SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
----------
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended March 29, 1997 Commission File No. 0-6882
URT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Florida 59-1167907
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1180 East Hallandale Beach Boulevard, Hallandale, Florida 33009
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (954) 454-5554
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $.01 per share
Class B Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES __X__ NO _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
YES _____ NO __X__
The aggregate market value (based on the average closing bid and asked prices)
of the voting stock held by non-affiliates of the registrant was, as of June 2,
1997, approximately $423,000.
As of June 3, 1997, the registrant's transfer agent reported as issued and
outstanding:
10,857,068 Shares of Class A Common Stock
1,348,141 Shares of Class B Common Stock
PART I
Item 1. BUSINESS
URT Industries, Inc. ("URT" or the "Company"), a Florida corporation, was
incorporated in 1967, the year it succeeded to the business of two companies
which had commenced operations in 1961 and 1965, respectively. Its executive
offices are located at 1180 East Hallandale Beach Boulevard, Hallandale,
Florida, 33009. Its telephone number is 954-454-5554.
Since 1981, URT has been engaged in the operation of retail stores which
sell prerecorded music, videos, and related products (the "Retail Business") in
the Southeastern part of the United States under the name "PEACHES". Such
business is operated by its subsidiary, Peaches Entertainment Corporation
("PEC"), a Florida corporation. URT owns approximately 94% of PEC's issued and
outstanding shares of common stock and all of its issued and outstanding shares
of preferred stock. The remaining approximately 6% of PEC's common stock is
owned by non-affiliated persons.
Confirmation of Amended Plan of Reorganization
PEC emerged from bankruptcy protection during the last quarter of the
fiscal year ended March 29, 1997 (the "1997 fiscal year"), following its filing
of a voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") with the United States Bankruptcy Court
for the Southern District of Florida (the "Bankruptcy Court") on or about
January 16, 1996 (the "Petition Date"). During the pendency of such proceeding
(the "Chapter 11 proceeding"), PEC continued to manage its affairs and operate
its business as a debtor-in-possession (subject to the approval of the
Bankruptcy Court with respect to transactions outside of the ordinary course of
business), while it developed a Plan of Reorganization that would allow it to
continue in business. PEC's Amended Plan of Reorganization, dated October 23,
1996, as modified by the Bankruptcy Court's Order of January 17, 1997 (the "Plan
of Reorganization"), was confirmed by the Bankruptcy Court on such date, and
became effective on February 19, 1997 (the "Effective Date"). For a discussion
of the Plan of Reorganization and other action taken in connection with the
Chapter 11 proceeding, see "LEGAL PROCEEDINGS" below.
The Peaches Stores
The following table sets forth the number of stores which were open at the
beginning of the year, which opened during the year, which closed during the
year and which were open at the end of the year, with respect to URT's last five
complete fiscal years ended March 29, 1997:
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1997 1996 1995 1994 1993
---- ---- ---- ----- ----
Number of stores:
At beginning of period 13 19 20 21 22
Opened during period 0 0 1 0 0
Closed during period (0) (6) (2) (1) (1)
--- --- --- --- ---
At end of period 13 13 19 20 21
The thirteen "Peaches" stores (the "'Peaches' stores") which are presently
in operation are located in the following four states: Florida (seven stores),
Virginia (three stores), North Carolina (two stores), and Alabama (one store).
The utilized space of the stores ranges from approximately 7,000 square feet to
approximately 14,000 square feet. Each store either has its own parking area or
is located in a shopping center which provides parking. PEC has options to renew
most of its leases for various periods.
Two of the Florida stores, one in Fort Lauderdale and the other in Orlando,
are currently leased from the Chairman of URT and his brother, a former director
of URT. (See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS").
For information concerning real property owned by PEC, see "Properties".
Trademarks
PEC is the registered owner of and owns nationwide rights to the tradename,
service mark and trademark "PEACHES" (the "Trademarks") in connection with the
operation of the Retail Business.
Operation of the Peaches Stores
The "Peaches" stores are all similar in appearance. They have distinct,
wood panelled interiors, are decorated in a manner which identifies them as
"Peaches" stores and carry a wide selection of prerecorded music as well as
recorded and blank video tapes, accessory items and specialty items such as
T-shirts and crates. Some stores are free standing and others are contiguous to
other stores in shopping centers. At present, each "Peaches" store is managed by
an individual director who is responsible for implementing guidelines for
ordering, pricing and displaying merchandise sold in the store, hiring and
firing personnel and other matters relating to store administration, including
re-orders of merchandise. The adoption of such guidelines, relationships with
landlords, the purchase and allocation of new
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releases, advertising and related other matters are handled by the home office.
PEC has a computerized inventory control system in place at each of its stores.
As of the last day of the 1997 fiscal year, PEC purchased merchandise from
approximately 61 suppliers, among whom the principal ones were BMG, CEMA, PGD,
SONY, UNI, WEA, and Bassin. Approximately 76% of the merchandise purchased
during the 1997 fiscal year came from such seven principal suppliers. Purchases
from given suppliers are, to a great extent, determined by which of them are
manufacturing or distributing the most popular prerecorded music products at a
given time, as well as the credit and other terms on which such suppliers are
willing to sell to PEC. PEC is not obligated to purchase merchandise from any
supplier. It has numerous alternate sources of supply for inventory, although in
some cases, the expenses are or would be greater if such alternate sources are
utilized. Merchandise is delivered directly by suppliers to the stores.
Prior to the Chapter 11 proceeding, the usual terms received by PEC from
suppliers provided for payment to be made within 60 days from the end of the
month in which a purchase was made. In addition, PEC normally received an
additional 30 to 120 days to pay for certain purchases during the course of the
year. Such terms are usual in the industry.
Prior to the Chapter 11 proceeding, PEC was also able to return
merchandise, without limitation, to all of its major suppliers, who charged a
penalty if returns exceeded certain percentages of the dollar amounts of gross
purchases. Such return policies did not have any adverse effect on PEC's
business.
For a short period after the Chapter 11 filing, PEC was not able to obtain
delivery from any of its principal suppliers of merchandise, except Bassin
(which supplied the inventory which might otherwise have been ordered through
other suppliers), and was not able to return merchandise in accordance with the
return policies described above. Eventually, during the course of the Chapter 11
proceeding, all of PEC's principal suppliers resumed shipping merchandise to PEC
and agreed to allow PEC to make returns of unneeded inventory for credit against
pre-petition indebtedness. In some cases, suppliers also agreed to ship
merchandise on credit. During the pendency of the Chapter 11 proceeding, PEC was
able to obtain approximately 80% of its inventory on credit, and was able to
return most of its unused inventory for credit against pre-petition
indebtedness. Because of the resumption in deliveries from suppliers, as well as
the use of alternate sources of merchandise, the Chapter 11 filing did not have
a materially negative effect on PEC's ability to obtain inventory or to return
unused inventory for credit, although the cost of such inventory was generally
higher than it would otherwise have been and the terms for the return of unused
inventory were sometimes different than those which were in effect prior to the
Petition Date.
Subsequent to the Effective Date, all of PEC's principal suppliers and most
of its other suppliers have agreed on terms with respect to payment for
merchandise and the return of unused merchandise for credit which are the same
or similar to the terms which were in effect prior to the Chapter 11 proceeding.
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Advertising in local newspapers and media is determined by consultation
between each store director and PEC management. PEC also engages in cooperative
advertising with suppliers who pay a portion of the cost. In addition to the
director, each "Peaches" store is staffed with managers, cashiers and sales and
stock room personnel. The stores are open seven days a week.
Based on management's experience to date, retail business sales fluctuate
during the year and are generally at their highest levels during the holiday
season, i.e., between October and December. During the last three fiscal years,
sales between January and March were approximately 21% of total sales for each
year; sales between April and June were approximately 25% of total sales; sales
between July and September were approximately 23% of total sales; and sales
between October and December were approximately 31% of total sales.
Competition
The retail sale of prerecorded music and video products is highly
competitive. There are hundreds of retail stores and department, discount and
variety stores and supermarkets which offer such merchandise to the public.
PEC's share of the retail market in the Southeastern United States is not
significant. In recent years, in addition to usual competition, there has been a
proliferation of non-traditional music outlets, such as appliance and computer
retailers and superbookstores, some of whom have used very aggressive price
cutting tactics including selling some products below actual cost in order to
attract customers to sell them non-music related products, such as computers.
For a discussion of action taken to attempt to address such competitive factors,
see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS."
Employees
As of the last day of the 1997 fiscal year, URT and PEC (hereinafter,
collectively, the "URT Companies") employed approximately 258 persons in all
capacities. Neither URT nor PEC is a party to any collective bargaining
agreements. Relations with employees have been satisfactory and there have been
no work stoppages.
Intercorporate Agreements
Effective as of January 1, 1996, there have been three agreements in place
pertaining to the management of PEC. Pursuant to such agreements, the following
arrangements are in effect: for the period from January 1, 1996 through March
31, 2000, URT will continue to provide to PEC the services of Mr. Wolk as PEC's
Chairman, President and Chief Executive Officer; PEC is required to pay to Mr.
Wolk during such period, so long as he continues to provide such services, a
salary in the amount
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described below and the amount so paid by PEC to Mr. Wolk pursuant to such
arrangement shall be credited against the amount payable by URT to Mr. Wolk
pursuant to the employment agreement between them (see "EXECUTIVE
COMPENSATION").
During the 1997 fiscal year, Mr. Wolk devoted approximately 75% of his
working time to the business of PEC.
Item 2. PROPERTIES
Since April, 1996, the headquarters for URT and PEC (the "URT Companies")
have been located in Hallandale, Florida in a building which is leased by PEC.
Such building contains a total of approximately 6,000 square feet of office
space. Prior to April, 1996, the URT Companies' headquarters had been located in
a larger and more expensive facility of approximately 26,000 square feet in
Miramar, Florida in a building which was leased by PEC and included both office
and warehouse space. The new headquarters has no warehouse space, as all
merchandise is shipped directly from suppliers to stores. The move to smaller
facilities with no warehouse space, and the elimination of the payroll expenses
associated with the old warehouse facility, has resulted in savings to PEC in
excess of $200,000 per year. The lease for the old headquarters was among the
leases which PEC rejected in connection with the Chapter 11 proceeding pursuant
to its rights under the Bankruptcy Code. (See "LEGAL PROCEEDINGS").
PEC owns real property in Mobile, Alabama on which it constructed and
operates a "Peaches" store. Such property is subject to a first mortgage to an
institutional lender and to a second mortgage to URT. PEC made all payments on
the first mortgage as they became due during the Chapter 11 proceeding, and
negotiated a longer payout of such mortgage during the course of such
proceeding. The second mortgage secures a debt owed by PEC to URT as a result of
a loan which was made by URT to PEC in January, 1997 in order to enable PEC to
satisfy certain of its obligations to creditors under the Plan of
Reorganization. (See "LEGAL PROCEEDINGS").
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All "Peaches" stores, other than the Mobile, Alabama store discussed
immediately above, are leased. For information concerning such other stores
operated by PEC, see "BUSINESS--The Peaches Stores".
Item 3. LEGAL PROCEEDINGS
PEC's above-described voluntary petition for relief under Chapter 11 of the
Bankruptcy Code resulted in the below-described Plan of Reorganization. The Plan
of Reorganization, as so confirmed by the Bankruptcy Court, provided for the
following:
(a) All unsecured creditors, including all of PEC's inventory suppliers,
but excluding landlords under leases rejected by PEC, are entitled to 100% of
their allowed claims (the total of which is approximately $4,922,000). PEC's
seven principal suppliers (whose allowed claims total approximately $4,372,000
out of such $4,922,000) were entitled to, and received, payment and inventory
returns equal to approximately 70% of their allowed claims (80% in the case of
one such supplier) within approximately 60 days after the Effective Date. The
balance of the payments to such seven principal suppliers (approximately
$1,284,000) is payable with interest at the prime rate charged by Chase
Manhattan Bank, N.A. over a period of 24 months commencing in March, 1997. The
amounts due to such suppliers are secured by a perfected first lien and security
interest in the inventory originally distributed by such suppliers or which is
otherwise in the possession of and owned by PEC. The remaining unsecured
creditors (whose allowed claims total approximately $550,000) were entitled to
and received the full amount of their allowed claims on the Effective Date.
(b) Landlords under the leases which were rejected by PEC in connection
with the bankruptcy filing were entitled to approximately $311,000 (30% of the
approximately $1,000,000 in allowed claims with respect to such leases), all of
which was paid on the Effective Date.
(c) PEC's sole secured creditor, the holder of the first mortgage with
respect to the store property owned by PEC in Mobile, Alabama, whose allowed
claim was approximately $466,000, will receive 100% of such amount, with
interest, in accordance with the amortization schedule previously in effect,
except that the balloon payment on such mortgage which would otherwise have been
due in September, 1997 was extended to September, 2002.
(d) The priority tax claim in the approximate amount of $118,000 which is
owed to the Florida Department of Revenue will be payable with interest over a
period of two years commencing 30 days from the Effective Date.
(e) The priority administrative claims, including professional fees in the
approximate amount of $200,000 which were incurred in connection with the
reorganization, were paid on the Effective Date.
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In order to enable PEC to effect the Plan of Reorganization on the terms
described above, URT, in exchange for the issuance to it of 20,000,000 shares of
PEC's authorized common stock (including 218,730 treasury shares), agreed that,
subject to the terms of the Plan, it would contribute $350,000 to the capital of
PEC, waive an aggregate of $75,000 of dividends payable by PEC to URT, guarantee
the approximately $1,284,000 which is due to the principal suppliers after the
Effective Date pursuant to the arrangements described in subparagraph (a) above,
and lend $700,000 to PEC on the Effective Date (For additional information
pertaining to such arrangements between PEC and URT, see "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS").
During the course of the Chapter 11 proceeding, the Bankruptcy Court issued
orders authorizing the following additional action:
(a) PEC's rejection of the unexpired portion of the leases covering PEC's
former corporate headquarters in Miramar, Florida, as well as the six
unprofitable stores closed by PEC during the 1996 fiscal year (See "PROPERTIES"
and "BUSINESS--The Peaches Stores").
(b) PEC's rejection of the unexpired portion of the lease covering a store
in Charlotte, North Carolina which had been closed by PEC during the 1991 fiscal
year and as to which PEC had been responsible for the shortfall between the
amount payable under PEC's lease for such store and the amount being paid by a
subtenant of such store.
(c) PEC's assumption of the unexpired portion of the leases covering PEC's
new corporate headquarters and the twelve leased stores which PEC had decided to
keep in operation.
(d) PEC's execution of a settlement agreement with its former Executive
Vice-President under which the amounts payable to him under an employment and
consulting agreement with him were reduced from a sum exceeding $870,000, if
such agreement had remained in effect, to the sum of $282,500 (payable over four
years commencing February, 1996), and under which such officer executed a
confidentiality agreement and indemnification agreement with PEC.
(e) PEC's entry into post-petition agreements with its suppliers of
inventory under which PEC was permitted to return merchandise to such suppliers
for a credit against pre-petition claims, and under which PEC was entitled to
purchase merchandise on credit from certain of such suppliers (See "BUSINESS -
Operation of the Peaches Stores").
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-8-
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Common Stock
URT's Class A and Class B Common Stock are quoted by market makers on the
over-the-counter market. The following table sets forth the closing high and
low, bid and asked quotations for the Class A Common Stock for the calendar
periods indicated, based on information supplied by the National Quotation
Bureau, Incorporated:
Bid Prices Asked Prices
---------- ------------
High Low High Low
1995
- ----
Quarter ended March 31, .14 .10 1/2 .19
Quarter ended June 30, .14 .10 1/2 .19
Quarter ended Sept. 30, .13 .05 1/2 .15
Quarter ended Dec. 31, .13 1/32 3/8 .11
1996
- ----
Quarter ended March 31, .08 1/32 .20 .11
Quarter ended June 30, .08 .07 .11 .10
Quarter ended Sept. 30, .07 .07 .10 .09
Quarter ended Dec. 31, .07 .03 .09 .06
1997
- ----
Quarter ended March 31, .04 .03 .05 .05
Quarter through June 2. .04 .03 .06 .05
The following table sets forth the closing high and low, bid and asked
quotations for the Class B Common Stock for the calendar periods indicated,
based on information supplied by the National Quotation Bureau, Incorporated:
Bid Prices Asked Prices
---------- ------------
High Low High Low
1995
- ----
Quarter ended March 31, .13 1/8 5/8 5/16
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Quarter ended June 30, .13 1/8 5/8 5/16
Quarter ended Sept. 30, .13 1/8 5/8 5/16
Quarter ended Dec. 31, .13 1/16 5/8 5/16
1996
- ----
Quarter ended March 31, 1/8 1/16 1/4 3/16
Quarter ended June 30, .125 .05 .25 .12
Quarter ended Sept. 30, .05 .05 .12 .12
Quarter ended Dec. 31, .05 .05 .12 .12
1997
- ----
Quarter ended March 31, .03 .03 .12 .12
Quarter through June 2. .035 .03 .12 .12
The above over-the-counter quotations represent prices between dealers, do
not include retail markups, markdowns or commissions and do not necessarily
represent actual transactions.
Dividends
There has been no payment of dividends during the past five years and
payment of dividends in the future will depend on URT's earnings and needs.
Approximate Number of Equity Security Holders
The following table indicates the approximate number of holders of record
of each class of URT's equity securities as of June 3, 1997, based on
information supplied by URT's transfer agent:
Number of Record
Title of Class Holders
- -------------- -------
Class A Common Stock, $.01 par value 4,827
Class B Common Stock, $.01 par value 1,197
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Item 6. SELECTED FINANCIAL DATA
Item 6 Selected Financial Data
The following table sets forth selected financial data and other operating
information of the Company. The selected financial data should be read in
conjunction with the financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
March 29, March 30, April 1, April 2, April 3,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Operating statement data:
Net sales $ 18,109,119 23,626,489 31,960,986 36,303,498 37,861,440
Net (loss) income (1,161,786) (2,161,535) (1,759,085) (153,053) 290,085
(Loss) income per common share (.09) (.17) (0.14) (0.01) 0.02
Weighted average number of common shares
outstanding 12,637,634 12,637,634 12,674,448 12,695,136 12,594,531
Balance sheet data:
Working capital excluding liabilities
subject to compromise in 1996 3,174,312 9,188,083 5,168,136 6,651,083 6,520,743
Total assets 8,068,055 12,788,918 14,647,795 16,805,328 17,504,370
Current portion of long-term obligations
730,239 124,774 110,028 131,173 174,579
Long-term obligations 1,337,190 810,367 929,654 705,109 836,282
Liabilities subject to compromise -- 5,671,434 -- -- --
Shareholders' equity 3,341,615 4,503,401 6,702,841 8,507,621 8,646,416
Store data:
Weighted average square feet of selling space
88,012 88,012 130,157 137,145 139,850
Weighted average sales per square foot of
selling space 206 268 246 265 271
Number of stores open at end of period
13 13 19 20 21
There were no cash dividends declared for common stock in any of the periods
presented.
(1) Includes 53 weeks of operations.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
From time to time, URT's management may make certain statements that contain
"forward-looking" information (as defined in the Private Securities Litigation
Reform Act of 1995). Words such as "believe", "anticipate", "estimate",
"project" and similar expressions are intended to identify such forward-looking
statements. Forward-looking statements may be made by management orally or in
writing, including, but not limited to, in press releases, as part of this
Management's Discussion and Analysis of Financial Condition and Results of
Operations and as part of other sections of this Annual Report or other filings.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of their respective dates, and are subject to
certain risks, uncertainties and assumptions. Should one or more of these risks
or uncertainties materialize, or should any of the underlying assumptions prove
incorrect, actual results of current and future operations may vary materially
from those anticipated, estimated or projected.
The results of operations discussed herein are those of the URT Companies on a
consolidated basis. As a result, references in this Section to the "Company"
include both of the URT Companies.
Results of Operations
FISCAL YEAR ENDED MARCH 29, 1997 (1997) COMPARED TO FISCAL YEAR ENDED
MARCH 30, 1996 (1996)
Net sales for 1997 decreased 23.4% compared to 1996. (13.3%) of such decrease is
attributed to the fact that 1996 included sales for stores that had been open
during 1996 and were closed during or near the end of 1996. The balance of such
decrease (10.1%) is attributed to comparable store sales.
The cost of sales for 1997 was lower than that for 1996 due principally to a
decrease in net sales. Cost of sales as a percentage of net sales decreased from
64.8% in 1996 to 63.2% in 1997 due to increased purchase discounts in 1997 and
the fact that 1996 reflected the effects of buying a portion of PEC's inventory
during the Chapter 11 proceeding from alternate sources with higher prices.
However, a portion of 1997 also included buying a portion of the inventory from
alternate sources at higher prices. The Company did not receive discounts
associated with normal trade terms until the first quarter of the fiscal year
commencing March 30, 1997 ("fiscal 1998").
Selling, general, and administrative (SG&A) expenses in 1997 decreased 20.4%
compared to 1996. Such decrease is attributed to a decrease in store operating
expenses of stores that had been open during 1996, but were closed during or
near the end of 1996 (13.8%), a decrease in corporate overhead (1.0%), and a
decrease in comparable store expenses (5.6%). SG&A expenses, as a percentage of
net sales, increased from 43.7% in 1996 to 45.3% in 1997 due to the fixed nature
of certain expenses and the decrease in net sales in addition to the
aforementioned items.
The Company incurred a net loss of approximately $1,162,000 in 1997 versus a net
loss of approximately $2,162,000 in 1996. The significant reduction of net loss
is attributed to the success of the Chapter 11 reorganization. However, such
success was offset by professional fees and lost gross profits as a result of
not obtaining similar terms from trade creditors to those that existed prior to
the Chapter 11 reorganization until approximately the first quarter of fiscal
1998. Also, further overhead reductions will not be evident until fiscal 1998.
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Recently, the Company's primary suppliers have taken steps to help protect the
retail marketplace from certain low cost retailers of music. These steps include
not disbursing cooperative advertising funds to retailers which engage in low
cost selling practices in violation of the minimum advertised pricing policies
of such suppliers. Management believes that such initiatives, in combination
with the other factors mentioned immediately below, should help the Company to
restore itself to a competitive position in subsequent fiscal years. Other
factors which, in management's opinion, should help the Company to restore
itself to a competitive position in the future include the fact that PEC's Plan
of Reorganization was confirmed during the last quarter of 1997. The benefits of
the reorganization include the termination of the leases associated with the six
unprofitable stores which were closed during 1996, the closing of the Company's
former headquarters and warehouse and the termination of other unprofitable
business arrangements as described herein. Another factor which, in management's
opinion, should help the Company to restore itself to a competitive position, is
the Company's concentration on advantages which it has over certain of its
competitors, including large inventory, convenient store locations and a high
level of customer service, which includes the ability of the customer to sample
virtually all product before purchasing and a timely special-order program.
FISCAL YEAR ENDED MARCH 30, 1996 (1996) COMPARED TO FISCAL YEAR ENDED APRIL 1,
1995 (1995)
Net sales for 1996 decreased 26.1% compared to 1995. Such decrease is attributed
principally to the closing of unprofitable stores during 1996, as well as the
effect of the opening of new stores during 1996 by certain of PEC's competitors.
11.8% of such decrease was attributable to comparable store sales and 14.3% of
such decrease was attributable to stores that opened or closed during 1996
versus 1995.
During the last few years, non-traditional music retailers such as appliance and
computer retailers and super bookstores have begun to sell prerecorded music and
video products. They have adopted policies of selling music product at near or
below wholesale cost as a means of attracting customers to sell other products.
PEC continued to suffer the effect of such competition during 1996 and, as a
result, filed its voluntary petition for relief under Chapter 11 of the
Bankruptcy Code in the early part of the last quarter of 1996.
The cost of sales for 1996 was lower than that for 1995 due principally to a
decrease in net sales. Cost of sales as a percentage of net sales increased from
63.7% in 1995 to 64.8% in 1996 as a result of a reduction in retail prices due
to increased competition, a change in terms with PEC's principal suppliers
during the Chapter 11 proceeding and the effects of buying a portion of PEC's
inventory during the Chapter 11 proceeding from alternate sources with higher
prices.
Selling, general, and administrative (SG&A) expenses in 1996 decreased 18.4%
compared to 1995. Such decrease is attributed to a decrease in store operating
expenses of stores that opened or closed during 1996 versus 1995 (13.6%) and a
decrease in corporate overhead (5.2%), offset by an increase in comparable store
expenses (0.3%). SG&A expenses, as a percentage of net sales, increased from
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39.6% in 1995 to 43.7% in 1996 due to the fixed nature of certain expenses and
the decrease in net sales in addition to the aforementioned items.
The Company incurred a net loss of approximately $2,162,000 in 1996 versus a net
loss of approximately $1,759,000 in 1995 due principally to the costs associated
with the closing of four stores, professional fees associated with the Chapter
11 proceeding and the reduction of net sales and gross profits as described
above. The two other stores closed during 1996 are reflected in the financial
statements for 1995.
FISCAL YEAR ENDED APRIL 1, 1995 (1995) COMPARED TO FISCAL YEAR ENDED APRIL 2,
1994 (1994)
Net sales for 1995 decreased 12.0% compared to 1994. Such decrease is attributed
to an 8.2% decrease in comparable store sales, and a 3.8% decrease in sales in
those stores that opened or closed during 1995 versus 1994.
The cost of sales for 1995 was lower than that for 1994 due to a decrease in net
sales. Cost of sales as a percentage of net sales increased from 62.7% in 1994
to 63.7% in 1995 due to a reduction in retail pricing in an effort to meet the
increased competition.
Selling, general and administrative (SG&A) expenses in 1995 decreased 6.8%
compared to 1994. Such decrease is attributed to a decrease in comparable store
expenses (1.0%), a decrease in store operating expenses of stores that opened or
closed during 1995 versus 1994 (2.6%), a decrease in corporate overhead (2.8%),
and a decrease in the cost of store openings (0.4%). SG&A expenses, as a
percentage of net sales, increased from 37.4% in 1994 to 39.7% in 1995 due to
the fixed nature of certain expenses and the decrease in net sales in addition
to the aforementioned items.
Store closing costs increased in 1995 over 1994 due to the fact that the cost of
closing 1 store is included in 1994, and the cost of closing 4 stores is
included in 1995.
The Company incurred a net loss of approximately $1,759,000 in 1995 versus a net
loss of approximately $153,000 in 1994 due to costs of closing four stores, a
loss on litigation, and the reduction in net sales and gross profit as described
above.
Liquidity and Capital Resources
The Company had working capital of $3,174,312 at March 29, 1997 compared to
working capital of $3,516,649 at March 30, 1996 (including liabilities in the
amount of $5,671,434 which were subject to compromise on such date). The Company
had a current ratio (the ratio of total current assets to total current
liabilities) of 2.0 to 1 at March 29, 1997, compared to a current ratio of 1.9
to 1 at March 30, 1996 (including the liabilities so subject to compromise on
such date).
At March 29, 1997, the Company had long-term obligations of $1,337,190.
Management anticipates that the Company's ability to repay its long-term
obligations will be satisfied primarily through
-14-
funds generated from its operations.
For a discussion of URT's guaranty of certain PEC obligations to creditors in
connection with the Chapter 11 proceeding, see "LEGAL PROCEEDINGS".
Management anticipates that cash generated from operations and cash equivalents
on hand will provide sufficient liquidity to maintain adequate working capital
for operations. Management would attempt to obtain financing for the opening of
any new stores which it may plan to open during the next few years.
Inflation trends have not had an impact upon revenues because increases in costs
have been passed along to customers.
The Company's business is seasonal in nature, with the highest sales and
earnings occurring in the third fiscal quarter, which includes the Christmas
selling season.
In March, 1995, the Financial Accounting Standards Board issued Statement No.
121, Accounting for the Impairment of Long-Lived Assets and for Long Lived
Assets to be Disposed Of, which became effective for fiscal years beginning
after December 15, 1995. This standard establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles and goodwill
related to those assets and certain intangibles to be disposed of. The Company
adopted this standard in 1997, and it did not have a material impact on the
financial condition or operating results of the Company.
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), Earnings per
Share, which supersedes ABP Opinion No. 15, Earnings per Share, was issued in
February 1997. SFAS 128 requires dual presentation of basic and diluted earnings
per share (EPS) for complex capital structures on the face of the income
statement. Basic EPS is computed by dividing income by the weighted-average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution from the exercise or conversion of securities into common
stock, such as stock options. SFAS 128 is required to be adopted for year-end
1998; earlier application is not permitted. Management does not expect the basic
or diluted EPS measured under SFAS 128 to be materially different than the
primary or fully-diluted EPS measured under APB No. 15.
-15-
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
URT INDUSTRIES, INC. AND SUBSIDIARIES
Table of Contents
Independent Auditors' Report 17
Consolidated Financial Statements:
Consolidated Balance Sheets as of March 29, 1997 and
March 30, 1996 18
Consolidated Statements of Operations for each of the
years in the three-year period ended March 29, 1997 19
Consolidated Statements of Shareholders' Equity for each
of the years in the three-year period ended March 29, 1997 20
Consolidated Statements of Cash Flows for each of the
years in the three-year period ended March 29, 1997 21
Notes to Consolidated Financial Statements 23
-16-
Independent Auditors' Report
Directors and Shareholders
URT Industries, Inc. and Subsidiaries
Hallandale, Florida:
We have audited the accompanying consolidated balance sheets of URT Industries,
Inc. and subsidiaries (the "Company") as of March 29, 1997 and March 30, 1996,
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the years in the three-year period ended March 29, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of URT Industries, Inc.
and subsidiaries as of March 29, 1997 and March 30, 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended March 29, 1997 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
May 30, 1997, except as to note 2
which is as of June 9, 1997
Ft. Lauderdale, Florida
-17-
URT INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
March 29, 1997 and March 30, 1996
Assets 1997 1996
------ ------------ ------------
Current assets:
Cash and cash equivalents $ 3,130,516 3,258,061
Marketable investment securities -- 1,761,336
Inventories 2,855,494 4,954,260
Prepaid inventory 39,733 254,249
Current portion due from officers/shareholders 30,832 30,832
Prepaid expenses and other current assets 293,221 350,197
Refundable income taxes -- 9,136
------------ ------------
Total current assets 6,349,796 10,618,071
Property and equipment, net 1,459,084 1,868,246
Due from officers/shareholders 77,885 110,722
Other assets 181,290 191,879
------------ ------------
$ 8,068,055 12,788,918
============ ============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current portion of long-term obligations 730,239 124,774
Accounts payable 1,371,869 103,038
Accrued liabilities 1,073,376 1,202,176
------------ ------------
Total current liabilities 3,175,484 1,429,988
Long-term obligations 1,337,190 810,367
Deferred rent 156,036 200,723
Minority interest in a subsidiary 57,730 173,005
------------ ------------
Total liabilities not subject to compromise 4,726,440 2,614,083
Liabilities subject to compromise -- 5,671,434
------------ ------------
Total liabilities 4,726,440 8,285,517
------------ ------------
Shareholders' equity:
Common stock, $.01 par value; 30,000,000 shares authorized;
15,317,454 shares issued 153,175 153,175
Additional paid-in capital 5,542,152 5,542,152
Retained deficit (1,335,377) (173,591)
------------ ------------
4,359,950 5,521,736
Treasury stock, 3,159,245 common shares at cost (1,018,335) (1,018,335)
------------ ------------
Total shareholders' equity 3,341,615 4,503,401
Commitments and contingencies
------------ ------------
$ 8,068,055 12,788,918
============ ============
See accompanying notes to consolidated financial statements.
-18-
URT INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For each of the years in the three-year period ended March 29, 1997
1997 1996 1995
------------ ------------ ------------
Net sales $ 18,109,119 23,626,489 31,960,986
Costs and expenses:
Cost of sales 11,453,125 15,316,441 20,347,493
Selling, general and administrative expenses 8,216,289 10,321,334 12,651,133
Store closing costs -- 189,623 548,701
Loss on litigation -- -- 431,692
------------ ------------ ------------
19,669,414 25,827,398 33,979,019
------------ ------------ ------------
Loss from operations (1,560,295) (2,200,909) (2,018,033)
------------ ------------ ------------
Other (expense) income:
Interest expense (88,345) (111,451) (84,478)
Interest income 155,888 202,845 204,810
Other income 108,957 5,491 --
------------ ------------ ------------
176,500 96,885 120,332
------------ ------------ ------------
Loss before reorganization costs, income
taxes, minority interest and extraordinary
gain (1,383,795) (2,104,024) (1,897,701)
Reorganization costs:
Professional fees (379,645) (88,223) --
Store closing costs -- (282,927) --
------------ ------------ ------------
(379,645) (371,150) --
Loss before income taxes, minority interest
and extraordinary gain (1,763,440) (2,475,174) (1,897,701)
Provision for income taxes -- -- 120,417
------------ ------------ ------------
Loss before minority interest and
extraordinary gain (1,763,440) (2,475,174) (2,018,118)
Minority interest in net loss of consolidated subsidiary (115,275) (313,639) (259,033)
------------ ------------ ------------
Loss before extraordinary gain (1,648,165) (2,161,535) (1,759,085)
Extraordinary gain due to reorganization (note 9) 486,379 -- --
------------ ------------ ------------
Net loss $ (1,161,786) (2,161,535) (1,759,085)
============ ============ ============
Net loss per common share $ (.09) (.17) (.14)
============ ============ ============
See accompanying notes to consolidated financial statements.
-19-
URT INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For each of the years in the three-year period ended March 29, 1997
Common stock issued Treasury stock
--------------------------------------- ---------------------------------------
Shares Shares
------------------------- -------------------------
Class "A" Class "B" Amount Class "A" Class "B" Amount
----------- ----------- ----------- ----------- ----------- -----------
Balance, April 2, 1994 13,678,338 1,552,866 $ 152,312 2,270,170 187,297 $ (930,707)
Treasury stock purchased, at cost -- -- -- 271,500 52,286 (49,723)
Issuance of common stock (note 10) 86,250 -- 863 -- -- --
Benefit from subsidiary's treasury stock
transactions -- -- -- -- -- --
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, April 1, 1995 13,764,588 1,552,866 153,175 2,541,670 239,583 (980,430)
Treasury stock purchased, at cost -- -- -- 365,850 12,142 (37,905)
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, March 30, 1996 13,764,588 1,552,866 153,175 2,907,520 251,725 (1,018,335)
Net loss -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balance, March 29, 1997 13,764,588 1,552,866 $ 153,175 2,907,520 251,725 $(1,018,335)
=========== =========== =========== =========== =========== ===========
Capital Retained
in excess earnings
of par (deficit) Total
----------- ----------- -----------
Balance, April 2, 1994 5,538,987 3,747,029 8,507,621
Treasury stock purchased, at cost -- -- (49,723)
Issuance of common stock (note 10) 16,387 -- 17,250
Benefit from subsidiary's treasury stock
transactions (13,222) -- (13,222)
Net loss -- (1,759,085) (1,759,085)
----------- ----------- -----------
Balance, April 1, 1995 5,542,152 1,987,944 6,702,841
Treasury stock purchased, at cost -- -- (37,905)
Net loss -- (2,161,535) (2,161,535)
----------- ----------- -----------
Balance, March 30, 1996 5,542,152 (173,591) 4,503,401
Net loss -- (1,161,786) (1,161,786)
----------- ----------- -----------
Balance, March 29, 1997 5,542,152 (1,335,377) 3,341,615
=========== =========== ===========
See accompanying notes to consolidated financial statements
-20-
(Continued)
URT INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For each of the years in the three-year period ended March 29, 1997
1997 1996 1995
----------- ----------- -----------
Cash flows from operating activities:
Net loss $(1,161,786) (2,161,535) (1,759,085)
----------- ----------- -----------
Adjustments to reconcile net loss to net cash used in operating activities:
Extraordinary gain (486,379) -- --
Depreciation and amortization 454,047 460,678 565,946
Loss on abandonment of leasehold improvements -- 190,601 --
Deferred income taxes -- -- 342,014
Deferred rent (44,687) (299,747) (4,538)
Minority interest in net loss of
consolidated subsidiary (115,275) (313,639) (259,033)
Change in assets and liabilities affecting
cash flows from operating activities:
(Increase) decrease in:
Inventories 25,200 624,477 263,579
Prepaid inventory 214,516 (254,249) --
Prepaid expenses and other current
assets 56,976 18,008 8,756
Refundable income taxes 9,136 248,093 (232,829)
Other assets 10,589 17,116 46,965
Increase (decrease) in:
Accounts payable 1,268,831 (4,027,492) (484,050)
Accrued liabilities (128,800) (445,470) 266,468
Long-term obligations -- (61,022) 334,573
Liabilities subject to compromise (1,854,514) 5,671,434 --
Changes due to reorganization activities:
Loss on abandonment of leasehold
improvements -- 296,509 --
----------- ----------- -----------
Net cash used in operating
activities (1,752,146) (36,238) (911,234)
----------- ----------- -----------
Cash flows from investing activities:
Purchase of marketable investment securities -- -- (2,649,534)
Sale of marketable investment securities 1,761,336 888,198 --
Purchases of property and equipment (44,885) (168,331) (922,536)
Due from officers/shareholders 32,837 26,466 26,285
Proceeds from disposition of land, property and
equipment -- 615,243 --
----------- ----------- -----------
Net cash provided by (used in)
investing activities 1,749,288 1,361,576 (3,545,785)
----------- ----------- -----------
(Continued)
-21-
URT INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
1997 1996 1995
----------- ----------- -----------
Cash flows from financing activities:
Repayment of long-term obligations $ (124,687) (43,519) (206,173)
Proceeds from issuance of stock -- -- 17,250
Acquisition of treasury stock -- (37,905) (49,723)
Acquisition of subsidiary stock -- -- (13,222)
----------- ----------- -----------
Net cash used in financing
activities (124,687) (81,424) (251,868)
----------- ----------- -----------
Net (decrease) increase in cash and
cash equivalents (127,545) 1,243,914 (4,708,887)
Cash and cash equivalents, beginning of year 3,258,061 2,014,147 6,723,034
----------- ----------- -----------
Cash and cash equivalents, end of year $ 3,130,516 3,258,061 2,014,147
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 88,345 111,451 84,478
=========== =========== ===========
Income tax payments (refund), net $ -- (248,093) (11,232)
=========== =========== ===========
Supplemental schedule of non-cash operating and
investing activities relating to the reorganization:
Liabilities subject to compromise, March 30, 1996 $5,671,434
Less: Inventory returns for credit 2,073,566
Cash paid 1,854,514
Extraordinary gain (primarily as a result of lease
rejection claims - note 9) 486,379
----------
Long-term obligation, March 28, 1997 (note 6) $1,256,975
==========
See accompanying notes to consolidated financial statements.
-22-
URT INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 29, 1997, March 30, 1996 and April 1, 1995
(1) Organization and Basis of Presentation
URT Industries, Inc. and subsidiaries (the "Company") is engaged in the
business of retailing prerecorded music, video and accessory items,
principally in the southeastern United States. The consolidated financial
statements include the accounts of URT Industries, Inc. (the "Parent") and
its wholly owned nonoperating subsidiary, whose business was discontinued
in 1984, and its 93.5 percent-owned subsidiary, Peaches Entertainment
Corporation ("Peaches").
(2) Confirmation of Amended Plan of Reorganization
On January 16, 1996 (the "Petition Date"), Peaches Entertainment
Corporation commenced reorganization proceedings under Chapter 11 of the
United States Bankruptcy Code. On January 17, 1997, the plan of
reorganization was confirmed by the Bankruptcy Court for the Southern
District of Florida ("Bankruptcy Court"). In Chapter 11, Peaches continued
to manage its affairs and operate its business as debtor-in-possession
while it developed a plan of reorganization to restructure and allow its
emergence from Chapter 11. As debtor-in-possession in Chapter 11, Peaches
could not engage in transactions outside of the ordinary course of business
without approval, after notice and hearing, of the Bankruptcy Court.
Under Chapter 11 proceedings, litigation and actions by creditors to
collect certain claims in existence at the petition date ("prepetition")
were stayed, absent specific bankruptcy court authorization to pay such
claims, which are reflected as "liabilities subject to compromise" at March
30, 1996.
As debtor-in-possession, Peaches had the right, subject to Bankruptcy Court
approval and certain other limitations, to assume or reject certain
executory contracts, including unexpired leases. Any claim for damages
resulting from the rejection of an executory contract or an unexpired lease
was treated as a general unsecured claim in the Chapter 11 proceedings.
Peaches affirmed 13 leases (5 of which were modified on terms more
favorable to Peaches) and rejected 8 leases.
-23-
URT INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On August 5, 1996, Peaches filed its plan of reorganization with the
Bankruptcy Court. An amended plan of reorganization, as modified by the
Bankruptcy Court's order of January 17, 1997, was filed on October 23,
1996. The amended plan of reorganization was confirmed by the Bankruptcy
Court on such date (the "confirmation date"), and became effective February
3, 1997 (the "effective date"), subject to satisfaction of certain
conditions which were satisfied by February 19, 1997. The principal terms
of the confirmed plan are as follows:
o All unsecured creditors, including all of Peaches' inventory
suppliers, but excluding landlords under leases rejected by Peaches,
are entitled to 100 percent of their allowed claims (the total of
which is approximately $4,922,000). Peaches' seven principal suppliers
(whose allowed claims total approximately $4,372,000 out of such
$4,922,000) are entitled to and received payment and inventory returns
equal to approximately 70 percent of their allowed claims (80 percent
in the case of one such supplier) within approximately 60 days after
the effective date, and the balance (approximately $1,284,000) is
payable with interest at prime over a period of 24 months commencing
March 1997. The remaining unsecured creditors (whose allowed claims
total approximately $550,000) were entitled to and received the full
amount of their allowed claims on the effective date. The amounts owed
to the principal suppliers are secured by a perfected first lien and
security interest in the inventory originally distributed by the
secured parties which was sold to the Company or is otherwise in the
possession and owned by the Company.
o Landlords under the leases rejected by Peaches in connection with the
bankruptcy filing were entitled to 30 percent of the allowed claims
with respect to such leases, all of which was paid on the effective
date.
o The mortgage holder will receive 100 percent of the allowed claim,
with interest, in accordance with the amortization schedule previously
in effect, except that the balloon payment on such mortgage which
would otherwise have been due in September 1997 was extended to
September 2002. All mortgage payments under the amortization schedule
were paid timely during the Chapter 11 proceedings.
o The priority tax claim in the approximate amount of $118,000, which is
owed to the Florida Department of Revenue, will be payable with
interest at 8 percent over two years from the effective date.
o The priority administrative claims, including professional fees in the
approximate amount of $200,000 which have been incurred in connection
with the reorganization, were paid on the effective date.
In order for Peaches to be able to effect the plan of reorganization on the
terms described above, the Parent, in exchange for the issuance to it of 20
million shares of Peaches authorized common stock (including 218,730
treasury shares), has contributed $350,000 to the capital of Peaches,
waived an aggregate of $75,000 of dividends payable by Peaches to the
Parent, guaranteed, subject to the terms of the Plan, the approximately
$1,284,000 which is due the principal suppliers in accordance with the
foregoing, and loaned $700,000 to Peaches. The loan will be repaid to the
Parent with interest at prime over a period of four years beginning on the
third anniversary of the effective date, is subordinate to the amounts
-24-
URT INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
owed to the principal suppliers, and is secured by inventory and all the
assets of Peaches. As a result of the above transaction, the Parent is the
beneficial owner of approximately 93.5 percent of Peaches' issued and
outstanding shares of common stock and all of its issued and outstanding
shares of preferred stock.
In March 1997, the Parent and Peaches agreed that if Peaches' financial
statements for its 1997 fiscal year show total shareholders' equity of less
than $1,000,000, the above-described $700,000 loan would be reduced by an
amount equal to the lesser of $200,000 or the difference between $1,000,000
and the total shareholders' equity of Peaches as of the end of its 1997
fiscal year, without taking such debt reduction into account, and cause the
amount of such aggregate debt reduction to be transferred to the capital
account of Peaches in exchange for shares of a new class of cumulative
preferred stock, entitled Series C preferred stock, in an amount as shall
be determined by dividing the amount of such aggregate debt reduction by
$100. Any Series C preferred stock to be so issued will have a par value of
$100 and a cumulative preferred dividend of 10% per annum. The approval of
the holders of a majority of the shares of Series C preferred stock, voting
as a separate class, shall be required with respect to all matters on which
the shareholders have a right to vote. On June 9, 1997, the above agreement
was rescinded.
(3) Liquidity
As discussed in note 2, the Company's Amended Plan of Reorganization was
confirmed by the bankruptcy court and became effective February 3, 1997.
The Company believes that it has benefited from its reorganization which
includes the closing of six unprofitable stores which were closed during
1996 and the modification of five store leases, the closing of the former
headquarters and warehouse, and the termination of other unprofitable
business arrangements. Also, the Company's primary suppliers have taken
steps to help protect the retail marketplace from certain low cost
retailers of music. These steps include not disbursing cooperative
advertising funds to retailers which engage in low cost selling practices
in violation of the minimum advertised pricing policies of such suppliers.
Management believes that such initiatives, in combination with the other
factors mentioned above, should help the Company to restore itself to a
competitive position in subsequent fiscal years.
(4) Summary of Significant Accounting Policies
(a) Principals of Consolidation
The consolidated financial statements include the accounts of URT
Industries, Inc. and its subsidiaries. All significant intercompany
balances and transactions have been eliminated. Reference to the
Company encompasses any or all of the aforementioned entities.
-25-
URT INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(b) Fiscal Year
The Company's fiscal year consists of 52 or 53 weeks ending on the
Saturday closest to the end of March. The fiscal years ended March 29,
1997, March 30, 1996 and April 1, 1995 consisted of 52 weeks,
respectively.
(c) Cash Equivalents
The Company considers highly liquid investments purchased with
original maturities of three months or less to be cash equivalents.
Cash equivalents totaled $13,657,209 and $2,385,945 at March 29, 1997
and March 30, 1996, respectively. The carrying amount of cash and cash
equivalents approximates fair market value because of the short-term
maturity of these investments. The fair values are estimated based on
quoted market prices for these or similar instruments.
(d) Marketable Investment Securities
The Company adopted Statement of Financial Accounting Standards No.
115 ("SFAS") No. 115, Accounting for Certain Investments in Debt and
Equity Securities, effective April 3, 1994. There was no cumulative
effect as a result of adopting SFAS 115 in 1995. Investments, which
are comprised of treasury bills with maturities exceeding one year,
are classified as available-for-sale at March 30, 1996, and are
reported at their fair market value which approximates cost.
(e) Inventories
Inventories, comprised of compact discs, cassettes, videos and
accessories, are stated at the lower of cost (principally average)
including freight in, or market.
(f) Property and Equipment
Property and equipment are stated at cost. The assets are depreciated
over their estimated useful lives ranging from 5 to 31.5 years using
both straight-line and accelerated methods. The Company's policy is to
retire assets from its accounts as they become fully depreciated.
(g) Income Taxes
The Company files a consolidated income tax return with its
subsidiaries. Provision is made for deferred income taxes which result
from certain items of income and expense being reported for tax
purposes in periods different than those reported for financial
reporting purposes. These items relate principally to the methods of
accounting for store leases with future scheduled rent payment
increases, inventory and the utilization of different methods of
depreciation for financial statement and income tax purposes.
-26-
URT INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company accounts for income taxes under the provisions of
Financial Accounting Standards Board's ("SFAS") No. 109, which
generally requires recognition of deferred tax liabilities and assets
for the future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
tax assets and liabilities are determined on differences between the
financial reporting and tax bases of assets and liabilities and are
measured by applying enacted tax rates and laws for the taxable years
in which those differences are expected to reverse. Under SFAS No.
109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date.
(h) Loss Per Common Share
Loss per common share was computed by dividing net loss, after
deducting preferred dividend requirements, by the weighted average
number of common shares outstanding during each of the periods which
was 12,637,634, 12,637,634 and 12,674,448 for the years ended March
29, 1997, March 30, 1996 and April 1, 1995, respectively.
(i) Store Closing Costs
Store closing costs are recorded in the period the Company decides to
close the store. Such costs include the book value of abandoned
leasehold improvements, provision for the present value of future
lease obligations, less estimated sub-rental income as well as other
costs incident to the store closing.
(j) Reorganization Costs
Reorganization costs include: (a) professional fees relating to legal,
accounting and consulting services provided in connection with the
Chapter 11 proceedings and (b) costs and expenses associated with the
closing of locations.
(k) Use of Estimates by Management
The preparation of financial statements in conformity with generally
accepted accounting principals requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reported period. Actual results could differ
from those estimates.
(l) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long Lived Assets to be
Disposed Of, on March 31, 1996. This statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
-27-
URT INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
carrying amount of the assets exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell. Adoption of this Statement
did not have a material impact on the Company's financial position,
results of operations or liquidity.
(m) New Accounting Standard
Statement of Financial Accounting Standards No. 128 ("SFAS 128"),
Earnings per Share, which supersedes ABP Opinion No. 15, Earnings per
Share, was issued in February 1997. SFAS 128 requires dual
presentation of basic and diluted earnings per share (EPS) for complex
capital structures on the face of the income statement. Basic EPS is
computed by dividing income by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential
dilution from the exercise or conversion of securities into common
stock, such as stock options. SFAS 128 is required to be adopted for
year-end 1998; earlier application is not permitted. Management does
not expect the basic or diluted EPS measured under SFAS 128 to be
materially different than the primary or fully-diluted EPS measured
under APB No. 15.
(n) Reclassifications
Certain amounts in the 1996 and 1995 consolidated financial statements
have been reclassified to conform with the 1997 presentation.
(5) Due From Officers/Shareholders
Due from officers/shareholders consist of the following at March 29, 1997
and March 30, 1996:
1997 1996
--------- ---------
Unsecured loans made to one officer/shareholder and one former
officer/shareholder; proceeds of the loans were used to purchase
shares of the Company's Class A and Class B common stock in the
open market from an unrelated party, interest 8 percent $ 108,717 141,554
Less current portion (30,832) (30,832)
--------- ---------
$ 77,885 110,722
========= =========
The promissory note agreements with the two officers/shareholders are
payable with interest at 8 percent in 96 equal, consecutive monthly
installments through March 31, 2000.
Under amended and restated employment agreements with these
officers/shareholders (note 10c), the required loan payments will be
credited as compensation for the officer/shareholder. Effective March 1996,
a former officer/shareholder is required to repay the loan in consecutive
monthly installments of $471.
Interest income on these loans amounted to $10,045, $16,610 and $18,460 in
each of the years in the three-year period ended March 29, 1997,
respectively, and is included in interest income in the accompanying
consolidated statements of operations.
-28-
URT INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Property and Equipment, net
Property and equipment consist of the following at March 29, 1997 and March
30, 1996:
1997 1996
----------- -----------
Land $ 395,570 395,570
Building 538,093 538,093
Leasehold improvements 1,760,459 1,895,438
Furniture and equipment 1,062,535 1,635,361
Building under capitalized lease 206,964 206,964
----------- -----------
3,963,621 4,671,426
Less accumulated depreciation and amortization (2,504,537) (2,803,180)
----------- -----------
$ 1,459,084 1,868,246
=========== ===========
(7) Long-term Obligations
Long-term obligations consists of the following at March 29, 1997 and March
30, 1996:
1997 1996
----------- -----------
Capital lease obligation, due in monthly installments of $3,382,
including interest at 17.5%; final payment due March 2005 $ 174,139 183,353
Mortgage payable, due in equal installments of $2,981 per month,
plus interest at prime plus .5%; collateralized by the mortgaged
property with depreciated cost of $802,178; final balloon
payment of $284,500 due September 2002 (note 2) 442,462 478,238
Settlement agreement with former director/shareholder, due in
monthly installments of $5,699, final payment due January 2000 193,853 273,550
Promissory notes due in installments of $26,744 for 21 months and
two payments of $347,675 (due February 1998 and 1999), plus
interest at prime; collateralized by inventory and guaranteed
by the Parent (note 2) 1,256,975 --
----------- -----------
2,067,429 935,141
Less current portion (730,239) (124,774)
----------- -----------
$ 1,337,190 810,367
=========== ===========
The capital lease pertains to the building portion of property owned by one
director and one former director. The rent expense on the land portion of
this lease was approximately $113,000 for 1997 and 1996 and $99,000 for
1995.
-29-
URT INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following represents future minimum lease payments under the capital
lease obligation:
Fiscal year Amount
----------- ------
1998 $ 40,600
1999 40,600
2000 40,600
2001 40,600
2002 40,600
Thereafter 121,560
---------
Total minimum lease payments 324,560
Less amount representing interest (150,421)
---------
Present value of minimum lease payments $ 174,139
=========
Maturities of long-term obligations, excluding the capital lease
obligation, to maturity, are as follows:
Fiscal year Amount
----------- ------
1998 $ 719,277
1999 746,023
2000 92,853
2001 35,775
2002 35,775
Thereafter 263,587
----------
$1,893,290
==========
The Company has a standby letter of credit of $64,800 available to a
landlord that was not drawn upon as of March 29, 1997. The letter of credit
is fully collateralized by a certificate of deposit, which is included in
other assets. In addition, the Company has an irrevocable letter of credit
of $150,000 that was not drawn upon as of March 29, 1997.
(8) Accrued Liabilities
Accrued liabilities consist of the following at March 29, 1997 and March
30, 1996:
1997 1996
---------- ----------
Gift certificate and credit slip liability $ 184,884 371,647
Payroll and related benefits 99,701 196,699
Sales and real estate taxes payable 188,087 280,191
Accrued overhead expenses 392,682 233,998
Other 208,022 119,641
---------- ----------
$1,073,376 1,202,176
========== ==========
-30-
URT INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(9) Liabilities Subject to Compromise
Liabilities subject to compromise at March 30, 1997 include the following:
Lease rejection claims $ 600,000
Trade and other miscellaneous claims 5,071,434
----------
$5,671,434
==========
Liabilities subject to compromise under the Chapter 11 proceedings include
substantially all trade and other payables as of the petition date. As
discussed in note 2, payment of these liabilities, including the maturity
of debt obligations, were stayed while Peaches continued to operate as a
debtor-in-possession.
On January 17, 1997, Peaches' plan of reorganization was confirmed by the
Bankruptcy Court and the Company recorded an extraordinary gain of $486,379
primary as a result of the settlement of lease rejection claims (note 2).
(10) Commitments and Contingencies
(a) Leases
The Company is a lessee under various operating leases, several of which
provide for percentage rent. An insignificant amount of percentage rent was
incurred in each of the years in the three-year period ended March 29,
1997. Most of the leases contain renewal options. In connection with the
Chapter 11 filing, Peaches affirmed 13 leases (5 of which were modified on
terms more favorable to Peaches) and rejected 8 leases.
The aggregate minimum rental commitments under all noncancelable operating
leases at March 29, 1997 are as follows:
Fiscal year Amount
----------- ------
1998 $1,195,769
1999 1,038,225
2000 698,232
2001 653,551
2002 334,395
Thereafter 2,900,248
----------
$6,820,420
==========
Rental expense under noncancelable operating leases, included in selling,
general and administrative expenses in the accompanying consolidated
statements of operations, amounted to $1,248,000, $1,887,000 and
$2,410,000, respectively, for each of the years in the three-year period
ended March 29, 1997.
Rental expense on stores owned by two directors and/or their relatives was
$131,250, $215,417 and $251,667, respectively, for each of the years in the
three-year period ended March 29, 1997.
-31-
URT INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(b) Legal Matters
The Company has been party to a lawsuit involving the Company's
closing of a store which it had based in Charlotte, North Carolina and
its refusal to pay rent with respect to such store from and after
February 1991. In February 1995, the court entered a judgment ordering
the Company to pay the sum of $405,460 to plaintiff. The Company
recorded a charge to operations for the year ended April 1, 1995
related to the loss on such litigation and paid such amount in March
1995.
The Company is a party to various other claims, legal actions and
complaints arising in the ordinary course of its business. In the
opinion of management, all such matters are without merit or involve
such amounts that unfavorable disposition will not have a material
impact on the financial position or results of operations of the
Company.
(c) Employment Agreements
As amended January 1, 1996, the Company entered into an amended and
restated employment agreement with an officer, which expires March 31,
2000. In addition, the officer shall be credited, as compensation,
with the monthly amounts payable by him to the Company under
promissory note (note 5).
The respective employment agreement provides the officer with the use
of an automobile, full medical coverage, reimbursement for life
insurance policies, paid vacations and severance pay if the Company
refuses to renew the employment agreement upon expiration, or in the
event of termination upon mutual consent or termination in certain
other events.
On March 18, 1996, the United States Bankruptcy Court Southern
District of Florida approved the settlement of an employment agreement
with one of its former officers. Peaches is to pay an amount of
$273,550 over a period of four years (note 7). Under the original
terms of employment, the officer would have been entitled to in excess
of $870,000 in the aggregate.
(11) Shareholders' Equity
Authorized shares of common stock as of March 29, 1997 and March 30, 1996
were 10,000,000 Class B and 20,000,000 Class "A" shares, both classes
having a par value of $.01. The two classes of the Company's common stock
are identical except that each class votes separately so that all matters
requiring the vote of stockholders require the approval of both classes of
common stock voting as separate classes.
The Company had agreed to sell to two officers shares of Class "A" common
stock in 96 equal consecutive monthly installments, starting April 1, 1992,
each installment involving the purchase of an aggregate of 14,375 shares
for $2,875 ($.20 per share). The amounts required to purchase such shares
were required to be credited as compensation to the two officers. Effective
October 1, 1994, the agreements were terminated.
-32-
URT INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) Pension Plan
Effective September 15, 1994, the Company curtailed its noncontributory
defined benefit plan. As a result of this curtailment all future benefit
accruals were eliminated and accrued benefits became fully vested. The net
impact of this curtailment and settlement in plan liabilities is a loss of
$24,949 which is reflected in selling, general and administrative expenses
in fiscal year 1995.
(13) Income Taxes
The provision for income taxes consists of:
1997 1996 1995
--------- -------- --------
Current:
Federal $ -- -- (222,000)
State -- -- --
--------- -------- --------
-- -- (222,000)
Deferred:
Federal -- -- 296,000
State -- -- 46,000
--------- -------- --------
-- -- 342,000
--------- -------- --------
$ -- -- 120,000
========= ======== ========
Reasons for differences between income tax provision and the amount
computed by applying the statutory federal income tax rate of 34 percent to
loss before income taxes and minority interest were:
1997 1996 1995
--------- --------- ---------
Income tax benefit at applicable statutory
tax rate of loss before income taxes $(395,000) (842,000) (645,000)
Add:
State income tax benefit, net of federal
benefit (43,000) (81,000) (64,000)
Change in valuation allowance 282,000 874,000 811,000
Capitalized reorganization expenses and
other permanent differences 52,000 -- --
Adjustments to net operating loss
carryovers and other deferred tax
assets 78,000 -- --
Other 26,000 49,000 18,000
--------- --------- ---------
Income tax provision for the year $ -- -- 120,000
========= ========= =========
-33-
URT INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at March 29, 1997 and March 30, 1996
are presented below.
Deferred tax assets: 1997 1996
----------- -----------
Inventories, principally due to additional costs
capitalized for tax purposes $ 106,000 87,000
Property and equipment, net, principally due to
differences in depreciation 235,000 166,000
Accrued rent, principally due to accrual for financial
reporting purposes 65,000 98,000
Provision for store closings -- 80,000
NOL carryforward 1,522,000 1,121,000
Accrued expenses 72,000 173,000
Other 36,000 29,000
----------- -----------
Total gross deferred tax assets 2,036,000 1,754,000
Less valuation allowance (2,036,000) (1,754,000)
----------- -----------
Net deferred tax assets $ -- --
=========== ===========
At March 29, 1997, the Company has a net operating loss carryforward for
federal income tax purposes of approximately $4,241,000 which is available
to offset future federal taxable income, if any, through 2012.
A valuation allowance is provided to reduce deferred tax assets to a level
which, more likely than not, will be realized. The net deferred assets
reflect management's estimate of the amount which will be realized from
future profitability which can be predicted with reasonable certainty. The
valuation allowance for deferred tax assets as of March 29, 1997 and March
30, 1996 was $2,036,000 and $1,754,000, respectively. The net change in the
total valuation allowance for the years ended March 29, 1997 and March 30,
1996 was an increase of approximately $282,000 and $874,000, respectively.
(14) Fair Value of Financial Instruments
The fair value of the Company's long-term debt is estimated by discounting
the future cash flows for each instrument at rates currently offered to the
Company for similar debt instruments of comparable maturities, which
approximates the carrying value.
The fair value of due from officers/shareholders was determined using
interest rates based on the credit worthiness of the note holders; the fair
values approximate carrying values.
(15) Business and Credit Concentrations
The retail sale of prerecorded music and video products is highly
competitive. The Company's share of the retail market in the Southeastern
United States is not significant. However, management believes the Company
has certain competitive advantages, including more convenient store
locations, a large selection of inventory and superior customer service.
-34-
URT INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Peaches purchased approximately 77 percent of its merchandise from six
principal suppliers during the fiscal year ended March 29, 1997. Purchases
from given suppliers are, to a great extent, determined by which of them
are manufacturing or distributing the most popular prerecorded music
products at a given time, as well as the credit and other terms on which
such suppliers are willing to sell to the Company.
The Company is not obligated to purchase merchandise from any supplier. The
loss of any particular supplier would not have a materially negative effect
on the Company's results of operations; however, a combination of lost
suppliers may have a materially negative effect on the Company's results of
operations. In addition, expenses would be greater if such alternate
sources were utilized.
(16) Condensed Financial Information
The following table summarizes condensed financial statement information
for the subsidiary included in the consolidated financial statements:
Balance Sheet 1997 1996
------------- ---- ----
Total current assets $ 4,571,572 $7,414,557
============ ==========
Total assets $ 6,170,065 $9,442,616
============ ==========
Total current liabilities $ 3,058,113 $1,330,866
============ ==========
Total liabilities subject to compromise $ -- $5,671,434
============ ==========
Total liabilities $ 5,256,152 $8,013,390
============ ==========
Total shareholders' equity $ 913,913 $1,429,226
============ ==========
Statement of Operations 1997 1996 1995
----------------------- ---- ---- ----
Net Sales $ 18,109,119 23,626,489 31,960,953
============ ============ ============
Loss from operations $ (914,534) (1,956,016) (1,864,979)
============ ============ ============
Reorganization costs $ (379,645) (371,150) --
============ ============ ============
Net loss $ (865,313) (2,416,051) (1,995,408)
============ ============ ============
-35-
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
As of the date of this filing, the directors and executive officers of URT
are:
Name Position Age
---- -------- ---
Allan Wolk Chairman of the Board,
President (Chief Executive
Officer) and Director 59
Brian Wolk Executive Vice-President and Director 31
Jason Wolk Executive Vice-President, Chief
Financial Officer (Principal Financial
and Accounting Officer), Treasurer and Director 29
Allan Wolk has been the Chief Executive Officer and a director of URT and
PEC since their formation. He has been engaged in the prerecorded music business
for more than 40 years, principally in the rack merchandising and retail
segments thereof.
Brian Wolk, an attorney, has been employed by the URT Companies in various
capacities and at various times since 1982 and has been employed by them, full
time, since 1992. He is a son of Allan Wolk. He has been a director of URT and
PEC since 1994 and a vice-president of both companies since June, 1995. He was
appointed Executive Vice-President of both companies in March, 1996.
Jason Wolk, a certified public accountant, has been employed by the URT
Companies in various capacities and at various times since 1983 and has been
employed by them, full time, since 1994. He is a son of Allan Wolk. Prior to his
full time employment by the URT Companies, he had been employed as an accountant
by KPMG Peat Marwick LLP. He has been a director of URT and PEC since 1994 and a
vice-president and the secretary of both companies since June, 1995. He was
appointed Treasurer and Chief Financial Officer (Principal Financial and
Accounting Officer) of both companies in September, 1995, and was appointed
Executive Vice-President of both companies in March, 1996.
-36-
The term of office of each director continues until the next annual meeting
of the stockholders and until his or her successor is elected. Mr. Wolk has an
employment agreement with URT (See "EXECUTIVE COMPENSATION--Employment
Contracts").
Item 11. EXECUTIVE COMPENSATION
The following table sets forth compensation paid or accrued by the URT
Companies for services rendered in all capacities during the 1997 fiscal year
and the two prior fiscal years to (i) URT's chief executive officer ("CEO") and
(ii) each of the other most highly compensated executive officers of the URT
Companies whose cash compensation exceeded $100,000 and who served as executive
officers during the 1997 fiscal year:
Summary Compensation Table
Annual Compensation Long Term Compensation
------------------------------------------------- ------------------------------------------------------
Awards Payouts
------------------------- -------
Long
Options/ Term
Other Stock Incen. All
Annual Restricted App. Plan Other
Name and Fiscal Salary Bonus Compensa- stock Rights Pay-outs Compensa-
position Year ($) ($) tion($) award(s)($) (#) ($) tion($)
- -------- ---- --- --- ------- ----------- --- -------- -------
Allan Wolk, 1997 616,714 -0- 101,446(1) -0- -0- -0- -0-
Chairman, 1996 662,500 -0- 95,431(1) -0- -0- -0- 308,222(2)
Pres. & CEO 1995 810,380 -0- 109,704(1) -0- -0- -0- -0-
- ----------
(1) Such amounts include life insurance premiums ($66,226 for the 1997 fiscal
year) and amounts credited to Mr. Wolk under his employment agreement
against amounts owed to URT.
(2) Such amount represents a one-time distribution to Mr. Wolk as a result of
the termination, effective May 12, 1995, of the PEC defined benefit pension
plan and trust.
-37-
Employment Contracts
Effective October 1, 1994, URT and Mr. Wolk entered into the employment
agreement between them which is presently in effect (the "1994 Agreement").
Under the 1994 Agreement, as under the March 31, 1992 employment agreement (the
"1992 Agreement") which the 1994 Agreement replaces, the period of employment
continues until March 31, 2000. The 1994 Agreement reduced the annual rate of
his base salary to $725,380 for the period from October 1, 1994 though March 31,
1995, to $575,380 for the next eighteen month period ending September 30, 1996
and to $784,048 for the balance of the term of employment (as compared to an
annual base salary at the rate of $834,048 under his 1992 Agreement). Pursuant
to the arrangements described above under "BUSINESS - Management Agreements
between URT and PEC, PEC pays a salary to Mr. Wolk in the amount described in
such section, and such amount is credited against the compensation payable by
URT to Mr. Wolk pursuant to the 1994 Agreement. The 1994 Agreement eliminated
provisions contained in the 1992 Agreement under which Mr. Wolk was entitled to
cost of living increases based on increases in the consumer price index and
changes in U. S. individual income tax rates. It reduced certain monthly credits
to which he was entitled under the 1992 Agreement effective October 1, 1994 from
$5,435 per month to $2,935 per month but retained the provision that if he died
or became disabled during the term of such agreement, the credits which he would
have received through March 31, 2000 (but in the reduced amount under the 1994
Agreement) if he had survived and not become disabled would be accelerated to
the date of death or disability. The 1994 Agreement also provided that URT would
pay or reimburse him for the premiums on term or other life insurance coverage
to be selected by URT and payable to his designee in the amount of $2,600,000
for the duration of his life (rather than being reduced to $1,500,000 after age
70 as provided in the 1992 Agreement). Mr. Wolk was also permitted under the
1994 Agreement (as he had been under the 1992 Agreement) to repay certain loans
which are hereinafter described in "Certain Relationships and Related
Transactions"), over the term of his employment.
The 1994 Agreement also continued to provide (as had the 1992 Agreement)
that during his employment period URT would furnish Mr. Wolk with an automobile,
reimburse him for business expenses, including socially related business
expenses incurred by him, and provide him with hospital and medical benefits;
that upon termination of his employment, he would not compete with the URT
Companies for a period of three years and for the additional period during which
he accepted severance payments; that upon the termination of his period of
employment and URT's refusal to continue to employ him on terms no less
favorable than those contained in his employment agreement or in the event of
the earlier termination of his employment for any reason other than death, URT
was required to pay him as severance payments, an amount equal to his annual
base salary which was in effect at the time of termination and thereafter, upon
each anniversary of the termination date until his death, 50% of such annual
base salary (except for the elimination of provisions which had been in the 1992
Agreement under which he could have been entitled to additional amounts if
adjustments were made due to increases in the consumer price index, changes in
the income tax laws or certain other contingencies), as reduced by any payments
he received under any pension or profit sharing plan of the URT Companies and if
applicable, any disability insurance
-38-
policy; that so long as he was entitled to receive severance payments, URT was
required to continue to furnish him with an automobile, pay the premiums on the
above described life insurance coverage and provide medical insurance coverage
for him and his family which would continue during his lifetime and that of his
wife, if she survived him; that as a condition of receiving such severance
payments and benefits, he was required to be available to the URT Companies as a
consultant; that if any persons, excluding officers and directors of URT, should
acquire effective control of URT while he was in its employ, he would be
entitled to receive, in addition to all other payments required to be made to
him under his employment agreement, an amount equal to the maximum amount
permitted to be paid by URT without such payment being considered a "parachute
payment" under the Internal Revenue Code; that such provision was designed to
deter corporate raiders and would require that a substantial payment be made to
him in the event that any such persons acquired effective control of URT. The
amount to which Mr. Wolk would be entitled under the circumstances described
above would depend on his compensation during the five tax years immediately
preceding any such change in control. If, for illustrative purposes, such change
in control had occurred during the 1997 fiscal year, the payment to Mr. Wolk
would have been approximately $2,935,000.
The 1994 Agreement also permits Mr. Wolk to obtain a loan from URT on a
single occasion not to exceed $400,000 for a period of up to five years at an
interest rate of 3% per annum, which is required to be collateralized by
adequate security and made upon such other terms and conditions as URT's
directors with the advice of counsel deem necessary to protect URT.
Pursuant to the intercorporate agreements described above, URT provides PEC
with the services of Mr. Wolk as PEC's Chairman, President and Chief Executive
Officer, and PEC pays a salary to Mr. Wolk which is credited against the amount
payable by URT to Mr. Wolk pursuant to the 1994 agreement. The salary so payable
by PEC to Mr. Wolk is $500,000 per annum, except that it has been reduced to
$400,000 per annum effective March 1, 1997 and continuing until February 28,
1999.
Compensation Committee Interlocks and Insider Participation
URT does not have a compensation committee or other board committee
performing equivalent functions. During the 1997 fiscal year, all deliberations
concerning executive officer compensation or any other arrangements between URT
and any executive officers were conducted by URT's full board of directors,
provided, however, that no director voted on compensation payable to him as an
executive officer or any other arrangement between him and URT.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains information concerning the number of shares of
each class of URT's common stock which was owned by each person who, on June 3,
1997, owned, beneficially, more than 5% thereof, and the number of shares of
each class of such stock owned beneficially, directly or indirectly, by each
executive officer and director and by all directors and executive officers as a
group on such date:
-39-
Amount & Nature
of Beneficial Percent
Title of Class Name Ownership of Class
- -------------- ---- --------- --------
Class A Common Executive Officers
Stock, par value and Directors
$.01 per share
Allan Wolk 3,194,186(1) 29.4%
Allan Wolk and
Lawrence Strauss,
as Trustees 33,072(2) *
Brian Wolk 12,980(3) *
Jason Wolk 17,480(3) *
---------
All officers and
directors as a
group (3 persons) 3,257,718 30.0
Other
Scorpio Music, Inc.
P. O. Box A
Trenton, N.J. 08691 1,195,550(4) 11.0%
Amount & Nature
of Beneficial Percent
Title of Class Name Ownership of Class
- -------------- ---- --------- --------
Class B Common Executive Officers and Directors
Stock, par value
$.01 per share Allan Wolk 786,654(5) 58.4%
=========
All officers and
directors as a
group (1 person) 786,654 58.4%
(1) Includes 3,150,786 shares owned by Allan Wolk, 25,920 shares owned by his
wife and 17,480
-40-
shares held by him for his daughter. However, Mr. Wolk has renounced all
voting and investment power with respect to those shares of URT which are
held by him for his daughter. He believes that his wife will vote the
shares owned by her in favor of proposals which he favors, but disclaims
beneficial ownership of any shares owned by her or held for the benefit of
his daughter.
(2) Such shares are held by Lawrence Strauss and Allan Wolk as trustees for the
benefit of children of Sheffield Wolk, Mr. Wolk's brother. Allan Wolk has
renounced all voting and investment power with respect to those shares of
URT which are so held in trust for the benefit of children of Mr. Wolk's
brother. All such powers as trustee are exercised exclusively by the
co-trustee, and Mr. Wolk disclaims beneficial ownership of such shares.
(3) Such shares are held in the name of Allan Wolk, as custodian. However, Mr.
Wolk has renounced all voting and investment power with respect to those
shares of URT which are held by him for his two sons, and disclaims
beneficial ownership of such shares. Such shares, being listed separately
here, are not included under the shares listed as beneficially owned by
Allan Wolk.
(4) Based on information supplied by URT's transfer agent. Does not include
160,000 shares reported in a Schedule 13D, dated June 14, 1989, as owned by
John T. Gervasoni, Scorpio's reported president and 100% shareholder, as to
which no confirmation of ownership has been made by URT's transfer agent.
(5) Includes 780,174 shares owned by Allan Wolk and 6,480 shares owned by his
wife. Mr. Wolk believes that his wife will vote the shares owned by her in
favor of proposals which he favors, but disclaims beneficial ownership of
such shares.
(*) Less than one percent.
As set forth in the above table and footnotes, Allan Wolk and members of
his immediate family own approximately 30% or URT's Class A common stock and
approximately 58% of URT's Class B common stock. The two classes of URT's common
stock are identical except that each class votes separately so that all matters
requiring the vote of stockholders require the approval of both classes of
common stock voting as separate classes. By reason of such ownership and his
position as Chairman of URT, Mr. Wolk may be deemed to have effective control of
URT.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As a result of their purchase in 1983 from an unaffiliated third party
seller, Allan Wolk and his brother, Sheffield Wolk, a former director of URT,
are the owners of the land and building on which the PEC store in Fort
Lauderdale, Florida is located. Such property was and continues to be subject to
a lease with PEC as tenant, which had been negotiated by the prior owner. During
the 1995 fiscal year, PEC made and paid for certain renovations to the premises.
Based on the provisions of the lease, the owners agreed to be responsible for
$26,225 of the cost of such renovations which, with interest, is being deducted
by PEC over a period of 36 months.
In December, 1984, PEC entered into a long-term lease with Allan Wolk and
Sheffield Wolk for premises owned by them in Orlando, Florida. The lease term
commenced in December,
-41-
1984, and is for a period of twenty years with two additional five year terms.
The lease is a triple net lease. The lease provides for a net minimum rental
rate of $125,000 per annum from the rental commencement date through March 31,
1985; a rate of $140,000 per annum during the following five year period; a rate
of $145,000 per annum during the next five year period; a rate of $160,000
during the next five year period; and increases of $5,000 during every five year
period thereafter. Notwithstanding the foregoing, commencing with the sixth
rental year, if net sales at the store during any rental year are less than
$1,800,000, the annual net minimum rental rate for such year will be the same as
that which had been in effect during the preceding five year period. The lease
was approved by disinterested directors and, in the opinion of management, is as
reasonable as those which could have been obtained from unaffiliated third
parties.
Because of the profitability of the above-referenced Fort Lauderdale and
Orlando stores, the leases for such two stores were among the leases which PEC
elected to assume during its Chapter 11 proceeding with the approval of the
Bankruptcy Court (See "LEGAL PROCEEDINGS").
In August, 1987, URT loaned $392,872 to Allan Wolk, and in March, 1988
loaned an additional $123,000 to him. The principal amount of the August, 1987
loan was payable in five years, with interest at the rate of 7.9% per annum and
the principal amount of the March, 1988 loan was payable in six years, with
interest payable at the rate of 7.86% per annum. As consideration, in part, for
the agreement of Mr. Wolk to reduce the amount of compensation which would have
been payable to him under the employment agreement with him which was then in
effect, the promissory notes evidencing the above-described indebtedness were
replaced by a new promissory note which permitted such indebtedness to be repaid
over a period of eight years, from April 1, 1992 through March 31, 2000, with
interest at the rate of 8.0% per annum, in 96 consecutive monthly installments
in the amount of $2,935 each. The loan is unsecured. Mr. Wolk used the funds
lent to him to purchase shares of URT's Class A and Class B Common Stock from
independent third parties. The disinterested directors authorized URT to finance
such purchases as above-described, because they believed that such action would
give Mr. Wolk continued incentive to remain with URT and to work to increase the
value of its shares. Under the above-described provisions of Mr. Wolk's 1994
Agreement (which took effect on October 1, 1994), he is entitled to be credited,
as additional compensation the amount of $2,935 per month during the period of
his employment until the amount owed is paid.
As a result of the arrangements described in the preceding paragraph,
during the 1997 fiscal year, Mr. Wolk was credited with a total of $35,220 with
respect to the above-described indebtedness. As of March 29, 1997, the
outstanding principal amount of Mr. Wolk's loan was $93,672 and the highest
amount outstanding on Mr. Wolk's loan during the 1997 fiscal year was $122,037.
In April, 1989, URT's board of directors authorized URT to enter into
agreements with its officers and directors under which they would be entitled to
be indemnified by URT and have their expenses advanced to them in the event of
any claim against them in their capacities as officers and directors. Such
agreements were entered into with all then-existing officers and directors of
URT on or about May 22, 1989. On or about July 14, 1995, and pursuant to the
further authorization of the board of directors on such date, URT entered into
indemnification agreements with the two
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additional officers and directors, Brian Wolk and Jason Wolk, who were appointed
to their respective positions subsequent to 1989. The indemnification agreements
so entered into with Brian Wolk and Jason Wolk are in the same form as the
indemnification agreements entered into in 1989 with the then-existing officers
and directors.
In order to enable PEC to effect the Plan of Reorganization on the terms
described above, URT, in exchange for the issuance to it of 20,000,000 shares of
PEC's authorized common stock (including 218,730 treasury shares), has:
contributed $350,000 to the capital of PEC; waived an aggregate of $75,000 of
dividends payable by PEC to URT with respect to the period running from January
1, 1996 to March 31, 1997; loaned $700,000 to PEC; and agreed that, subject to
the terms of the Plan of Reorganization, it would guarantee the approximately
$1,284,000 which is due to PEC's principal suppliers after the Effective Date
pursuant to the arrangements described in "LEGAL PROCEEDINGS" above. In order to
facilitate the issuance of such shares to URT, URT also waived its right to
convert to common stock the Series A preferred stock of PEC which is owned by
URT. The loan from URT is required to be paid back by PEC with interest at the
prime rate charged by Chase Manhattan Bank, N.A. over a period of four years
beginning on the third anniversary of the Effective Date. The debt so owed by
PEC to URT is subordinate to the amounts owed to PEC's principal suppliers, and
is secured by a second mortgage on PEC's Mobile, Alabama property.
On or about March 25, 1997, URT and PEC agreed that, if the total
shareholders' equity of PEC, as of the end of the 1997 fiscal year, is less than
$1,000,000, then such above-described $700,000 loan from URT to PEC would be
reduced by an amount equal to the lesser of $200,000 or the difference between
$1,000,000 and such total shareholders' equity as of the end of the 1997 fiscal
year, without taking such debt reduction into account, and cause the amount of
such aggregate debt reduction to be transferred to the capital account of PEC in
exchange for shares of a new class of cumulative preferred stock. Such agreement
between URT and PEC was terminated by them on or about June 9, 1997.
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report.
Page
1. Consolidated Financial Statements 16
Table of Contents 17
Independent Auditors' Report
URT Industries, Inc. and Subsidiaries
Consolidated Financial Statements:
Consolidated Balance Sheets as
of March 29, 1997 and
March 30, 1996. 18
Consolidated Statements of Operations
for each of the years in the three year period
ended March 29, 1997. 19
Consolidated Statements of Shareholders'
Equity for each of the years in the three year
period ended March 29, 1997. 20
Consolidated Statements of Cash Flows
for each of the years in the three year
period ended March 29, 1997. 21
Notes to Consolidated Financial Statements. 23
2. Financial Statement Schedules
Schedules have been omitted which are not
applicable or where the required information
is shown in the financial statements or the
notes thereto.
3. Exhibits.
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Exhibit No.
- -----------
3.1 Articles of Incorporation of URT Industries, Inc. ("URT") and
all amendments thereto through January 11, 1973, incorporated
by reference to Exhibit No. 3.1 to URT's Registration Statement
No. 2-36263.
3.1-1 Amendment to URT's Articles of Incorporation dated January 2,
1975, incorporated by reference to Exhibit No. 3.1-1 to URT's
Registration Statement No. 2-59153.
3.1-2 Amendment to URT's Articles of Incorporation dated November 10,
1976, incorporated by reference to Exhibit No. 3.1-2 to URT's
Registration Statement No. 2-59153.
3.1-3 Amendment to URT's Articles of Incorporation dated September
21, 1979, incorporated by reference to Exhibit No. 3.1-3 to
URT's Registration Statement No. 2-63747.
10(mm) Lease dated December 13, 1984 between Allan Wolk and Sheffield
Wolk and PEC applicable to Orlando, Florida premises,
incorporated by reference to Exhibit No. 13.47 to URT's
Registration Statement No. 2-63747.
10(ss) Amendment to Lease dated February 25, 1986 between Allan Wolk
and Sheffield Wolk and PEC applicable to Orlando, Florida
premises incorporated by reference to Exhibit 10(ss) to URT's
Form 10-K Annual Report filed on June 27, 1986.
10(kkk) Indemnification Agreement dated May 22, 1989 between Allan Wolk
and URT, incorporated by reference to Exhibit 10(kkk) to URT's
Form 10-K Annual Report dated June 27, 1989.
10(lll) Indemnification Agreement dated May 22, 1989 between David
Jackowitz and URT, incorporated by reference to Exhibit 10(lll)
to URT's Form 10-K Annual Report dated June 27, 1989.
10(nnn) Indemnification Agreement dated May 22, 1989 between Ann Krouse
and URT, incorporated by reference to Exhibit 10(nnn) to URT's
Form 10-K Annual Report dated June 27, 1989.
10(ppp) By-Laws of URT, as amended and restated, incorporated by
reference to Exhibit 10 (ppp) to URT's Form 10-K Annual Report
dated June 28, 1990.
10(xxx) Promissory Note dated March 31, 1992 made by Allan Wolk to URT,
as payee, incorporated by reference to Exhibit 10(xxx) to URT's
Form 10-K Annual Report dated June 25, 1992.
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10(bbbb) Promissory Note dated March 31, 1992 made by David Jackowitz to
URT, as payee, incorporated by reference to Exhibit 10(bbbb) to
URT's Form 10-K Annual Report dated June 25, 1992.
10(dddd) Management and Intercorporate Agreement dated March 29, 1993
between URT and PEC, incorporated by reference to Exhibit
10(dddd) to URT's Form 10-K Annual Report dated June 25, 1993.
10(eeee) Amended and Restated Employment Agreement, dated October 1,
1994, between Allan Wolk and URT, incorporated by reference to
Exhibit 10(eeee) to URT's 10-K Annual Report dated June 29,
1995.
10(ffff) Amended and Restated Employment Agreement, dated December 14,
1994, between David Jackowitz and PEC, incorporated by
reference to Exhibit 10(ffff) to URT's 10- K Annual Report
dated June 29, 1995.
10(iiii) Amendment No. 1 dated as of October 1, 1994 to Management and
Intercorporate Agreement dated March 29, 1993 between URT and
PEC, incorporated by reference to Exhibit 10(iiii) to URT's
10-K Annual Report dated June 29, 1995.
10(jjjj) Letter Agreement dated January 1, 1996 between URT and PEC
pertaining to termination of Management and Intercorporate
Agreement dated March 29, 1993.
10(kkkk) Letter Agreement dated January 1, 1996 between URT and PEC
pertaining to services of Allan Wolk, incorporated by reference
to Exhibit 10(kkkk) to URT's 10- K Annual Report dated April
25, 1997.
10(llll) Letter Agreement dated January 1, 1996 between Allan Wolk and
URT, incorporated by reference to Exhibit 10(llll) to URT's,
10-K Annual Report dated April 25, 1997.
10(mmmm) Indemnification Agreement dated July 14, 1995 between Brian
Wolk and URT, incorporated by reference to Exhibit 10(mmmm) to
URT's 10-K Annual Report dated April 25, 1997.
10(nnnn) Indemnification Agreement dated July 14, 1995 between Jason
Wolk and URT, incorporated by reference to Exhibit 10(nnnn) to
URT's 10-K Annual Report dated April 25, 1997.
10(oooo) PEC's Amended Plan of Reorganization, dated October 23, 1996,
incorporated by reference to Exhibit 1 to PEC's Form 8-K dated
April 7, 1997.
10(pppp) Order Confirming PEC's Amended Plan or Reorganization, as
Modified, dated January 17, 1997, incorporated by reference to
Exhibit 2 to PEC's Form 8-K dated April 7, 1997.
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10(qqqq) URT Promissory Note dated January 27, 1997 made by PEC to URT,
incorporated by reference to Exhibit 10.66 of PEC's 10-K Annual
Report dated April 25, 1997.
10(rrrr) Security Agreement dated January 27, 1997 between URT and PEC,
incorporated by reference to Exhibit 10.67 of PEC's 10-K Annual
Report dated April 25, 1997.
10(ssss) Mortgage Agreement with Assignment of Rents, Security Agreement
and Fixture Filing dated January 27, 1997 by PEC in favor of
URT, incorporated by reference to Exhibit 10.68 of PEC's 10-K
Annual Report dated April 25, 1997.
10(tttt) PEC, incorporated by reference to Exhibit 10.69 of PEC's 10-K
Annual Report dated April 25, 1997.
10(uuuu) Subordination Agreement dated January 27, 1997 between URT, PEC
and selected creditors, incorporated by reference to Exhibit
10.70 of PEC's 10-K Annual Report dated April 25, 1997.
10(vvvv) Subordination Agreement dated January 27, 1997 between URT, PEC
and creditor, incorporated by reference to Exhibit 10.71 of
PEC's 10-K Annual Report dated April 25, 1997.
10(wwww) Surrender and Waiver Agreement dated January 27, 1997 between
URT and PEC, incorporated by reference to Exhibit 10.72 of
PEC's 10-K Annual Report dated April 25, 1997.
10(xxxx) Waiver Agreement dated March 1, 1997 between URT and PEC,
incorporated by reference to Exhibit 10.73 of PEC's 10-K Annual
Report dated April 25, 1997.
10(yyyy) Stock Purchase Agreement dated March 24, 1997 between URT and
PEC, incorporated by reference to Exhibit 10.74 of PEC's 10-K
Annual Report dated April 25, 1997.
22 Subsidiaries of URT.
27 Financial Data Schedule
(b) Reports on Form 8-K.
None.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
URT INDUSTRIES, INC.
By: /s/Allan Wolk
--------------------------
Allan Wolk,
Chairman of the Board
Dated: June 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Title Date
----- ----
By: s/Allan Wolk June 27, 1997
-----------------------
Allan Wolk,
Chairman of the Board ,
President (Principal
Executive Officer) and Director
By: s/Brian Wolk June 27, 1997
-----------------------
Brian Wolk, Executive
Vice President and Director
By: s/Jason Wolk June 27, 1997
-----------------------
Jason Wolk, Executive
Vice President, Chief Financial Officer
(Principal Financial and Accounting
Officer), Treasurer, Secretary and Director
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