Stockholders' Deficit ------------------------------------- Current liabilities: Note payable to bank (note 5) $ 164,291 Current installments of long-term debt (note 5) 1,210,000 Current installments of obligation under capital lease (note 10) 318,031 Account payable 6,531,076 Accrued expenses 2,716,879 ------------ Total current liabilities 10,940,277 ------------ Long-term debt, excluding current installments (note 5) 2,357,337 Obligation under capital lease, excluding current installments (note 10) 6,599,739 ------------ Total liabilities 19,897,353 ------------ Stockholders' deficit (notes 6 and 9): Series A redeemable preferred stock, $.01 par value; 119,048 shares authorized, issued and outstanding (redemption value $84 per share) 9,794,332 Series B redeemable preferred stock, $.01 par value; 857,144 shares, authorized, issued and outstanding (redemption value $17.50 per share) 14,947,508 Common stock, $.01 par value; authorized 3,500,000 shares; issued and outstanding 1,818,149 shares 18,181 Accumulated deficit (25,565,437) ------------ Total stockholders' deficit (805,416) ------------ Commitments (notes 6,8,9, 10 and 12) --------------- --------------- $ 19,091,937 =================
See accompanying notes to financial statements. -3- 80 TWEEDS, INC. Statement of Operations Period from July 1, 1991 to February 2, 1992 Net sales $ 34,416,477 Cost of sales 20,383,347 ------------ Gross profit 14,033,130 ------------ Operating expenses (income): Selling 12,939,979 Fulfillment operations 5,036,088 General and administrative 3,424,839 Customer list rental income (508,768) ------------ Total operating expenses, net 20,892,138 ------------ Loss from operations (6,859,008) ------------ Other income (expense): Interest income 45,391 Interest expense (779,890) Other, net 9,078 ------------ Other income (expense), net (725,421) ------------ Net loss $ (7,584,429) ==============
See accompanying notes to financial statements. -4- 81 TWEEDS, INC. Statement of Stockholders' Deficit Period From July 1, 1991 to February 2, 1992
Series "A" Series "B" Redeemable Redeemable Preferred Stock Preferred Stock Common Stock ----------------------------------------------------------------------------- Shares Amount Shares Amount Shares Amount ----------------------------------------------------------------------------- Balance, July 1, 1991 119,048 $ 9,794,332 857,144 14,947,508 1,816,913 18,169 Stock options exercised (note 9) - - - - 1,236 12 Net Loss - - - - - - ------------------------------------------------------------------------------- Balance, February 2, 1992 119,048 $ 9,794,332 857,144 14,947,508 1,818,149 18,181 ======= ================================================================
Total Accumulated Stockholders' Deficit Deficit -------------------------------- Balance, July 1, 1991 (17,981,008) 6,779,001 Stock options exercised (note 9) - 12 Net Loss (7,584,429) (7,584,429) ----------------------------- Balance, February 2, 1992 (25,565,437) (805,416) ==============================
See accompanying notes to financial statements. -5- 82 TWEEDS, INC. Statement of Cash Flows Period From July 1, 1991 to February 2, 1992 Cash flows from operating activities: Cash received from customers $ 28,069,647 Cash paid to suppliers and employers (27,867,561) Interest received 45,391 Interest paid (779,890) ------------ Net cash used in operating activities (532,413) ------------ Cash flows from investing activities (note 11): Purchases of property, plant and equipment (90,506) Proceeds from sale of property, plant and equipment 6,461 Net cash used in investing activities (84,045) ----------- Cash flows from financing activities (note 11): Proceeds from issuance of long-term debt 3,567,337 Payments on note payable to bank (1,835,709) Payments on capitalized lease obligations and long-term debt (679,685) Proceeds from issuance of common stock 12 ------------ Net cash provided by financing activities 1,051,955 ------------ Net increase in cash 435,497 Cash and cash equivalents, beginning of period 1,251,979 ------------ Cash and cash equivalents, end of period $ 1,687,476 ============ Reconciliation of net loss to net cash used in operating activities: Net loss $ (7,584,429) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 563,353 Increase in accounts receivable (66,644) Decrease in inventories 3,023,648 Decrease in prepaid expenses and other current assets 150,335 Increase in accounts payable 1,986,365 Increase in accrued expenses 1,394,959 ------------ Net cash used in operating activities $ (532,413) ============
See accompanying notes to financial statements. -6- 83 TWEEDS, INC. Notes to Financial Statements February 2, 1992 (1) Description of Company Tweeds, Inc. (the "Company") is a "private label" men's and women's apparel direct mail catalog business. The Company, through its Tweeds and Smythe catalogs, offers distinct lines of clothing to customers throughout the United States. Previously, the Company's fiscal year ended on the Sunday nearest to June 30. Effective in 1992, the Company's fiscal year ends on the Sunday nearest to January 31. As a result of the change in the Company's year end, the accompanying financial statements include the period from July 1, 1991 to February 2, 1992. (2) Significant Accounting Policies (a) Inventory Inventories are valued at the lower of cost (first-in, first-out method) or market. To the extent market is less than cost, valuation reserves are established to reduced inventories to their estimated net realizable value. (b) Catalog Costs The cost of catalogs is deferred and recorded as prepaid expense. These costs are amortized based on the estimated future gross revenues over the catalog's estimated useful life averaging approximately seven months. (c) Property, Plant and Equipment Property, plant and equipment is recorded at cost, or in the case of assets under capital leases, the lower of fair market value or the present value of minimum lease payments at the inception of the lease. Depreciation of property, plant and equipment is computed using the straight-line method over the estimated useful lives of the assets. Property, plant and equipment held under capital leases and leasehold improvements are amortized straight-line over the shorter of the lease term or estimated life of the asset. -7- 84 TWEEDS, INC. Notes to Financial Statements (d) Revenue Recognition Catalog merchandise sales are recognized when the merchandise is prepared for shipment, generally the same day shipment occurs. Advance payments from customers received with orders are classified as customer deposits and are included in accrued expenses. Sales returns and customer refunds are generally processed upon receipt of the returned merchandise. At February 2, 1992, refunds to customers awaiting final processing were delayed due to deteriorating cash flow. The total refunds due amounted to $1,246,000 (approximately 12 days) and are included in accrued expenses. (e) Income Taxes Deferred income taxes are recognized for income and expense items that are reported in different years for financial reporting purposes and income tax purposes. These deferred income taxes originate principally from differences in the recognition of depreciation of property, plant and equipment and inventories valuation. (f) Statement of Cash Flows For the purposes of the statement of cash flows, cash and cash equivalents include cash on deposit and overnight repurchase agreements. -8- 85 TWEEDS, INC. Notes to Financial Statements (3) Management Plans and Intentions and Subsequent Events The Company has a working capital deficiency and has incurred significant operating losses since its inception. During the period ended February 2, 1992, the Company was in violation of various debt covenants under its loan agreements including the primary line of credit and term loan agreement. Management of the Company was able to negotiate new agreements with the creditors and was able to comply with the new agreements (see note 5). Management of the Company has implemented a business plan to reduce the losses which have occurred and direct the Company to profitable operations. This plan includes a reduction of the number of catalog mailings by 30 percent and a reduction in sales volume by 50 percent for the spring and fall seasons. The Company has also substantially reduced the number of employees and management overhead. In addition, the Company is pursuing a sublease or assumption of the leases for a portion of its distribution facility and corporate offices. On May 27, 1992, the Company obtained a $6,500,000 asset-based line of credit to finance its purchases of inventories. The line of credit is secured by inventories and a $2,500,000 collateralized guarantee of the stockholders. Management believes the newly obtained working capital financing and the recently implemented business plan provide the basis for improved operational performance. (4) Inventories Inventories consist of the following at February 2, 1992: Merchandise $ 7,430,774 Piece goods 357,155 Supplies 222,065 ----------- Total inventories, at cost 8,009,994 Valuation Reserves (3,187,508) ----------- Total inventories, at lower of cost or market $ 4,822,486 ===========
-9- 86 TWEEDS, INC. Notes to Financial Statements (5) Note Payable to Bank and Long-term Debt The Company previously had available a line of credit in the amount of $2,000,000, bearing interest at 3/4 percent above the prime rate. On September 23, 1991, the lender initiated a declaration of the event of default on the line of credit. The Company subsequently entered into a Forbearance Agreement on October 29, 1991 to repay amounts totaling $2,441,000 under the line of credit and term loans. Subsequently, on December 2, 1991, the Company entered into a second Forbearance Agreement. This agreement required the repayment of the unpaid balance of $1,328,000 in weekly installments of $100,000 through December 30, 1991 and the assignment of monthly customer list rental income. At February 2, 1992, the remaining outstanding principal under the line of credit and term loan amounted to $164,291. Final payment of this amount was subsequently made in March 1992. The Company has agreed in principal with its catalog printer to convert $3,567,337 of accounts payable to term loan with an initial principal payment of $60,000 due on March 15, 1992, and continuing with monthly principal payments of $115,000 with the remaining unpaid principal balance due on July 1, 1993. The loan will accrue interest at a rate of prime (as determined by First National Bank of Chicago) plus 3 percent (9.5 percent at February 2, 1992). All accrued interest will be payable with the final principal payment on July 1, 1993. The loan will be secured by a second position lien on all of the Company's assets. The aggregate maturities under this term loan for each year subsequent to February 2, 1992 are $1,210,000 in 1993 and $2,357,337 in 1994. As previously stated in note 3, the Company obtained a $6,500,000 asset-based, revolving line of credit on May 27, 1992 to finance its purchases of inventories. The line of credit bears interest at the lender's prime rate plus 3 percent and contains various covenants pertaining to maintenance of working capital and equity and limitations on the acquisition of property, plant and equipment. All available cash of the Company will be applied daily to the line of credit to reduce the outstanding balance. (6) Stockholders' Deficit The Company is obligated to redeem one-third of the Series A and B preferred stock and unpaid cumulative dividends in September of 1994, 1995 and 1996, or 50 percent of the Series A Preferred Stock on the consummation of a public offering. The Series -10- 87 TWEEDS, INC. Notes to Financial Statements A Preferred Stock is redeemable at $84.00 per share plus unpaid cumulative dividends of $10.08 per annum through September 9, 1989 and $5.04 per share per annum after September 9, 1989. The Series B Preferred Stock is redeemable at $17.50 per share plus unpaid cumulative dividends of $1.05 per annum. The Series B Preferred Stock is convertible to common stock at the option of the stockholder on a one-for-one basis and carries voting rights equal to the number of shares of common stock into which it is convertible. Accumulated and undeclared dividends on the redeemable preferred stock was approximately $5,425,000 at February 2, 1992. (7) Income Taxes At February 2, 1992, the Company had available, to offset future taxable income, net operating loss carryforwards of approximately $25,500,000 for book purposes and $25,150,000 for tax purposes. The carryforwards for tax purposes are scheduled to expire as follows:
Tax Years Ending ---------------- 2002 $ 613,000 2003 3,610,000 2004 1,392,000 2005 720,000 2006 10,800,000 2007 8,015,000 ----------- $ 25,150,000 ==========
The principal differences between book and tax net operating loss carryforwards resulted from the acceleration of depreciation on equipment and amortization of capital leases, and capitalization of certain costs in inventory for tax purposes. (8) Employee Benefit Plan The Company sponsors a 401(k) Salary Deferral Plan. The Company has elected to match 25 percent of the first 5 percent of qualified compensation contributed by participants. Company contributions to the Plan for the period from July 1, 1991 to February 2, 1992 were $4,916. -11- 88 TWEEDS, INC. Notes to Financial Statements (9) Stock Options and Warrants The Company has an Incentive Stock Option Plan (the "Plan") under which options are granted to key employees to purchase shares of common stock at a price not less than the fair market value at the date of grant. The options granted vest over a four-year period in increments of 25 percent per year. The Company reserved 200,000 shares of common stock under this Plan. These options were subsequently terminated in May 1992 as a stipulation for obtaining the $6,500,000 line of credit (see notes 3 and 5). Warrants to purchase common stock were issued in connection with certain loans from stockholders in fiscal 1990. The warrants were subsequently terminated in May 1992 as a stipulation for obtaining the $6,500,000 line of credit (see notes 3 and 5). Prior to July 1, 1991, a board member was granted options to purchase 75,000 shares of common stock at $1 per share. These options expire in 1995. A summary of the options and warrants to purchase the Company's common stock follows:
Options Under Incentive Stock Other Option Plan Warrants Options --------------- -------- ------- Balance, July 1, 1991: 93,893 9,779 75,000 Exercised (1,236) - - ------------------------------------------- Balance, February 2, 1992 92,657 9,779 75,000 ====== ===== ====== Exercise price per share $.01-$1.00 $.01 $1.00 ========== ====== =====
(10) Leases In October 1989, the Company entered into an agreement to lease a fulfillment center in Virginia. The lease term is 25 years from January 1, 1991. The base rent of $920,688 per annum is based on development cost of $6,635,602. The annual base rent will be adjusted every five years based on the change in the consumer price index. The lease contains an option for the Company to purchase the building after year five through year nine at 110 percent of the actual original development cost subject to certain increases in the consumer price index. -12- 89 TWEEDS, INC. Notes to Financial Statements In December 1989, the Company entered into an agreement to lease computer equipment for a 60-month period. The lease payments included below in other capital leases are $28,878 for the first 36 months and $2,125 per month thereafter. The Company may purchase the equipment at the fair market value as determined in the lease agreement. The Company leases offices, operating facilities and machinery under various capital and operating leases. The future minimum annual rent required for each of the next five years and thereafter under the above agreements are as follows:
Building Other Capital Capital Operating Lease Leases Leases -------- -------- ---------- 1993 $ 920,688 $ 295,009 $ 582,938 1994 920,688 26,154 558,563 1995 920,688 21,246 509,369 1996 920,688 - 466,008 1997 920,688 - 408,921 After 1997 17,416,348 - 1,097,246 ---------- ---------- ---------- Total minimum lease payments 22,019,788 342,409 $ 3,623,045 ========== Less amounts representing interest (at rates ranging from 10% to 22%) 15,422,544 21,883 ------------------------ Present value of future minimum payments on capital leases 6,597,244 320,526 Less current installments 40,664 277,367 ----------------------- Obligations under capital leases, excluding current installments $ 6,556,580 $ 43,159 =======================
-13- 90 TWEEDS, INC. Notes to Financial Statements Rent expense under operating leases was $368,876 for the period from July 1, 1991 to February 2, 1992. Amortization of the capital leases was $262,049 for the period from July 1, 1991 to February 2, 1992. Accumulated amortization was $663,255 at February 2, 1992. (11) Noncash Investing and Financing Activities Building under capital lease and the related obligation under capital lease were each reduced by $164,398 during the period ended February 2, 1992 when construction costs of the building were finalized at an amount less than originally recorded. (12) Commitment At February 2, 1992, cash in the amount of $916,473 is pledged as collateral against outstanding letters of credit. -14- 91 TWEEDS, INC. Financial Statements for the Years Ended June 30, 1991 and July 1990 and Independent Auditors' Report -1- 92 INDEPENDENT AUDITORS' REPOR Board of Directors Tweeds, Inc. Edgewater, New Jersey We have audited the accompanying balance sheets of Tweeds, Inc. as of June 30, 1991 and July 1, 1990, and the related statements of operations, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Tweeds, Inc. as of June 30, 1991 and July 1, 1990, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that Tweeds, Inc. will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered recurring losses from operations since its inception and is in violation of certain debt covenants at June 30, 1991 that raise substantial doubt about the entity's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Deloitte & Touche Parsippany, New Jersey September 12, 1991, except for Note 3, as to which the date is December 11, 1991 -2- 93 TWEEDS, INC BALANCE SHEETS JUNE 30, 1991 AND JULY 1, 1990
June 30, July 1, 1991 1990 -------- -------- ASSETS - ------ CURRENT ASSETS: Cash (including certificates of deposit of $562,000 (1991) and $377,000 (1990) (Note 10) $ 1,251,979 $ 1,899,850 Accounts receivable 618,784 993,317 Inventories (Note 4) 7,846,134 17,580,332 Prepaid expenses and other assets 1,948,647 3,506,007 --------------------- --------------------- Total current assets 11,665,544 23,979,506 --------------------- --------------------- PROPERTY, PLANT AND EQUIPMENT, AT COST (Notes 5 and 10): Building under capital lease 6,909,648 6,899,022 Furniture, fixtures and equipment 2,986,411 2,461,960 Leasehold improvements 1,077,284 387,002 Equipment under capital lease 903,752 1,203,975 Land 61,519 61,519 --------------------- --------------------- 11,938,614 11,013,478 Less accumulated depreciation and amortization (1,196,673) (878,828) -------------------- -------------------- 10,741,941 10,134,650 --------------------- --------------------- $ 22,407,485 $ 34,114,156 ===================== ===================== LIABILITIES AND STOCKHOLDERS' EQUIT - ----------------------------------- CURRENT LIABILITIES: Notes payable - bank (Note 5) $ 2,000,000 $ - Accounts payable 4,544,711 8,205,121 Accrued expenses 1,321,920 1,008,396 Long-term debt in default (Note 5) 320,000 - Current portion of long-term debt and obligations under capital leases (Notes 5 and 10) 508,425 557,094 --------------------- --------------------- Total current liabilities 8,695,056 9,770,611 --------------------- --------------------- LONG-TERM DEBT (Note 5) - 480,000 --------------------- --------------------- OBLIGATIONS UNDER CAPITAL LEASE (Note 10) 6,933,428 7,363,880 --------------------- --------------------- STOCKHOLDERS' EQUITY (Note 6): Series A redeemable preferred stock, $.01 par value; 119,048 shares authorized, issued and outstanding (redemption value $84 per share) 9,794,332 9,794,332 Series B redeemable preferred stock, $.01 par value; 857,144 shares, authorized, issued and outstanding (redemption value $17.50 per share) 14,947,508 14,947,508 Common stock, $.01 par value; authorized: 3,500,000 shares; issued and outstanding: (1991) 1,816,913 shares, (1990) 1,879,232 shares 18,169 18,792 Accumulated deficit (17,981,008) (8,243,050) Notes receivable for stock - (17,917) --------------------- -------------------- TOTAL STOCKHOLDERS' EQUITY 6,779,001 16,449,665 --------------------- --------------------- $ 22,407,485 $ 34,114,156 ===================== =====================
See notes to financial statements -3- 94 TWEEDS, INC STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1991 AND JULY 1, 1990
June 30, July 1, 1991 1990 -------- ------- NET SALES $68,395,660 $66,091,773 COST OF SALES 35,386,483 31,824,148 ----------- ----------- 33,009,177 34,267,625 ------------ ----------- OPERATING EXPENSES (INCOME): Selling 22,211,064 18,468,113 Fulfillment operations 13,983,969 12,360,116 General and administrative 6,585,781 6,230,010 Customer list rental income (666,333) (594,704) ----------- --------- 42,114,481 36,463,535 ------------ ----------- LOSS BEFORE DISPOSAL OF EQUIPMENT AND TERMINATION OF LEASE (9,105,304) (2,195,910) LOSS FROM DISPOSAL OF EQUIPMENT AND TERMINATION OF LEASE (Note 10) - (333,763) ----------- ----------- LOSS FROM OPERATIONS (9,105,304) (2,529,673) ----------- ----------- INTEREST INCOME (EXPENSE): Interest expense (862,048) (249,313) Interest income 229,394 434,215 ----------- ---------- (632,654) 184,902 ---------- ---------- NET LOSS $(9,737,958) $(2,344,771) ============ ============
See notes to financial statements. -4- 95 TWEEDS, INC STATEMENTS OF STOCKHOLDERS' EQUITY YEARS ENDED JUNE 30, 1991 AND JULY 1, 1990 - ------------------------------------------------------
Series "A" Series "B" Redeemable Stock Redeemable Stock Common Stock ------------------------ ------------------------ -------------------- Shares Amount Shares Amount Shares Amount ------ ------ ------ ------ ------ ------ BALANCE, JULY 2, 1989 119,048 $9,794,332 - $ - 1,643,727 $16,438 Preferred stock sold for cash and cancellation notes and accrued interest in September 1989, net of $52,492 representing cost of issuance (Note 6) - - 857,144 14,947,508 - - Stock options exercised in - - - - 11,920 119 August and September 1989 Stock warrants exercised in - - - - 88,025 880 September 1989 Common stock issued for cash - - - - 135,560 1,355 in August and September 1989 Cash received on notes - - - - - - Net loss - - - - - - -------- --------- ------- ---------- --------- -------- BALANCE, JULY 1, 1990 119,048 9,794,332 857,144 14,947,508 1,879,232 18,792 Common stock repurchased in February/May 1991 - - - - (62,518) (625) Stock options exercised in August and September 1990 and May 1991 - - - - 199 2 Cash received on notes - - - - - - Net loss - - - - - - ------- ---------- ------- ----------- --------- ---------- BALANCE, JUNE 30, 1991 119,048 $9,794,332 857,144 $14,947,508 1,816,913 $18,169 ======= ========== ======= =========== ========= =======
Notes Total Stock- Deficit Receivable holders' Accumulated for Stock Equity ----------- --------- -------- BALANCE, JULY 2, 1989 $ (5,898,279) $ (35,834) $ 3,876,657 Preferred stock sold for cash and cancellation notes and accrued interest in September 1989, net of $52,492 representing cost of issuance (Note 6) - - 14,947,508 Stock options exercised in - - 119 August and September 1989 Stock warrants exercised in - - 880 September 1989 Common stock issued for cash - - 1,355 in August and September 1989 Cash received on notes - 17,917 17,917 Net loss (2,344,771) - (2,344,771) ----------- --------- ----------- BALANCE, JULY 1, 1990 (8,243,050) (17,917) 16,499,665 Common stock repurchased in February/May 1991 - - (625) Stock options exercised in August and September 1990 and May 1991 - - (2) Cash received on notes - 17,917 17,917 Net loss (9,737,958) - (9,737,958) ------------- ----------- ---------- BALANCE, JUNE 30, 1991 $(17,981,008) $ - $ 6,779,001 ============= ========== =========
See notes to financial statements. 96 TWEEDS, INC STATEMENTS OF CASH FLOW YEARS ENDED JUNE 30, 1991 AND JULY 1, 1990
June 30, July 1, 1991 1990 -------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(9,737,958) $(2,344,771) ----------- ----------- Adjustments to reconcile net loss to cash used in operating activities: Depreciation and amortization 777,966 525,124 Loss on disposal of equipment 106,514 288,027 Changes in assets and liabilities: Decrease (increase) in accounts receivable 374,533 (111,508) Decrease (increase) in inventories 9,734,198 (7,336,403) Decrease (increase) in prepaid expenses 1,557,360 (2,618,433) Decrease in other assets - 67,405 (Decrease) increase in accounts payable (3,660,410) 3,504,869 Increase in accrued expenses 313,524 73,652 ----------- ----------- Total adjustments 9,203,685 (5,607,267) ----------- ----------- Net cash used in operating activities (534,273) (7,952,038) ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Payments for purchase of equipment and leasehold improvements (1,666,771) (1,247,291) Proceeds from sale of equipment and leasehold improvements 175,000 - ------------ ------------ Net cash used in investing activities (1,491,771) (1,247,291) ----------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common and preferred stock, net or cost of issuance - 10,690,813 Payments on capitalized lease obligations and long-term debt (639,121) (197,551) Proceeds from notes receivable from stock 17,917 17,917 Proceeds from bank line of credit 2,000,000 - Repurchase of common stock (623) - ----------- ---------- Net cash provided by financing activities 1,378,173 10,511,179 ----------- ------------ NET INCREASE (DECREASE) IN CASH (647,871) 1,311,850 CASH, BEGINNING OF YEAR 1,899,850 588,000 ----------- ----------- CASH, END OF YEAR $ 1,251,979 $ 1,899,850 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the year for interest $ 846,631 $ 166,464 ----------- -----------
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES: Capital lease obligations of $7,792,997 were incurred in the year ended July 1, 1990, when the company entered into leases for a building and equipment. Notes and accrued interest payable to stockholders of $4,259,049 were converted to preferred stock during the year ended July 1, 1990. See notes to financial statements. -6- 97 TWEEDS, INC NOTES TO FINANCIAL STATEMENTS YEARS ENDED JUNE 30, 1991 AND JULY 1, 1990 1. DESCRIPTION OF COMPANY Tweeds, Inc. (the "Company") is a "private label" men's and women's apparel direct mail catalog business. The Company, through its Tweeds and Smythe catalogues, offers distinct lines of clothing to customers throughout the United States. The Company's fiscal year ends on the Saturday nearest to June 30. 2. SIGNIFICANT ACCOUNTING POLICIES a. Property, Plant and Equipment - Property, plant and equipment is recorded at a cost, or in the case of assets under capital leases (Note 10) the lower of fair market value or the present value of future lease payments. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets or the lives of the leases, whichever is less. b. Inventory - Inventories are valued at the lower of cost (first-in, first-out method) or market. c. Catalog Costs - The cost of catalogs is deferred and recorded as prepaid expense. These costs are amortized based on the estimated future gross revenues over the catalogue's estimated useful life averaging approximately seven months. d. Statement of Cash Flows - For the purposes of the statement of cash flows, cash includes cash on deposit and certificates of deposit, with an original maturity of three months or less. 3. MANAGEMENT PLANS AND INTENTION AND SUBSEQUENT EVENTS The Company has incurred significant operating losses from operations since its inception and was in violation of various debt covenants under its line of credit and term loan agreement. This resulted in the notification on September 23, 1991 from the Company's primary lender of the non-renewal of the line of credit (see Note 5) and an available letter of credit of $4 million (see Note 10b) at their maturity date of October 31, 1991, and the demand for repayment of the term loan (see Note 5) on October 31, 1991. In addition, on October 28, 1991, a secondary lender notified the Company that the available letter of credit line of $5 million (see Note 10b) was terminated and the lender demanded cash collateral for all outstanding letters of credit. These conditions give rise to substantial doubt about the Company's ability to continue as a going concern. The Company entered into a Forbearance Agreement with its primary lender on October 29, 1991 to repay amounts totaling $2,441,000 under the line of credit and term loans. Subsequently, on December 2, 1991, the Company entered into a second Forbearance Agreement. This agreement requires the repayment of the unpaid balance of $1,328,000 in weekly installments of $100,000 through December 30, 1991, the assignment of monthly list rental income, and the balance to be paid on January 10, 1992. Amounts due bear interest at the bank's prime rate plus 3%. On November 13, 1991, the secondary lender filed proceedings against the Company requiring the Company to post 100% cash collateral for outstanding letters of credit or sought for the appointment for a statutory receiver to liquidate the assets of the Company and wind up its affairs. This lender also froze bank accounts totaling $96,000 of the Company located at this lender's bank. On December 9, 1991, the Company settled this action and entered into a Security Agreement which required the Company to pay down and/or cancel letters of credit to the amount of collateral of $916,000, and grant a first party lien on merchandise purchased with said letters of credit by December 16, 1991. Management of the Company anticipates that they will be able to comply with all of the above agreements. Management of the Company has also adopted a preliminary reorganization plan to reduce the losses which have occurred and direct the Company to profitable operations. These plans include a reduction of -7- 98 the number of catalog mailings by 30% and a reduction in the volume of business by 50% for the Spring catalog season. The Company will also substantially reduce the number of employees and management by early January 1992. In addition, the Company is pursuing a sublease or assumption of the leases of its distribution facility and corporate offices. The Company has agreed in principal with its catalog printer to convert approximately $3.4 million of accounts payable at December 11, 1991 to a 30-month term loan with a balloon payment in 18 months. The loan will bear interest at the prime rate plus 3%. In addition, the Company is negotiating with this printer and other suppliers for a minimum 5% reduction in the cost of goods and services the Company plans to purchase for the Spring catalog season. The Company is actively pursuing alternative sources of financing and anticipates that it will be able to obtain an asset-based line of credit to finance its working capital needs and an available letter of credit to finance its purchase of inventory. Management believes that the operations will require a $2 million line of credit and a $2 million letter of credit line plus an equity infusion of $1,000,000. 4. INVENTORIES Inventories consist of the following:
June 30, July 1, 1991 1990 ------- ------- Merchandise $ 7,588,868 $ 16,981,759 Piece goods 152,899 414,289 Supplies 104,367 184,284 ---------- ---------- $ 7,846,134 $ 17,580,332 --------- ----------
5. NOTES PAYABLE - BANK AND LONG-TERM DEBT The Company has available a line of credit in the amount of $2,000,000 which bears interest at 3/4% above the prime rate through October 30, 1991. Related debt outstanding at the close of business on June 30, 1991 and July 1, 1990 was $2,000,000 and $-0-, respectively. The Company must meet certain covenants including a minimum current ratio, debt to adjusted funds ratio and borrowings cannot exceed 50% of the inventory on hand at any time. The Company's long-term debt consists of a term loan payable with interest at 10.8%. Repayment is due in monthly installments of $13,333 plus interest which began in July 1989 and continues through June 1993 with a balloon payment of $173,333 at June 1993. These loans are secured by receivables, inventory, mailing lists, furniture, fixtures and equipment. The line of credit and term loan agreement contain cross-default provisions. At June 30, 1991, the Company was in default of the debt to adjusted funds ratio and the current ratio covenants of the loan agreement. A declaration of the event of default was initiated by the lender on September 23, 1991. Accordingly, the long-term portion of the term loan has been classified as long-term debt in default at June 30, 1991. 6. STOCKHOLDER'S EQUITY The Company is obligated to redeem one-third of the preferred stock and accumulated dividends on each September of 1994, 1995 and 1996, or 50% of the Series A Preferred Stock on the consummation of a public offering. The Series A Preferred Stock is redeemable at $84.00 per share plus unpaid cumulative dividends of $10.08 per annum through September 9, 1989 and $5.04 per share per annum after September 9, 1989. The Series B Preferred Stock is redeemable at $17.50 per share plus cumulative dividends of $1.05 per annum. The Series B Preferred Stock is convertible to common stock at the option of the stockholder on a one-for-one basis and carries voting rights equal to the number of shares of common stock into which it is convertible. -8- 99 Accumulated and undeclared dividends on the redeemable preferred stock was approximately $4,550,000 at June 30, 1991 and $3,050,000 at July 1, 1990. During the year ended July 1, 1990, the Company issued 135,560 shares of restricted common stock at $.01 per share to certain individuals. The Compensation Committee of the Board of Directors determined the fair value of stock and options granted during the year ended June 30, 1991 to be $1.00 and during the year ended July 1, 1990 to be $.01 per share. The stock vests based on the individual's length of service and/or a formula based on the Company's performance. In 1991, the Company repurchased 62,518 shares of restricted common stock which was not earned by the individual receiving the stock in accordance with the vesting requirements. 7. INCOME TAXES At July 1, 1990, the Company had available, to offset future taxable income, net operating loss carryforwards of approximately $17,900,000 for book purposes and $17,285,000 for tax purposes. The carryforwards for tax purposes are scheduled to expire as follows:
Year Ending June 30, ----------- 2002 $ 613,000 2003 3,610,000 2004 1,392,000 2005 720,000 2006 10,950,000 ---------- $17,285,000 ===========
The principal differences between book and tax net operating loss carryforwards resulted from the acceleration of depreciation on equipment and amortization of capital leases, and capitalization of certain costs in inventory for tax purposes. 8. BENEFIT PLAN The Company sponsors a 401(k) Salary Deferral Plan. The Company has elected to match 25% of the first 5% of qualified compensation contributed by participants for plan years ended December 31, 1991 and 1990. Company contributions to the Plan for the years ended June 30, 1991 and July 1, 1990 were $31,755 and $64,113, respectively. 9. STOCK OPTIONS AND WARRANTS The Company has an Incentive Stock Option Plan (the "Plan") under which options are granted are granted to key employees to purchase shares of common stock at a price not less than the fair market value at the date of grant. The options granted vest over a four-year period in increments of 25% per year. The Company reserved 200,000 shares of common stock under this Plan. Warrants to purchase common stock were issued in connection with certain loans from stockholders in fiscal 1990. During 1991, certain board members were granted options to purchase 87,000 shares of common stock at $1 per share. These options expire in 1994. A summary of the options to purchase the Company's common stock follows: -9- 100
Options under Incentive Stock Other Option Plan Warrants Options ---------------- -------- ------- Balance, July 2, 1989 3,095 - - Granted 18,062 167,672 - Exercised - (88,025) - Canceled, expired or not vested (2,647) (69,868) - ------- -------- ------- Balance, July 1, 1990 18,510 9,779 - Granted 84,263 - 87,000 Exercised (199) - - Canceled, expired or not vested (8,681) - - ------- -------- ------- Balance, June 30, 1991 93,893 9,779 87,000 ------- -------- ------- Exercise price per share $.01 - $1.00 $.01 $1.00 ------------ ---- ----- Options expire in 1999 1994 1994 ---- ---- ----
10. COMMITMENTS a. Lease Commitments - In October 1989, the Company entered into an agreement to lease a fulfillment center in Virginia. The lease term is 25 years from January 1, 1991. The base rent of $943,500 per annum is based on an estimated development cost of $6,800,000 and is subject to adjustment based on the developers' final cost. The annual base rent will be adjusted every five years based on the change in the consumer price index. The lease contains an option for Tweeds to purchase the building after year five through year nine at 110% of the actual original development cost subject to certain increases in the consumer price index. In 1989, the Company entered into an agreement to lease computer equipment for a 60-month period. The lease payments included below in other capital leases are $28,878 for the first 36 months and $2,125 per month thereafter. The Company may purchase the equipment at the fair market value as determined in the lease agreement. Computer equipment, under a capital lease, which is no longer utilized by the Company resulted in a loss of $288,027 in 1990. The Company also terminated an office lease in 1990 which resulted in a loss of $45,736. The Company leases offices, operating facilities and machinery under various capital and operating leases. -10- 101 The future minimum annual rent required for each of the next five years and thereafter under the above agreements are as follows:
Building Other Capital Capital Operating Lease Leases Leases --------- ------- --------- 1992 $ 943,500 $ 349,024 $ 591,043 1993 943,500 161,076 571,529 1994 943,500 25,495 527,511 1995 943,500 10,623 490,286 1996 943,500 - 442,375 After 1996 18,398,250 - 1,335,520 ---------- ---------- ---------- Total minimum payments 23,115,750 546,218 $3,958,264 ========== Less imputed interest 16,333,191 46,923 ---------- ---------- Present value of future minimum payments on capital leases 6,782,559 499,295 Less current portion (38,562) (309,864) -------- ----------- Long-term obligation under capital leases $ 6,743,997 $ 189,431 ============ ==========
Rent expense under operating leases is $1,051,952 and $819,792 in 1991 and 1990, respectively. Amortization of the capital leases is $210,781 in 1991 and $138,816 in 1990. Accumulated amortization is $272,096 at June 30, 1991 and $169,816 at July 1, 1990. b. Letters of Credit - The Company has outstanding approximately $5,030,670 in letters of credit at June 30, 1991, which are collateralized in part by certificates of deposits. * * * * * * -11- 102 Item 7(a)(vi) TWEEDS, INC. CONSOLIDATED BALANCE SHEET (UNAUDITED) AS OF SEPTEMBER 26, 1993 (IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents $ 239 Accounts receivable, net 743 Inventories 2,795 Other current assets 2,024 --------- Total Current Assets 5,801 --------- Property and equipment 5,267 Accumulated depreciation (2,641) -------- Net Property 2,626 --------- Other assets 267 --------- Total Assets $ 8,694 ========= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current Liabilities: Current portion of long term debt $ 4,514 Accounts payable & accrued liabilities 4,047 --------- Total Current Liabilities 8,561 Noncurrent liabilities: Long-term debt 700 --------- Total Liabilities 9,261 --------- Shareholders' Equity (Deficit): Preferred stock, cumulative, nonvoting, $.01 par value; 2,004,479 shares authorized, issued and outstanding 20 Common stock, $.01 par value, authorized 6,000,000 shares; issued and outstanding 4,986,368 shares 50 Additional paid-in capital 26,724 Accumulated deficit (27,361) -------- Total Shareholders' Equity (Deficit) (567) -------- Total Liabilities and Shareholders' Equity (Deficit) $ 8,694 =========
-1- 103 TWEEDS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS)
FOR THE EIGHT MONTHS ENDED -------------------------- September 27, September 26, 1992 1993 ----------- ------------ Revenues $ 20,976 $ 22,743 Operating costs and expenses: Costs of sales and operating expenses 14,227 14,015 Selling expenses 5,351 6,690 General and administrative expenses 2,033 2,554 --------- ---------- Loss from operations (635) (516) --------- ---------- Interest and other income (expense): Interest expense (654) (362) Other expense (61) (128) --------- ---------- (715) (490) --------- ---------- Net loss $ (1,350) $ (1,006) ========= ==========
-2- 104 TWEEDS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
FOR THE EIGHT MONTHS ENDED -------------------------- SEPTEMBER 27, SEPTEMBER 26, 1992 1993 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (loss) ($1,350) ($1,006) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization 632 499 Inventory reserves (1,097) (446) Changes in operating assets and liabilities: Accounts receivable 171 (323) Inventories 1,557 441 Prepaid expenses and other (117) (41) Accounts payable (5,013) 972 Accrued expenses 571 (281) Other - 107 -------- -------- Net cash provided (used) by operating activities (4,646) (78) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of property (55) (61) -------- -------- Net cash provided (used) by investing activities (55) (61) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings under revolving credit facilities 2,937 1,513 Payments of long term debt (486) (1,121) Proceeds from stock issuance, net 25 (20) -------- -------- Net cash provided (used) by financing activities 2,476 372 -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,225) 233 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD 1,688 6 -------- -------- CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD ($537) $239 ======== ========
-3- 105 TWEEDS, INC. AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements: 1. Basis of presentation - In the opinion of management, the accompanying unaudited interim financial statements contain all material adjustments, consisting of normal recurring accruals, necessary to present fairly the financial condition as of September 26, 1993 and the results of operations for the eight month periods ended September 27, 1992 and September 26, 1993 of Tweeds, Inc. and its consolidated subsidiaries for the interim periods. Operating results for interim periods are not necessarily indicative of the results that may be expected for the entire year. 2. Subsequent event - On September 30, 1993, TW Acquisitions, Inc. ("TWA"), a wholly-owned subsidiary of Hanover Direct, Inc., acquired all of the issued and outstanding shares of preferred stock of Tweeds, Inc. The purchase price was $3.7 million and was paid as follows: (i) $.1 million in cash; and (ii) 771,774 shares of Hanover Direct, Inc.'s common stock, valued at $4.06 per share, or $3.6 million. -4- 106 Item 7(b) PRO FORMA UNAUDITED CONSOLIDATED CONDENSED FINANCIAL INFORMATION OF THE COMPANY The following Pro Forma Unaudited Consolidated Condensed Financial Information of the Company represents the historical and consolidated condensed balance sheet of the Company at September 25, 1993, and consolidated condensed statements of operations of the Company for the year ended December 26, 1992, and for the nine months ended September 25, 1993; (1) as adjusted to reflect the acquisition of the retail and mail-order assets of Gump's, Inc. which was consummated on July 12, 1993, and (2) as adjusted to reflect the acquisition of Company Store Holdings, Inc., which was consummated on August 25, 1993, and (3) as adjusted to reflect the acquisition of Tweeds, Inc., which was consummated on September 30, 1993. The adjustments to the consolidated condensed statement of operations of the Company for the year ended December 26, 1992, reflects the impact of Gump's, Inc., Company Store Holdings, Inc. and the Tweeds, Inc. acquisitions as of the beginning of the fiscal year ended December 26, 1992. The adjustments to the consolidated condensed statement of operations of the Company for the nine months ended September 25, 1993, reflects the impact of such acquisitions as of the beginning of such nine month period. The unaudited consolidated statement of operations of Hanover Direct, Inc. for the nine months ended September 25, 1993, includes the results of operations of Gump's, Inc. and Company Store Holdings, Inc. from the respective dates of acquisition by the Company through September 25, 1993. The adjustments to the unaudited consolidated condensed balance sheet of the Company at September 25, 1993, reflects the impact of the Tweeds, Inc. acquisition as if such transaction occurred on September 25, 1993. Company Store Holdings, Inc. and Gump's, Inc. are included in the unaudited consolidated balance sheet of Hanover Direct, Inc. as of September 25, 1993. The Pro Forma Unaudited Consolidated Condensed Financial Statements have been adjusted to reflect the elimination of assets and liabilities that were not acquired and for transactions and charges that will occur in connection with the acquisitions. The adjustments reflect entries that are to be made in accordance with the purchase method of accounting. The pro forma information is not necessarily indicative of the results that would have occurred or that may be achieved in the future. The Pro Forma Unaudited Consolidated Condensed Financial Statements for the twelve months ended December 26, 1992 include the historical audited financial statements of the Company, Gump's, Inc. and Tweeds, Inc. for the year ended December 26, 1992, February 27, 1993 and January 31, 1993, respectively, and the historical unaudited financial statements for Company Store Holdings, Inc. for the twelve months ended January 30, 1993. The Pro Forma Unaudited Consolidated Condensed Financial Statements for the nine months ended September 25, 1993 include the historical unaudited financial statements of the Company, Gump's, Inc., Company Store Holdings, Inc. and Tweed's, Inc. for the nine months ended September 25, 1993, for the twenty- seven weeks ended July 11, 1993, for the eight months ended August 25, 1993 and for the nine months ended September 26, 1993, respectively. The Pro Forma Unaudited Consolidated Condensed Financial Statements should be read in conjunction with the historical financial statements of each company as described in Item 7(a) and filed as part of this Report. -1- 107 HANOVER DIRECT, INC. CONDENSED PRO FORMA BALANCE SHEET AS OF SEPTEMBER 25, 1993 (UNAUDITED)
(in thousands) Hanover Direct, Inc. Tweeds, Inc. Pro Forma September 25, 1993 September 26, 1993 Adjustments Pro Forma ---------------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents $ 1,360 $ 239 $ (100) A $ 1,499 Accounts receivable, net 23,868 743 (75) B 24,536 Inventories 75,259 2,795 (276) C 77,778 Deferred tax asset 2,975 2,975 Other current assets 35,446 2,024 (478) D 36,992 ---------------------------------------------------------------------------- Total Current Assets 138,908 5,801 (929) 143,780 Net Property & Equipment 17,925 2,626 288 E 20,839 Excess of Cost over Net Assets of Acquired Businesses 13,189 5,685 F 18,874 Deferred tax asset, net 7,656 7,656 Other Assets 4,317 267 933 G 5,517 ---------------------------------------------------------------------------- Total Assets $ 181,995 $ 8,694 $ 5,977 $ 196,666 ============================================================================
- ------------------- A. Represents cash used in the purchase of Tweeds. B. Represents the write off of accounts receivable in connection with the purchase. C. Represents reserves for Tweeds' inventory. D. Represents the reduction of certain prepaid expenses of Tweeds to conform with Hanover Direct, Inc.'s accounting policy. E. Represents the increase in appraised value of Tweeds property and equipment. F. Represents goodwill associated with the purchase of Tweeds. G. Represents the appraised value of Tweeds' mailing list, net of the reduction of certain Other Assets. H. Represents the issuance of common stock of Hanover Direct, Inc. in connection with the purchase of Tweeds and the elimination of the Tweeds, Inc. accumulated deficit and Preferred stock. I. Represents the restructuring of long-term debt in connection with the acquisition. J. Represents transaction and transition costs and certain accruals to conform with Hanover Direct, Inc.'s accounting policy. -2- 108 HANOVER DIRECT, INC. CONDENSED PRO FORMA BALANCE SHEET AS OF SEPTEMBER 25, 1993 (UNAUDITED)
(in thousands) Hanover Direct, Inc. Tweeds, Inc. Pro Forma September 25, 1993 September 26, 1993 Adjustments Pro Forma ------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long term debt and Capital Leases $ 237 $ 4,514 (4,514) I $ 237 Accounts payable & Accrued Liabilities 86,074 4,047 1,760 J 91,881 Other liabilities 5,886 5,886 -------------------------------------------------------------------------- Total Current Liabilities 92,197 8,561 (2,754) 98,004 -------------------------------------------------------------------------- Noncurrent Liabilities: Long-term debt 55,401 700 4,514 I 60,615 Other 2,160 2,160 -------------------------------------------------------------------------- Total Noncurrent Liabilities 57,561 700 4,514 62,775 -------------------------------------------------------------------------- Total Liabilities 149,758 9,261 1,760 160,779 -------------------------------------------------------------------------- Commitments and Contingencies Common and Other Shareholders' Equity (Deficit): 7.5% Preferred stock 7,158 7,158 Class B Preferred stock 25,516 25,516 Preferred Stock 20 (20) H 0 Class B Common Stock 123 123 Common Stock 40,777 50 465 H 41,292 Capital in excess of par 187,741 26,724 (23,589) H 190,876 Accumulated deficit (222,737) (27,361) 27,361 H (222,737) -------------------------------------------------------------------------- 38,578 (567) 4,217 42,228 Less: Treasury Stock (3,451) (3,451) Notes receivable from the sale of common stock (2,002) (2,002) Deferred compensation (888) (888) -------------------------------------------------------------------------- Common and Other Shareholders' Equity (Deficit) 32,237 (567) 4,217 35,887 -------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $ 181,995 $ 8,694 $ 5,977 $ 196,666 ==========================================================================
-3- 109 HANOVER DIRECT, INC. CONDENSED PRO FORMA INCOME STATEMENT TWELVE MONTHS ENDED DECEMBER 26, 1992 (UNAUDITED)
Company Store (In thousands) Hanover Direct, Inc. Gump's, Inc. Holdings, Inc. Tweeds, Inc. Year Ended Year Ended 12 Months Ended Year Ended December 26, 1992 February 27, 1993 January 30, 1993 January 31, 1993 ---------------------------------------------------------------------------------- REVENUES $ 586,562 $ 45,361 $ 74,551 $ 34,564 Operating costs and expenses: Costs of sales and operating expenses 381,716 24,313 42,820 18,505 Selling expenses 138,494 21,783 27,230 13,033 General administrative expenses 51,950 5,263 7,659 2,631 ---------------------------------------------------------------------------------- INCOME FROM OPERATIONS 14,402 (5,998) (3,158) 395 ---------------------------------------------------------------------------------- Interest and other income (expenses): Interest expense (13,379) (2,651) (2,417) (1,398) Interest income 244 0 0 14 Other income (expense) 0 0 (822) 199 ---------------------------------------------------------------------------------- (13,135) (2,651) (3,239) (1,185) Income tax provision 219 0 0 ---------------------------------------------------------------------------------- Income (loss) before extraordinary gains and accounting change for income taxes $ 1,048 $ (8,649) $ (6,397) $ (790) ================================================================================== Net income (loss) per share: Income (loss) before extraordinary gains and accounting change for income taxes $ 0.03 ==========
(In thousands) Pro Forma Adjustments Pro Forma -------------------------------------- REVENUES $ (7,584) A $ 733,454 Operating costs and expenses: Costs of sales and operating expenses (691) B 466,663 Selling expenses (11,498) C 189,042 General administrative expenses (2,387) D 65,116 ------------------------------------- INCOME FROM OPERATIONS 6,992 12,633 ------------------------------------- Interest and other income (expenses): Interest expense 4,076 E (15,769) Interest income 258 Other income (expense) (623) ------------------------------------- 4,076 (16,134) Income tax provision 219 ------------------------------------ Income (loss) before extraordinary gains and accounting change for income taxes $ 11,068 $ (3,720) ===================================== Net income (loss) per share: Income (loss) before extraordinary gains and accounting change for income taxes $(0.09) ==========
A. Represents the elimination of approximately $4,638 and $3,453 of revenues related to operations not acquired for Gump's, Inc. and Company Store Holdings, Inc., respectively. Also included in this amount is approximately $507 representing the reclassification of Tweeds, Inc.'s financial statements to conform with the Company's reporting classifications. B. Represents the elimination of approximately $3,408 and $2,334 of costs related to operations not acquired for Gump's, Inc. and Company Store Holdings, Inc., respectively. Also included in this amount is approximately $5,051 representing certain reclassifications of Tweeds, Inc.'s financial statements to conform with the Company's reporting classifications. C. Represents the elimination of approximately $2,902 and $1,356 of costs related to operations not acquired for Gump's, Inc. and Company Store Holdings, Inc., respectively. Also, approximately $4,544 representing certain reclassifications of Tweeds, Inc.'s financial statements to conform with the Company's reporting classifications; approximately $3,188 of occupancy and payroll costs that are being eliminated from the operations of Gump's, Inc. due to the downsizing of the Gump's, Inc. retail store, and approximately $492 of additional costs for the amortization of the Tweeds, Inc.'s and Gump's, Inc.'s mailing list. D. Represents the elimination of approximately $545 of costs related to operations not acquired for Gump's, Inc.; approximately $186 of amortization of goodwill associated with the purchase of Tweeds, Inc. and Gump's, Inc.; approximately $2,028 of costs for store and equipment leases, depreciation expense and reorganization and amortization costs that are being eliminated from Company Store Holdings, Inc. E. Represents the elimination of higher interest expense for Gump's, Inc. ($2,140), Company Store Holdings, Inc. ($1,817) and Tweeds, Inc. ($119) as the result of the elimination of certain operations. -4- 110 HANOVER DIRECT, INC. CONDENSED PRO FORMA INCOME STATEMENT NINE MONTHS ENDED SEPTEMBER 25, (UNAUDITED)
(In thousands) Gump's, Inc. Company Store Hanover Direct, Inc. Twenty-seven Holdings, Inc. Nine Months Ended Weeks Ended Eight Months Ended September 25, 1993 July 11, 1993 August 25, 1993 ---------------------------------------------------------------- REVENUES $ 413,774 $ 27,309 $ 31,151 Operating costs and expenses: Costs of sales and operating expenses 266,378 16,178 26,553 Selling expenses 99,250 8,230 6,285 General administrative expenses 38,190 5,745 4,419 ---------------------------------------------------------------- INCOME FROM OPERATIONS 9,956 (2,844) (6,106) ---------------------------------------------------------------- Interest and other income (expense): Interest expense (3,557) (1,367) (546) Interest income 1,735 0 0 Other income (expense) 836 0 (56) ---------------------------------------------------------------- (986) (1,367) (602) Income tax benefit (355) 0 0 ---------------------------------------------------------------- Net income (loss) $ 9,325 $ (4,211) $ (6,708) ================================================================ Net income (loss) per share: $ 0.09 ================
(In thousands) Tweeds, Inc. Nine Months Ended Pro September 26, 1993 Adjustments Pro Forma ------------------------------------------------------------- REVENUES $ 24,513 $ (1,735) A $ 495,012 Operating costs and expenses: Costs of sales and operating expenses 15,426 (1,569) B 322,966 Selling expenses 6,910 (1,797) C 118,878 General administrative expenses 3,328 (1,966) D 49,716 -------------------------------------------------------------- INCOME FROM OPERATIONS (1,151) 3,597 3,452 -------------------------------------------------------------- Interest and other income (expense): Interest expense (379) 1,491 E (4,358) Interest income 1,735 Other income (expense) 184 964 -------------------------------------------------------------- (195) 1,491 (1,659) Income tax benefit (355) -------------------------------------------------------------- Net income (loss) $ (1,346) $ 5,088 $ 2,148 ============================================================== $ .03 Net income (loss) per share: =============
A. Represents the elimination of revenues related to operations not acquired for Company Store Holdings, Inc. B. Represents the elimination of costs related to operations not acquired for Company Store Holdings, Inc. C. Represents the elimination of approximately $1,364 and $739 of costs related to operations not acquired for Gump's, Inc. and Company Store Holdings, Inc., respectively, and approximately $306 of additional costs for the amortization of Tweeds, Inc.'s and Gump's, Inc.'s mailing list. D. Represents the elimination of approximately $1,357 of net reorganization and amortization costs for Gump's Inc., Company Store Holdings, Inc. and Tweeds, Inc., and the elimination of approximately $609 of store and equipment leases and depreciation expense for Company Store Holdings, Inc. E. Represents the elimination of higher interest expense for Gump's, Inc. ($1,270), Company Store Holdings, Inc. ($146) and Tweeds, Inc. ($75) as the result of the elimination of certain operations. -5- -----END PRIVACY-ENHANCED MESSAGE-----