REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Broadway Stores, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of earnings, of cash flows and of shareholders' equity
present fairly, in all material respects, the financial position of Broadway
Stores, Inc. (formerly known as Carter Hawley Hale Stores, Inc.) and its
subsidiaries at January 28, 1995 and January 29, 1994, and the results of their
operations and their cash flows for the fiscal years ended January 28, 1995 and
January 29, 1994 and the seventeen weeks ended January 30, 1993, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Our audits of the consolidated financial statements referred to above also
included an audit of the accompanying Financial Statement Schedule VIII for
the fiscal years ended January 29, 1995 and January 28, 1994 and the
seventeen weeks ended January 30, 1993. In our opinion, this Financial
Statement Schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
As discussed in the Reorganization and Basis of Reporting section of the Summary
of Significant Accounting Policies, on September 14, 1992, the United States
Bankruptcy Court confirmed the Company's plan of reorganization. The plan of
reorganization, which was effective October 8, 1992, resulted in the discharge
of all claims against the Company which arose prior to February 11, 1991 and
substantially altered the rights and interests of the existing equity security
holders. The Company utilized fresh start reporting as of October 3, 1992 to
account for the effects of the reorganization.
Price Waterhouse LLP
Los Angeles, California
March 13, 1995
1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Broadway Stores, Inc.
In our opinion, the accompanying consolidated statements of earnings, of cash
flows and of shareholders' equity present fairly, in all material respects, the
results of operations and cash flows of Broadway Stores, Inc. (formerly known as
Carter Hawley Hale Stores, Inc.) and its subsidiaries for the thirty-five weeks
ended October 3, 1992, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
Our audit of the consolidated financial statements referred to above also
included an audit of the accompanying Financial Statement Schedule VIII for
the thirty-five weeks ended October 3, 1992. In our opinion, this Financial
Statement Schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
As discussed in the Reorganization and Basis of Reporting section of the Summary
of Significant Accounting Policies, on February 11, 1991, the Company filed a
petition with the United States Bankruptcy Court for reorganization under
Chapter 11 of the Bankruptcy code. The plan of reorganization was effective
October 8, 1992, at which time the Company emerged from bankruptcy. The Company
utilized fresh start reporting as of October 3, 1992 to account for the effects
of the reorganization.
As discussed in the Change in Accounting Policy section of the Summary of
Significant Accounting Policies, the Company changed its method of accounting
for income taxes in the thirty-five week period ended October 3, 1992.
Price Waterhouse LLP
Los Angeles, California
March 12, 1993
2
BROADWAY STORES, INC.
Consolidated Statement of Earnings
Year Ended Period Ended
-------------------------- ---------------------------
January 28, January 29, January 30, October 3,
1995 1994 1993 1992
(In thousands, except per share amounts) (52 weeks) (52 weeks) (17 weeks) (35 weeks)
- -----------------------------------------------------------------------------------------------------
Sales $2,086,804 $2,092,681 $889,843 $1,248,004
Finance charge revenue 91,330 81,438 27,265 55,377
Cost of goods sold, including
occupancy and buying costs 1,560,035 1,589,077 641,361 946,618
Selling, general and administrative
expenses 554,405 551,098 206,804 354,806
Charge for non-recurring costs 45,000
---------- ---------- -------- ----------
Earnings (loss) from operations before
interest expense, reorganization
income and income taxes 63,694 (11,056) 68,943 1,957
Interest expense, net 100,904 84,864 29,623 60,185
---------- ---------- -------- ----------
Earnings (loss) from operations
before reorganization income
(costs) and income taxes (37,210) (95,920) 39,320 (58,228)
Reorganization income 884,131
---------- ---------- -------- ----------
Earnings (loss) from operations
before income taxes (37,210) (95,920) 39,320 825,903
Income tax benefit (expense) (150) (16,600) 6,800
---------- ---------- -------- ----------
Earnings (loss) before extraordinary
item and cumulative effect of
change in accounting (37,360) (95,920) 22,720 832,703
Extraordinary gain on debt discharge 304,388
Cumulative effect of change in accounting
for income taxes 18,832
---------- ---------- -------- ----------
Net earnings (loss) $ (37,360) $ (95,920) $ 22,720 $1,155,923
========== ========== ======== ==========
Earnings (loss) per common share $ (.80) $ (2.30) $ .65
========== ========== ========
See accompanying Summary of Significant Accounting Policies and Financial
Review.
3
BROADWAY STORES, INC.
Consolidated Balance Sheet
January 28, January 29,
(In thousands) 1995 1994
--------------------------------------------------------------------
Assets
Current assets
Cash $ 18,318 $ 18,192
Accounts receivable, net 664,825 627,374
Merchandise inventories 504,522 427,631
Other current assets 11,613 9,799
---------- ----------
1,199,278 1,082,996
Property and equipment, net 888,258 810,608
Other assets 39,540 40,543
---------- ----------
$2,127,076 $1,934,147
========== ==========
Liabilities and Shareholders' Equity
Current liabilities
Notes payable and current
installments $ 18,490 $ 3,459
Accounts payable 175,622 151,687
Accrued expenses 141,027 186,837
Current income taxes 1,002 1,203
---------- ----------
336,141 343,186
Receivables based financing 573,138 332,182
Other secured long-term debt 522,517 517,287
Convertible senior subordinated notes 143,750 143,750
Capital lease obligations 41,524 44,667
Other liabilities 109,504 124,508
Deferred income taxes 14,850 14,850
Shareholders' equity
Preferred stock, $.01 par value 8 9
Common stock, $.01 par value 469 468
Other paid-in capital 502,039 500,785
Total accumulated deficit (116,864) (87,545)
---------- ----------
385,652 413,717
---------- ----------
$2,127,076 $1,934,147
========== ==========
See accompanying Summary of Significant Accounting Policies and Financial
Review.
4
BROADWAY STORES, INC.
Consolidated Statement of Cash Flows
Year Ended Period Ended
-------------------------- -----------------------
January 28, January 29, January 30, October 3,
1995 1994 1993 1992
(In thousands) (52 weeks) (52 weeks) (17 weeks) (35 weeks)
- -----------------------------------------------------------------------------------------------------------
Operating activities
Earnings (loss) from operations $ (37,360) $ (95,920) $ 22,720 $ 832,703
Adjustments to reconcile earnings (loss) from
operations to net operating cash flows
Fresh-start adjustment (906,373)
Depreciation and amortization 42,951 33,987 10,617 27,923
Stock compensation 1,401
Deferred income taxes 2,400 16,450
Change in operating assets and liabilities
Restricted cash 47,954 (47,954)
Customer receivables, net (55,829) 2,158 (88,217) 105,040
Merchandise inventories (76,891) 40,078 43,715 (79,476)
Accounts payable and accrued expenses 35,247 (7,590) (64,157) 59,309
Other, net (48,753) (10,455) (4,989) 14,359
--------- --------- -------- ---------
Net cash provided (used) by operating activities (140,635) (35,342) (14,506) 5,531
--------- --------- -------- ---------
Investing activities
Proceeds from sales of property and
equipment 6,468
Purchases of property and equipment (109,726) (59,957) (21,190) (17,052)
--------- --------- -------- ---------
Net cash used by investing activities (109,726) (53,489) (21,190) (17,052)
--------- --------- -------- ---------
Financing activities
Net change in financing under receivables
based facilities 240,956 (135,395) 79,271 (100,948)
Net change in financing under working
capital facilities 11,740 (52,315) (38,485) 53,800
Retirements of long-term debt and
capital lease obligations (3,463) (16,855) (2,739) (1,929)
Costs relating to early retirements of long-term
debt, net of items not requiring cash outlay (10,652)
Issuance of convertible subordinated notes 143,750
Issuances of common stock 1,254 149,221 50,000
--------- --------- -------- ---------
Net cash provided (used) by financing activities 250,487 88,406 38,047 (9,729)
--------- --------- -------- ---------
Net increase (decrease) in cash 126 (425) 2,351 (21,250)
Cash at the beginning of the period 18,192 18,617 16,266 37,516
--------- --------- -------- ---------
Cash at the end of the period $ 18,318 $ 18,192 $ 18,617 $ 16,266
========= ========= ======== =========
See accompanying Summary of Significant Accounting Policies and Financial
Review.
5
BROADWAY STORES, INC.
Consolidated Statement of Shareholders' Equity
Total Accumulated
Earnings (Deficit)
Shares Issued Par Value ---------------------------
------------------ ------------------- Accumulated
Warrants Other Paid- SFAS 87 Earnings
(In thousands) Issued Preferred Common Preferred Common in Capital Adjustment (Deficit)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, February 1, 1992 30,349 $ $ 303 $ 643,194 $ (23,111) $(1,128,862)
Net earnings 1,155,923
Net cancellations of
common stock under the
stock incentive plan (868) (9)
Adjustment to additional
minimum pension liability 23,111 (27,061)
Reorganization Plan
transactions:
Existing equity holders:
Cancellation of existing
common stock outstanding (29,481) (294) (643,194)
Issuance of new
common stock together
with warrants or
preferred stock 1,333 1,143 2,386 11 24 23,965
Issuance of new common
stock to holders of
liabilities subject to
settlement 27,600 276 275,724
Additional equity
investment 5,000 50 49,950
----- ----- ------- ------ ------- --------- ---------- -----------
Balance, October 3, 1992 1,333 1,143 34,986 11 350 349,639
Net earnings 22,720
Issuances of new common
stock 214 2 2,039
Conversions of preferred
stock 41 (41)
----- ----- ------- ------ ------- --------- ---------- -----------
Balance, January 30, 1993 1,374 1,102 35,200 11 352 351,678 22,720
Net loss (95,920)
Issuances of new common
stock 11,450 114 147,432
Conversion of preferred
stock 160 (160) (2) 2
Exercise of stock options 164 2 1,673
Adjustment to additional
minimum pension liability (14,345)
----- ----- ------- ------ ------- --------- ---------- -----------
Balance, January 29, 1994 1,534 942 46,814 9 468 500,785 (14,345) (73,200)
Net loss (37,360)
Issuances of new common
stock 44 411
Conversion of preferred
stock 96 (96) (1) 1
Exercise of stock options 83 1 842
Adjustment to additional
minimum pension liability 8,041
----- ----- ------- ------ ------- --------- ---------- -----------
Balance, January 28, 1995 1,630 846 46,941 $ 8 $ 469 $ 502,039 $ (6,304) $ (110,560)
===== ===== ======= ====== ======= ========= ========== ===========
See accompanying Summary of Significant Accounting Policies and Financial
Review.
6
BROADWAY STORES, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reorganization
On February 11, 1991 (the "Petition Date"), the Company filed a petition (the
"Filing") for relief under Chapter 11 of the Bankruptcy Code in the United
States Bankruptcy Court for the Central District of California (the "Bankruptcy
Court"). The Company subsequently managed its affairs and operated its business
under Chapter 11 as a debtor-in-possession while a plan of reorganization was
formulated.
On July 28, 1992, the Company's plan of reorganization ("POR"), which was
supported by the largest secured and unsecured creditors and the official
committee of the equity security holders, was filed with the Bankruptcy Court.
The POR was subsequently confirmed at the Bankruptcy Court hearing held on
September 14, 1992 and became effective October 8, 1992 (the "Emergence Date").
The POR provided for the conversion of substantially all unsecured claims
into 27.6 million shares of Common Stock, the conversion of all common stock
outstanding immediately prior to the Emergence Date ("Old Common Stock") into
2.4 million shares of newly-issued common stock of the Company ("Common Stock")
and a combined total of 2.5 million of convertible warrants or shares of
preferred stock, and the conversion of accrued interest under certain secured
debt agreements into secured long-term obligations in accordance with the
related settlement agreements.
Pursuant to the POR, Zell/Chilmark Fund, L.P. ("Zell/Chilmark"), the
Company's largest unsecured creditor, received 21.2 million shares of Common
Stock in settlement of approximately $461.0 million of unsecured claims on the
Emergence Date. In addition, pursuant to the terms of the Postpetition Store
Modernization Facility Conversion Agreement (the "Conversion Agreement"),
Zell/Chilmark and an institutional investor each acquired an additional 2.5
million shares of Common Stock at a price of $10.00 per share. As of the
Emergence Date, 32.4 million shares of Common Stock were issued pursuant to the
POR and the Conversion Agreement, of which Zell/Chilmark owned 73.2 percent. As
of January 28, 1995 Zell/Chilmark owned approximately 53.9% of the Company's
outstanding Common Stock.
Basis of Reporting
The financial statements for the 35 week period ended October 3, 1992 (the
"Effective Date") reflect the Company's emergence from Chapter 11 and were
prepared utilizing the principles of fresh-start reporting contained in American
Institute of Certified Public Accountants' Statement of Position 90-7 "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code" (the
"Reorganization Statement").
Operations during the period from October 3, 1992 through the Emergence Date
had no significant impact on the emergence transactions and as a result have not
been separately identified. The financial statements for periods subsequent to
October 3, 1992 have been segregated from those for prior periods by a solid
double line to reflect the significant change in reporting entity resulting from
the application of fresh start reporting.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to January 31.
7
Change in Accounting Policy
During 1992, the Company adopted Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Prior to the adoption
of SFAS No. 109, the Company accounted for income taxes under Statement of
Financial Accounting Standards No. 96 ("SFAS No. 96"). Both SFAS No. 109 and
SFAS No. 96 require the use of the liability method of accounting for income
taxes and require the adjustment of previously recorded deferred tax liabilities
and assets for the effects of changes in tax laws or rates through the date of
the latest financial statements presented. SFAS No. 109 changed the criteria for
recognition and measurement of deferred tax assets and allowed the Company to
recognize certain benefits resulting from net operating loss carryforwards for
which no benefit could be recognized under SFAS 96. The cumulative effect of the
change on prior years was a gain of $18.8 million, which has been reflected in
net earnings for the first quarter of 1992.
Sales
Sales are net of returns, exclude sales tax, and comprise sales of
merchandise, services, and leased departments. Leased department sales were
$116.5 million in 1994, $210.7 million in 1993, $88.5 million for the seventeen
week period ended January 30, 1993, and $139.3 million for the thirty-five week
period ended October 3, 1992. In May 1994, the leased shoe department was
converted from a third party operation into an owned department.
Customer Accounts Receivable
An account is generally written-off when the aggregate of payments made in
the most recent six months is less than one full monthly scheduled payment, or
when it is otherwise determined that the account is uncollectible.
Inventories
Merchandise inventories are valued at the lower of cost or market, as
determined by the retail method on the last-in, first-out ("LIFO") basis. For
periods subsequent to the Effective Date, the Company utilized internally
developed inflation indices in the computation of LIFO inventories. Prior to
the Effective Date, the Company utilized the inflation indices published by the
Bureau of Labor Statistics.
Property and Equipment
Property and equipment additions are recorded at cost and include major
renewals and improvements which significantly add to productive capacity or
extend the useful life of an asset. Maintenance and repairs are expensed.
Depreciation and Amortization
Depreciation and amortization are calculated on a straight-line basis over
the estimated useful lives of the property and equipment, or over the terms of
the related leases, if shorter. Debt acquisition costs are amortized over the
life of the related debt.
Advertising and Promotional Costs
Advertising and promotional costs are generally expensed as incurred except
for certain costs which are deferred over the term of the promotion, generally
three months or less. Advertising costs charged to expense were $72.5 million
in fiscal 1994, $71.7 million in fiscal 1993, $31.6 million for the seventeen
week period ended January 30, 1993 and $47.9 million for the thirty-five week
period ended October 3, 1992.
8
Income Taxes
Income taxes are recorded in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" which requires the
recognition of a deferred tax liability for taxable temporary differences and a
deferred tax asset for deductible temporary differences. A valuation allowance
is established when, based on the weight of available evidence, it appears more
likely than not that some portion or all of the deferred tax assets will not be
realized.
Earnings Per Share of Common Stock
Earnings per share are computed on the basis of the weighted average number
of shares outstanding during the period, including dilutive stock options and
all 35.0 million shares of Common Stock expected to be issued in accordance with
the POR. As of January 28, 1995, 1.0 million shares remain to be issued in
accordance with the POR. Per share data for periods prior to October 3, 1992
have been omitted as these amounts do not reflect the current capital structure.
9
FINANCIAL REVIEW
Non-recurring Costs
A significant number of the Company's Southern California stores suffered
damage as a result of the major earthquake which affected that area on January
17, 1994. While most of the area stores were reopened within two weeks, four
stores suffered extensive damage and were closed for repairs for periods of 4 to
10 months. The Company maintains earthquake and business interruption insurance
with standard deductible provisions that require the Company to incur an initial
level of costs at each location subject to damage or interruption of business.
In January 1994, the company established a reserve of $65.4 million to cover
costs of building and fixture repairs, inventory and business interruption
losses, and other costs related to the earthquake. As of January 29, 1994,
$17.1 million of the reserve had been utilized with the remainder being utilized
during fiscal 1994. In addition, a $50.4 million receivable was established for
estimated insurance recoveries resulting in a $15.0 million non-recurring charge
being recognized in 1993 for earthquake related losses in excess of estimated
insurance proceeds. During 1994, $35.4 million in insurance payments have been
received and an additional receivable of $10.0 million was established at year-
end for anticipated recoveries for additional capital expenditures. The reserve
utilization and insurance proceeds received are reflected in the Consolidated
Statements of Cash Flows and are included as other net changes in operating
assets and liabilities. The $15.0 non-recurring charge recognized in January
1994, in management's opinion, continues to be adequate to cover earthquake
losses in excess of estimated insurance proceeds.
During 1993, the Company recorded $30.0 million in non-recurring charges
associated with one-time costs incurred in the implementation of the strategic
plan to streamline the Company. The charge comprised severance and other
benefit costs incurred from staff reductions, related consulting fees, and the
costs of implementing other efficiencies under the plan.
Reorganization Income and Costs
In accordance with the Reorganization Statement, income and costs directly
related to the reorganization have been segregated and are separately disclosed.
The major components are as follows:
Period Ended
--------------
October 3, 1992
(In millions) (35 Weeks)
- ------------------------------------------------------------
Adjustments to fair value $906.4
Provision for settlement of disputed claims (8.5)
Professional fees and other expenditures
directly related to the Filing (13.8)
------
$884.1
======
The adjustments to fair value reflected the effects of the revaluation of
assets and liabilities in accordance with the Reorganization Statement. These
adjustments included the $283.4 million write-up of fixed assets, the net
increase of $3.5 million in other balance sheet items and the elimination of the
remaining $619.5 million accumulated deficit in shareholders' equity.
The provision for settlement of disputed claims represented management's
estimate of the net amount required to cover all outstanding disputed claims
included in liabilities subject to settlement based on facts and circumstances
at that time.
10
Gain on Debt Discharge
The gain on debt discharge reflected the conversion of $600.0 million of
liabilities subject to settlement into $276.0 million of shareholders' equity
resulting in a $324.0 million gain. The gain is presented net of write-offs and
costs associated with the repayment of borrowings on the Effective Date.
Interest Expense, Net
The components of interest expense are as follows:
Year Ended Period Ended
------------------------- ------------------------
January 28, January 29, January 30, October 3,
1995 1994 1993 1992
(In millions) (52 weeks) (52 weeks) (17 weeks) (35 weeks)
- -----------------------------------------------------------------------------------------
Interest on total debt $ 86.2 $71.3 $24.9 $54.1
Imputed interest on capitalized
lease obligations 4.2 4.4 1.6 3.4
Capitalized interest (2.8) (1.4) (.5) (.4)
Amortization of debt
issuance costs 10.9 8.3 2.6 4.3
Commitment fees 1.6 1.5 .8
Other .8 .8 .2 (1.2)
------ ----- ----- -----
Interest expense, net $100.9 $84.9 $29.6 $60.2
====== ===== ===== =====
Interest payments, net of amounts capitalized, were $58.9 in 1994, $63.8
million in 1993, $34.0 million in the seventeen week period ended January 30,
1993, and $32.8 million in the thirty-five week period ended October 3, 1992.
As a result of the Filing, interest payments during bankruptcy were limited
to amounts due under the Post-petition Credit Agreement, the Interim Receivables
Facility (during its existence), the Post-petition Receivables Securitization
Facility, and the interest element of capital lease payments made. During
bankruptcy, interest continued to accrue on the Company's secured mortgage debt
but no payments were made. Both the accrual of interest and amortization of
debt issuance costs on the Company's subordinated debt ceased at the Filing.
Unaccrued interest on the subordinated debt amounted to $29.2 million in the
thirty-five weeks ended October 3, 1992. In accordance with the POR, the
liability for such unaccrued interest was cancelled with no payment due.
Commitment fees totalling $1.8 million in the thirty-five week period ended
October 3, 1992 were included in selling, general and administrative expenses.
Such fees are reported as a component of interest expense for periods subsequent
to the Effective Date.
11
Income Taxes
The $.2 million tax provision for the current year ended January 28, 1995
reflects state franchise taxes not measured by or based upon income. The tax
effect of the current year loss was offset by an addition to the SFAS 109
valuation allowance and, accordingly, no income tax provision was recorded.
Similarly, no income tax provision was recognized for the year ended January 29,
1994.
Income taxes for 1992 were required to be separately computed for the pre-
and post-reorganization periods. The $6.8 million tax benefit recognized for
the thirty-five week period ended October 3, 1992 reflects the reversal of
certain tax reserves on favorable resolution of income tax audits for tax years
through July 1990.
Year Ended Period Ended
------------------------ ------------------------
January 28, January 29, January 30, October 3,
1995 1994 1993 1992
(In millions) (52 weeks) (52 weeks) (17 weeks) (35 weeks)
- --------------------------------------------------------------------------------------
Current
Federal $ $ $ $ (6.8)
State .2 .1
---------- ----------- ----------- ----------
.2 -- .1 (6.8)
---------- ----------- ----------- ----------
Deferred
Federal (2.6) 11.6
State 2.6 4.9
---------- ----------- ----------- ----------
-- -- 16.5 --
---------- ----------- ----------- ----------
Income tax expense (benefit) $ .2 $ -- $ 16.6 $ (6.8)
========== =========== =========== ==========
The limited ability to utilize net operating loss carryforwards in certain
periods is reflected in the following analysis of the effective income tax rate
reconciliation and in the composition of deferred income tax liability.
Year Ended Period Ended
------------------------ ------------------------
January 28, January 29, January 30, October 3,
1995 1994 1993 1992
(Percent of pre-tax earnings) (52 weeks) (52 weeks) (17 weeks) (35 weeks)
- --------------------------------------------------------------------------------------
Federal income tax at
statutory rate (35.0)% (35.0)% 34.0% (34.0)%
State income taxes 2.7 8.4
Losses for which no benefit
is recognized 35.0 32.3 34.0
Adjustments to taxes
previously recorded (.8)
Other, net .4 (.2)
---------- ----------- ----------- ----------
Effective income tax rate .4% --% 42.2% (.8)%
========== =========== =========== ==========
12
In the following table of components of the net deferred tax liability,
adjustments to the valuation allowance offset the benefits related to losses
from operations.
January 28, January 29,
(In millions) 1995 1994
- --------------------------------------------------------------------
Employee benefits $ 54.2 $ 60.7
Unscheduled claims 3.8 4.9
Short-period loss 6.4 8.5
Accounts receivable 8.4 7.6
Restructuring reserves 1.0 5.0
Earthquake 17.9 3.4
Loss carryforwards 210.3 165.9
Credit carryforwards 11.5 7.9
Other 7.1 8.2
------- -------
Gross deferred tax asset 320.6 272.1
------- -------
Property and equipment (218.9) (194.7)
Inventories (51.4) (36.8)
Other (9.2) (9.6)
------- -------
Gross deferred tax liability (279.5) (241.1)
SFAS 109 valuation allowance (56.0) (45.9)
------- -------
Net deferred tax liability $ (14.9) $ (14.9)
======= ========
The estimated federal and California net operating loss carryforwards of
$619.0 million and $261.0 million, respectively, expire in years 2004 through
2009, and 1996 through 2002. As of the bankruptcy Emergence Date, the Company
experienced a change of ownership which may have the effect of restricting the
Company's ability to utilize losses. The California net operating loss
carryforward period was legislatively reduced to five years effective for losses
generated in and subsequent to 1993. This change may further restrict the
Company's ability to utilize its loss carryforwards.
The federal and California credit carryforwards of $3.6 million and $6.9
million, respectively, expire in years 2002 through 2005, and 2007 through 2009.
The federal alternative minimum tax credit carryforward of $1.0 million carries
over indefinitely.
Tax payments were $.4 million in 1994, $.2 million in 1993, $.2 million and
$.1 million in the seventeen and thirty-five week periods comprising the fifty-
two week period ended January 30, 1993.
13
Accounts Receivable and Credit Operations
Accounts receivable consist of the following:
January 28, January 29,
(In millions) 1995 1994
- -----------------------------------------------------------------
Customer receivables $635.9 $578.3
Other receivables 47.9 66.3
------ ------
683.8 644.6
Less allowance for doubtful accounts (19.0) (17.2)
------ ------
Accounts receivable, net $664.8 $627.4
====== ======
Other receivables included estimated earthquake insurance recoveries of $25.0
million as of January 28, 1995 and $50.4 million as of January 29, 1994.
Selected credit operations information is as follows:
Year Ended Period Ended
------------------------- ------------------------
January 28, January 29, January 30, October 3,
1995 1994 1993 1992
(52 weeks) (52 weeks) (17 weeks) (35 weeks)
- --------------------------------------------------------------------------------------
Credit sales as a percent of
gross sales 49.0% 51.7% 52.7% 52.0%
Uncollectible account losses,
net of recoveries, as a
percent of credit sales 2.2% 2.5% 2.2% 3.6%
The Company's proprietary credit card penetration has eroded 3.0% from 52.0%
of gross sales in the thirty-five week period ended October 3, 1992 to 49.0% in
the current year. In part, this reflects the impact of the Company's
approximately 85% sales concentration in California which continues to
experience economic weakness, resulting in lower levels of consumer confidence
and decreased total credit sales. In addition, it reflects the wider use of
third party bank cards. Current year write-offs at 2.2% of credit sales
improved from 2.5% for the fifty-two week period ended January 29, 1994
reflecting improved collections and the effect of easing minimum payment
requirements. Since the decline in write-offs is partially attributable to the
temporary favorable impact of reduced minimum payments, the allowance for
doubtful accounts continues to be carried at 3.0% of customer receivables
outstanding.
Inventories
The LIFO method of accounting resulted in a credit to cost of goods sold of
$3.5 million in the current year compared to credits of $8.9 million in 1993 and
$1.9 million for the seventeen weeks ended January 30, 1993 and a charge of $7.1
million for the thirty-five weeks ended October 3, 1992. If all inventories had
been valued on the first-in, first-out ("FIFO") basis, they would have been
lower at each period end by $14.3 million at January 28, 1995, $10.8 million at
January 29, 1994 and $1.9 million at January 30, 1993.
In accordance with the principles of fresh start reporting, merchandise
inventories at October 3, 1992 were restated at fair market value, resulting in
elimination of the LIFO reserve at that date.
Leases
Certain Company operations are conducted in leased properties, which include
retail stores, distribution centers, and office facilities. Leases are
generally for periods of up to thirty years, with renewal options for
substantial periods. Leases are generally at fixed rental rates, except that
certain leases provide for additional rental charges based on sales in excess of
predetermined levels.
14
Rent expense for each period is as follows:
Year Ended Period Ended
------------------------- ------------------------
January 28, January 29, January 30, October 3,
1995 1994 1993 1992
(In millions) (52 weeks) (52 weeks) (17 weeks) (35 weeks)
- ----------------------------------------------------------------------------
Minimum rent $21.1 $21.4 $ 8.2 $18.0
Rent based on sales .6 .7 .4 .4
----- ----- ----- -----
Total rent expense $21.7 $22.1 $ 8.6 $18.4
===== ===== ===== =====
The following table shows the future minimum obligations under leased
commitments in effect at January 28, 1995:
Capitalized Operating
(In millions) Leases Leases
- --------------------------------------------------------------------------
1995 $ 7.1 $ 22.8
1996 6.9 23.1
1997 6.9 24.8
1998 6.6 24.8
1999 6.6 24.8
Thereafter 42.9 277.5
------ ------
Total future minimum obligations $ 77.0 $397.8
====== ======
Present value, including $3.1 million current
portion of capital lease obligations $ 44.7 $164.7
====== ======
Property and Equipment, Net
Property and equipment was adjusted to fair market value at October 3, 1992.
The revaluation resulted in a net increase in property and equipment of $283.4
million, including the elimination of all accumulated depreciation.
Property and equipment is as follows:
January 28, January 29,
(In millions) 1995 1994
- ------------------------------------------------------------
Land $121.7 $121.7
Buildings and improvements 376.4 358.8
Leasehold improvements 70.9 57.4
Fixtures and equipment 209.1 144.9
Construction in progress 24.4 9.9
Leased property under capital leases,
primarily buildings 38.3 38.5
Revalued leases 112.5 112.5
------ ------
953.3 843.7
------ ------
Less accumulated depreciation and
amortization 65.0 33.1
------ ------
Property and equipment, net $888.3 $810.6
====== ======
15
Capital expenditures in the past three years have been focused on
modernization of stores and support facilities. Expenditures include
renovating, expanding, and re-equipping existing stores and expenditures for
improvements and fixtures for administrative facilities and distribution
centers.
Depreciation expenses included in selling, general and administrative
expenses were $32.1 million in 1994, $25.7 in 1993, $8.0 million for the
seventeen week period ended January 30, 1993, and $21.5 million for the thirty-
five week period ended October 3, 1992.
Credit Facility
Working capital financing is provided under a General Electric Capital
Corporation ("GE Capital") facility (the "Credit Facility") which matures
October 8, 1996. The facility provides for up to $225.0 million in working
capital borrowings secured on a first priority basis by substantially all of the
Company's tangible and intangible personal property. Interest is computed at a
rate equivalent to one and one-half percent above the GE Capital index rate. In
addition, the facility includes a commitment fee of one-half percent on the
unused portion of the credit line and requires the payment of administrative
fees and line-of-credit fees equivalent to 2.375 percent of the face amount of
letter-of-credit obligations. In addition, the facility includes restrictions
on capital expenditures and the payment of dividends and includes covenants for
material adverse changes, minimum aggregate net cash flow and earnings before
interest, taxes, depreciation and amortization. As of January 28, 1995, there
were $11.7 million in advances and $48.7 million in letters of credit
outstanding under the facility.
Long-Term Debt
January 28, January 29,
(In millions) 1995 1994
- -----------------------------------------------------------------------
Receivables based financing
Receivables facility $509.1 $332.2
Subordinated asset backed notes
7.55 percent notes due 1999 38.0
11.0 percent notes due 1999 26.0
------ ------
$573.1 $332.2
====== ======
Other secured long-term debt
Term loans due in 1999 (6.75 percent at
January 28, 1995 and 3.875 percent at
January 29, 1994) $ 89.7 $ 89.7
9.0 percent notes due 1997-2002 77.1 68.5
9.9 percent notes due 1995-2010 9.9 9.4
10.67 percent notes due 1997-2002 344.0 344.0
Other notes (8.25 percent to 9.9 percent at
January 28, 1995 and January 29, 1994) 5.4 6.3
------ ------
526.1 517.9
Less current portion of long-term debt 3.6 .6
------ ------
$522.5 $517.3
====== ======
6.25 percent convertible senior subordinated
notes due 2000 $143.8 $143.8
====== ======
Up to $575.0 million in receivables based financing is provided under a
receivables facility provided by GE Capital. The GE Capital facility provides
for Blue-Hawk Funding Corporation, a limited purpose corporation not affiliated
with the Company, to acquire interests in the Company's credit card receivables
and pay for these interests through the issuance of commercial paper.
Outstanding borrowings under the facility, which are secured by the Company's
customer receivables, accrue interest at the A-1/P-1 commercial paper rate plus
1.08%. At January 28, 1995, the interest rate for borrowings under the facility
was 7.3%.
16
A private placement of an additional $64.0 million in receivables based
financing is provided under subordinated asset backed notes (the "Asset Backed
Notes") completed in September 1994. The notes were issued in two classes:
$38.0 million of 7.55% Class A notes due in 1999 and $26.0 million of 11.0%
Class B notes due 1999. The notes are redeemable at the option of the Company,
in whole or in part, on each interest payment date on or after October 15, 1994
and on October 8, 1996 at a redemption price combining principal, accrued
interest, unpaid interest, and a make-whole premium.
On December 31, 1991,the Company and Prudential concluded the Prudential
Settlement Agreement with respect to the $344.0 million of notes (the "Existing
Notes") due 1993 to 1997. The Prudential Settlement Agreement, which became
effective on October 8, 1992, extended the maturity of the notes for five years
to October 2002. In addition, previously accrued and unpaid interest and
certain other charges totalling $53.4 million were capitalized into a 9 percent
note (the "Accrued Interest Note"). Principal payments on the Accrued Interest
Note will commence in November 1997, continuing in equal monthly installments
through October 2002. Although the Existing Notes continued to accrue interest
at the blended contract rate of 10.67 percent during the first two years
following the Emergence Date, the Company was only required to pay interest at a
lower rate of 7.5 percent (the "Pay Rate"). The difference between the Pay Rate
and the blended contract rate amounted to $23.8 million and was capitalized
under the terms of the Accrued Interest Note with principal payments commencing
in November 1997 and continuing in equal installments over the remaining life of
the notes.
On July 28, 1992, the Company and Bank of America NT&SA ("BofA") concluded
the BofA Settlement Agreement with respect to the $89.7 million of term loans
due in 1995. The BofA Settlement Agreement, which became effective on October 8,
1992, extends the maturity of the term loans for four years to June 1999. In
accordance with the BofA Settlement Agreement, interest from October 8, 1992
through June 30, 1995, will be payable at LIBOR plus .625 percent and thereafter
at LIBOR plus 1.25 percent.
On December 21, 1993, the Company issued and sold $143.75 million of 6.25%
Convertible Senior Subordinated Notes due December 31, 2000 (the "Convertible
Notes"). Prior to the maturity date, the notes are convertible at the option of
the holder into shares of Common Stock, at a conversion price of $12.19 per
share, subject to adjustment in certain events. The notes are redeemable at the
option of the Company, in whole or in part, at any time on and after December
31, 1998, at a redemption price equal to 100% of the principal amount thereof,
together with accrued and unpaid interest. The notes do not provide for any
sinking fund. Upon a Change in Control (as defined in the Registration
Statement), holders of the Convertible Notes will have the right, subject to
certain restrictions and conditions, to require the Company to purchase all or
any part of the notes at the principal amount thereof together with accrued and
unpaid interest to the date of purchase.
Principal maturities of other secured long-term debt payable over the next
five years are $3.6 million in 1995, $5.4 million in 1996, $9.8 million in 1997,
$21.6 million in 1998, $95.4 million in 1999, with $390.3 million due
thereafter. This debt is secured by property with a net carrying value of
$491.9 million.
The Company's debt agreements include restrictions on capital expenditures
and covenants for minimum aggregate net cash flow and earnings before interest,
taxes, depreciation and amortization.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 ("SFAS No. 107") requires
the disclosure of fair value of financial instruments for which it is practical
to estimate that value. The Company's various long term debt liabilities
constitute the only financial instruments with a potential carrying value
different from fair value. Each class of financial instrument requires
different methods of estimating fair value as described below.
Receivables based financing - Financing under the receivables facility of
$509.1 million bear interest at floating rates which reflect short-term
market rate changes and are assumed to have a book value that approximates
fair value. The $64.0 million of asset backed notes were issued in a
September 1994 private placement and their fair value is assumed not to have
changed significantly at year-end.
17
Other Secured long-term debt - Management believes that no practicable method
exists for establishing a current fair value for the $526.1 million secured
long-term debt because arrangements with similar terms would not have been
negotiable outside of bankruptcy proceedings. Discounting assumptions are
likewise not ascertainable as each lender has a unique perception of fair
value depending on their unique assessment of credit risk, their targeted
investment goals and their relationship to the Company. Except for the $89.7
million of borrowings which bear interest at LIBOR plus 0.625%, all other
borrowings are at fixed rates from 8.25% to 10.67%.
Convertible Senior Subordinated Notes - These notes were issued in a private
placement during December 1993. Since these notes are privately held, there
is no readily ascertainable market value for these notes. The fair value of
these notes cannot be compared to other publicly traded securities because
the notes are unique with respect to the conversion price, relationship to
stock price, maturity date, and interest rate.
Retirement Plans
The Company has two qualified noncontributory pension plans covering
substantially all employees. Employees who have completed one year of
employment, are at least 21 years of age, and are not covered by a collectively
bargained pension plan, are covered by the plans and become vested for benefit
purposes after completing five years of employment with the Company. The
Company also has unfunded nonqualified pension plans covering certain employees
and directors. The Company contributes at least the actuarially determined
minimum amount necessary to fund participants' benefits in accordance with the
requirements of the Employee Retirement Income Security Act of 1974.
Periodically, changes in the business environment cause management to revise
significant actuarial assumptions used in the development of the pension plans
funded status and for computation of pension expense. As of January 29, 1994,
the discount factor used to compute the present value of pension liabilities was
reduced from 8.5 percent to 7.25 percent, reflecting the reduction in long-term
rates experienced during 1993. Lower actual and expected rates of inflation
also resulted in reductions to the long-term rate of return on assets from 9.5
percent to 9.25 percent and in the projected rate of compensation increases from
5.0 percent to 4.5 percent. In fiscal 1994, a market reversal of long-term
interest rate trends caused the Company to revise the discount factor back to
8.5 percent, effective January 28, 1995.
The assumption changes made effective January 29, 1994 resulted in a $27.1
million increase to the pension liability at that date, of which $14.3 million
was charged directly to equity as a separate component of the Total Accumulated
Deficit. The January 28, 1995 revision to the discount rate resulted in a $28.5
million decrease in the current year end pension liability of which $8.0 million
was credited directly to equity as a separate component of the Total Accumulated
Deficit.
18
The following table summarizes pension expense and funded status of the
plans, as determined by the Company's actuary, together with an analysis of the
significant actuarial assumptions used:
Year Ended Period Ended
------------------------- --------------------------
January 28, January 29, January 30, October 3,
1995 1994 1993 1992
(In millions except percentage information) (52 weeks) (52 weeks) (17 weeks) (35 weeks)
- -----------------------------------------------------------------------------------------------------
Service cost $ 4.5 $ 3.8 $ 1.3 $ 2.7
Interest cost 15.2 14.6 4.7 9.5
Actual net return on plan assets 2.8 (13.1) (4.9) (3.6)
Net amortization and deferral (11.8) 3.6 2.0
------- ------- ------- -------
Net pension expense $ 10.7 $ 8.9 $ 3.1 $ 8.6
======= ======= ======= =======
Funded status of plans
Accumulated benefit obligation
Vested benefits $(188.9) $(203.7) $(167.1) $(166.1)
Nonvested benefits (2.3) (3.7) (4.0) (4.9)
------- ------- ------- -------
(191.2) (207.4) (171.1) (171.0)
Effect of projected compensation
increase (8.8) (13.2) (11.1) (12.1)
------- ------- ------- -------
Projected benefit obligation (200.0) (220.6) (182.2) (183.1)
Plan assets at fair value 109.3 114.0 102.9 97.4
------- ------- ------- -------
Funded status (90.7) (106.6) (79.3) (85.7)
Unrecognized net (gain) loss 14.5 27.2 (4.0)
Additional minimum liability recognized
under SFAS No. 87 (6.7) (14.8)
------- ------- ------- -------
Pension liability $ (82.9) $ (94.2) $ (83.3) $ (85.7)
======= ======= ======= =======
Significant actuarial assumptions
Discount rate 8.5% 7.25% 8.5% 8.5%
Long-term rate of return on plan
assets 9.25 9.25 9.5 9.5
Rate of future compensation
increases 4.5 4.5 5.0 5.0
As of January 28, 1995, the $90.7 million unfunded projected benefit
obligation consisted of $56.2 million relating to the qualified plans and $34.5
million relating to the nonqualified plans.
Certain retired employees also receive health care and life insurance
benefits which are subsidized to varying degrees by the Company. The post-
retirement medical benefits are available only to employees who had retired or
were eligible to retire by August 1, 1991 and who had met all other plan
eligibility requirements. A life insurance benefit of $1,000 per employee is
provided by the Company to all eligible current and retired employees.
Additional life insurance benefits are also provided to a select group of
executives. The executive life benefits were amended effective January 1993, to
reduce the amount of coverage post-retirement, based on age. The amendment
which applies to both current retirees and eligible plan participants resulted
in a $1.9 million reduction to the January 30, 1993 accumulated benefit
obligation. This gain is being amortized as a reduction in post-retirement
benefit expense on a straight line basis over a ten year period representing the
average service period to full eligibility for this benefit.
19
The following table summarizes the expense and the accumulated benefit
obligation for these plans.
Year Ended Period Ended
-------------------------- -----------------------
January 28, January 29, January 30, October 3,
1995 1994 1993 1992
(In millions) (52 weeks) (52 weeks) (17 weeks) (35 weeks)
- ------------------------------------------------------------------------------------------
Medical Plan Benefits
- ---------------------
Interest cost representing net
periodic plan expense $ 1.9 $ 2.2 $ .7 $ 1.5
====== ====== ====== ======
Accumulated benefit obligation:
Retirees $(22.1) $(25.2) $(24.7) $(24.8)
Fully eligible active plan
participants (.8) (1.0) (1.2) (1.2)
Other active plan participants (.1) (.1) (.1) (.1)
Unrecognized net (gain) loss (2.5) .6 .1
------ ------ ------ ------
Accrued benefit liability $(25.5) $(25.7) $(25.9) $(26.1)
====== ====== ====== ======
Life Insurance Benefits
- -----------------------
Net periodic plan expense:
Service cost $ .1 $ .1 $ $ .2
Interest cost .4 .4 .2 .3
Amortization of prior service
gain (.2) (.2)
------ ------ ------ ------
$ .3 $ .3 $ .2 $ .5
====== ====== ====== ======
Accumulated benefit obligation
at period end:
Retirees $ (3.9) $ (4.4) $ (3.0) $ (4.0)
Fully eligible active plan
participants (.4) (.5) (.6) (1.2)
Other active plan participants (.2) (.3) (.4) (.7)
Unrecognized prior service
gain (1.5) (1.7) (1.9)
Unrecognized net (gain) loss (.3) .8
------ ------ ------ ------
Accrued benefit liability $ (6.3) $ (6.1) $ (5.9) $ (5.9)
====== ====== ====== ======
The postretirement medical and life insurance benefits are provided under
nonqualified plans. The accumulated benefit obligation represents the present
value of expected future payments discounted at 8.5 percent. Medical inflation
has been projected at a blended rate of eleven percent per annum for fiscal
1995, declining by 2002 to a long term rate of approximately six and one-half
percent per annum. The effect of a one-percentage-point increase in the assumed
medical cost trend rate would be to increase the net periodic medical plan
expense by $.2 million and to increase the related accumulated benefit
obligation by $2.3 million.
The Company's 401(k) Savings and Investment Plan is available to
substantially all employees who have completed one year of service. For
eligible participant contributions made after March 1993, the Company provides a
25 percent matching contribution in the form of newly issued shares of Company
common stock.
At January 28, 1995, the plan held .5 million shares of Common Stock
representing 1.1 percent of common stock outstanding or still issuable under the
POR and .5 million shares of preferred stock representing 55.7 percent of
preferred shares outstanding or still issuable under the POR.
20
Employee Stock Incentive Plans
The Company has a long-term incentive compensation plan designed to attract
and retain top-quality management. The plan, among other things, provides for
the issuance of stock options at an exercise price that is generally not less
than the market value of the common stock on the date of grant. During the
fiscal year ended January 28, 1995, 1.1 million options were awarded and 82,466
options were exercised under the plan. As of January 28, 1995, 2.4 million
options were outstanding and exercisable at exercise prices ranging from $9.125
to $14.00. The options, which vest in one-third increments over three years,
are exercisable over a ten year period, generally beginning one year from the
date of grant.
Contingencies
Notwithstanding the confirmation and effectiveness of the POR, the Bankruptcy
Court continues to have jurisdiction to, among other things, resolve disputed
prepetition claims against the Company and to resolve other matters that may
arise in connection with or relate to the POR.
Pursuant to the POR, the Company was required to distribute .046 shares of
Common Stock for each $1.00 of allowed general unsecured claims. The POR
estimated the total amount of such claims to be approximately $600.0 million,
against which the Company reserved 27.6 million shares of Common Stock. As of
January 28, 1995, approximately $28.6 million of disputed claims remained
outstanding. Management believes such claims will ultimately be allowed upon
settlement or litigation for approximately $10.0 million, for which the Company
has reserved approximately .8 million shares which are included in the Company's
calculation of its outstanding Common Stock. Management believes that reserved
shares of Common Stock will be sufficient to meet the Company's obligations to
such claim holders. If all disputed claims were allowed in full, such claim
holders would be entitled to a total of 1.3 million shares of Common Stock,
compared to the .8 million shares reserved, resulting in a dilution to holders
of outstanding Common Stock of approximately 1%. Management regularly evaluates
the status of remaining disputed claims and claim settlement experience and
accordingly would adjust its estimate of the number of shares to be reserved for
issuance with respect to such claims if necessary.
The Company is engaged in an ongoing effort to resolve these remaining
disputed claims. Because of the disputed nature of these claims and the delays
associated with litigation generally, Management anticipates that the settlement
of these claims is likely to occur over an extended period of time.
The Company is involved in various other legal proceedings incidental to the
normal course of business. Management does not expect that any of such other
proceedings will have a material adverse effect on the Company's financial
position or results of operations.
Preferred Stock and Warrants
Pursuant to the POR, shares of Series A exchangeable preferred stock, par
value $.01 ("Preferred Stock") or warrants to purchase shares of Common Stock
("Warrants") were issuable to existing holders of Old Common Stock at a rate of
.084 for each share of Old Common Stock held. The Company does not intend to
have the preferred stock listed for trading on any national securities exchange
or other national automated quotation system. The Warrants have been registered
and listed for trading on the New York and Pacific Stock Exchanges.
At the option of the holders of Preferred Stock, shares of Preferred Stock
are exchangeable on a one-for-one basis to Warrants to purchase Common Stock.
During 1994, approximately 96,000 shares of Preferred Stock were converted to
warrants. The Company does not expect ever to pay a dividend with respect to
the Preferred Stock. In the event of dissolution, liquidation, or winding-up,
the holders of Preferred Stock are entitled to a liquidation preference of $0.25
per share from assets remaining after the full satisfaction of the prior rights
of creditors. As of January 28, 1995, the authorized Preferred Stock of the
Company consisted of twenty-five million shares, $.01 par value, of which .8
million shares were issued and outstanding.
21
Each Warrant entitles the holder any time prior to the close of business on
October 8, 1999, to purchase a share of Common Stock at a purchase price equal
to $17.00 per share, subject to adjustment from time to time. In the event the
market price of the common stock equals or exceeds $25.50 per share for 30
consecutive trading days, the Board of Directors, after the passage of 30 months
from October 8, 1992, may, upon 75 days notice, shorten the exercise period to
end on a date earlier than October 8, 1999.
Common Stock
Pursuant to the POR, effective October 8, 1992, all existing shares of Old
Common Stock were converted into 2.4 million shares of Common Stock and a
combined total of 2.5 million in warrants or shares of convertible preferred
stock. Unsecured claims were converted into approximately 27.6 million shares
of new Common Stock. In addition, in accordance with the POR Zell/Chilmark and
an institutional investor each acquired an additional 2.5 million shares of new
common stock at a price of $10.00 per share.
In addition, shortly after the Effective Date, 80,000 shares of Common Stock
were issued as bonus compensation to certain professionals engaged in the
Chapter 11 proceedings, and a total of approximately 134,000 shares of Common
Stock were issued to employees. In December 1992, all eligible employees each
received ten shares of Common Stock as a result of this stock issuance.
In July 1993, the Company raised net proceeds of $147.5 million through a
public offering of 11.45 million shares of Common Stock.
The accompanying financial statements reflect the issuance of all shares of
Common Stock, preferred stock, and warrants contemplated by the POR. As of
January 28, 1995, up to 1.0 million shares of Common Stock, .1 million shares of
Preferred Stock, and fewer than .1 million Warrants remain issuable under the
POR to satisfy outstanding claims and conversion of unpresented shares of Old
Common Stock. At January 28, 1995, the Company's authorized common stock
consisted of 100 million shares, $.01 par value of which 5.9 million shares were
reserved under the employee stock incentive plan (.2 million options exercised
to date), 1.5 million shares were reserved for purchase by and contribution to
the Company's 401(k) Savings & Investment Plan which currently holds .5 million
shares and 2.5 million shares were reserved for purchase by warrant holders of
which there have been no purchases to date.
The Company's ability to pay dividends on its common stock is restricted
pursuant to the terms of its Credit Facility and the BofA Settlement Agreement.
As a result, the Company does not expect to pay common stock dividends for the
foreseeable future.
22
BROADWAY STORES, INC.
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Balance Additions Accounts Balance
At Charged to Charged At
Beginning Costs and off Less End
(In thousands) of Period Expenses Recoveries Other of Period
- ------------------------------------ ---------- ---------- ---------- ----- ---------
Fiscal year ended January 28, 1995.. $17,224 $26,383 $24,615 $ $18,992
======= ======= ======= ===== =======
Fiscal year ended January 29, 1994.. $17,300 $29,545 $29,621 $ $17,224
======= ======= ======= ===== =======
Seventeen week period ended
January 30, 1993
Allowance for doubtful
accounts.......................... $14,583 $14,133 $11,416 $ $17,300
======= ======= ======= ===== =======
Thirty-five week period ended
October 3, 1992
Allowance for doubtful
accounts.......................... $16,605 $22,277 $25,271 $ 972/(1)/ $14,583
======= ======= ======= ===== =======
/(1)/ Adjusted to fair value in accordance with the Reorganization Statement.
23
QUARTERLY INFORMATION (unaudited)
Period Ended
----------------------------------------------------------------------
April 30, July 30, October 29, January 28, January 28,
1994 1994 1994 1995 1995
(Dollar amounts in millions) (13 weeks) (13 weeks) (13 weeks) (13 weeks) (52 weeks)
- ------------------------------------------------------------------------------------------------------------------
1994
Sales.................................. $ 431.1 $ 457.0 $ 474.9 $ 723.8 $2,086.8
Percent change from prior year
Total sales basis.................... (2.6) (3.8) 1.1 2.6 (.3)
Comparative store sales basis........ 4.7 1.2 3.9 2.8 3.1
Finance charge revenue................. 22.5 22.4 22.2 24.2 91.3
Cost of goods sold, including occupancy
and buying costs/(1)/................. 319.4 338.3 355.3 547.1 1,560.0
Selling, general and administrative
expenses.............................. 129.7 130.5 134.7 159.4 554.4
Interest expense, net.................. 22.5 23.5 25.5 29.4 100.9
------- ------- ------- ------- --------
Earnings (loss) from operations before
income taxes.......................... (18.0) (12.9) (18.4) 12.1 (37.2)
Income tax expense/(2)/................ (.2) (.2)
------- ------- ------- ------- --------
Net earnings (loss).................... $ (18.0) $ (12.9) $ (18.4) $ 11.9 $ (37.4)
======= ======= ======= ======= ========
Net earnings (loss) per common share... $ (.38) $ (.28) $ (.39) $ .25 $ (.80)
======= ======= ======= ======= ========
/(1)/ As a result of the seasonal nature of the Company's business, the Company
follows the practice of allocating certain fixed buying and occupancy
costs among quarters within the fiscal year in proportion to projected
quarterly sales results. This process results in a higher portion of
yearly fixed buying and occupancy costs being allocated to the fourth
quarter.
/(2)/ For fiscal 1994, the Company recorded a $.2 million charge for state
franchise taxes in the fourth quarter.
24
QUARTERLY INFORMATION (unaudited)
Period Ended
---------------------------------------------------------------------
May 1, July 31, October 30, January 29, January 29,
1993 1993 1993 1994 1994
(Dollar amounts in millions) (13 weeks) (13 weeks) (13 weeks) (13 weeks) (52 weeks)
- -------------------------------------------------------------------------------------------------------------------
1993
Sales................................... $ 442.5 $ 474.9 $ 469.7 $ 705.6 $2,092.7
Percent change from prior year
Total sales basis..................... 2.0 (1.3) (4.2) (3.7) (2.1)
Comparative store sales basis......... 5.2 1.3 (.8) 1.3 1.6
Finance charge revenue.................. 21.2 19.9 18.9 21.5 81.5
Cost of goods sold, including occupancy
and buying costs (1) .................. 329.5 360.3 360.0 539.3 1,589.1
Selling, general and administrative
expenses............................... 129.2 130.3 133.9 157.8 551.1
Charge for non-recurring costs (2)...... 25.0 20.0 45.0
Interest expense, net................... 22.3 21.7 19.8 21.1 84.9
------- ------- ------- ------- --------
Earnings (loss) from operations before
income taxes........................... (17.3) (42.5) (25.1) (11.1) (95.9)
Income tax benefit (expense)(3)......... 6.9 (6.9)
------- ------- ------- ------- --------
Net loss................................ $ (10.4) $ (42.5) $ (25.1) $ (18.0) $ (95.9)
======= ======= ======= ======= ========
Net loss per common share............... $ (.29) $ (1.12) $ (.54) $ (.38) $ (2.30)
======= ======= ======= ======= ========
(1) As a result of the seasonal nature of the Company's business, the Company
follows the practice of allocating certain fixed buying and occupancy
costs among quarters within the fiscal year in proportion to projected
quarterly sales results. This process results in a higher portion of
yearly fixed buying and occupancy costs being allocated to the fourth
quarter.
(2) Non-recurring costs include $25.0 million in the second quarter and $5.0
million in the fourth quarter for one-time costs to be incurred in the
implementation of the strategic plan to streamline the Company. The
fourth quarter also includes a charge of $15.0 million to cover January
1994 earthquake related losses in excess of insurance proceeds.
(3) For fiscal 1993, the Company recorded a zero net tax benefit comprised of
a federal deferred tax benefit of $2.6 million offset by a state deferred
tax provision of $2.6 million. The federal tax benefit was limited to the
$2.6 million beginning of the year federal deferred tax liability. The
state tax provision resulted from a California tax law change enacted in
late 1993 which reduced the carryover period for California net operating
loss carryforwards from fifteen years to five years. These adjustments
were reflected in the fourth quarter of the year, resulting in the
elimination of the first quarter benefit which was established on the
basis of a 40% statutory rate applied to pretax results.
25
BROADWAY STORES, INC.
Consolidated Statement of Earnings
(In thousands, except per share data)
(Unaudited)
Thirteen Weeks Ended Twenty-Six Weeks Ended
----------------------- -----------------------
July 29, July 30, July 29, July 30,
1995 1994 1995 1994
--------- --------- --------- ---------
Sales $460,639 $457,030 $884,550 $888,107
Finance charge revenue 23,691 22,388 48,285 44,925
Cost of goods sold, including
occupancy and buying costs 351,797 338,288 676,550 657,654
Selling, general, and
administrative expenses 138,617 130,549 274,532 260,244
-------- -------- -------- --------
Earnings (loss) from operations
before interest expense and
income taxes (6,084) 10,581 (18,247) 15,134
Interest expense, net 31,364 23,516 62,499 46,029
-------- -------- -------- --------
Pretax loss (37,448) (12,935) (80,746) (30,895)
Income taxes 0 0 0 0
-------- -------- -------- --------
Net loss $(37,448) $(12,935) $(80,746) $(30,895)
======== ======== ======== ========
Loss per common share $ (0.80) $ (0.28) $ (1.72) $ (0.66)
======== ======== ======== ========
See Accompanying Notes to Consolidated Financial Statements.
26
BROADWAY STORES, INC.
Consolidated Balance Sheet
(In thousands)
(Unaudited)
July 29, January 28, July 30,
1995 1995 1994
---------- ---------- ----------
ASSETS
Current assets
Cash $ 15,901 $ 18,318 $ 15,575
Accounts receivable, net 559,939 664,825 569,931
Merchandise inventories 390,825 504,522 415,443
Other current assets 25,418 11,613 27,640
---------- ---------- ----------
992,083 1,199,278 1,028,589
Property and equipment, net 885,002 888,258 816,947
Other assets 34,521 39,540 35,572
---------- ---------- ----------
$1,911,606 $2,127,076 $1,881,108
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable $ 51,676 $ 11,740 $
Current installments 6,750 6,750 3,460
Accounts payable 107,295 175,622 128,997
Accrued expenses 113,029 141,027 125,525
Current income taxes 824 1,002 977
---------- ---------- ----------
279,574 336,141 258,959
Receivables based financing 503,584 573,138 392,143
Other secured long-term debt 521,384 522,517 523,517
Convertible subordinated notes 143,750 143,750 143,750
Capital lease obligations 39,930 41,524 43,199
Other liabilities 103,121 109,504 121,227
Deferred income taxes 14,850 14,850 14,850
Shareholders' equity
Preferred stock, $.01 par value 8 9 9
Common stock, $.01 par value 470 469 469
Other paid-in capital 502,545 502,038 501,425
Accumulated deficit (197,610) (116,864) (118,440)
---------- ---------- ----------
305,413 385,652 383,463
---------- ---------- ----------
$1,911,606 $2,127,076 $1,881,108
========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements.
27
BROADWAY STORES, INC.
Consolidated Statement of Cash Flows
(In thousands)
(Unaudited)
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------------- --------------------------
July 29, July 30, July 29, July 30,
1995 1994 1995 1994
--------- --------- --------- ---------
Operating activities
Loss from operations $(37,448) $(12,935) $(80,746) $(30,895)
Adjustments to reconcile
loss from operations
to net operating cash flows
Depreciation and amortization 12,703 10,192 25,339 20,201
Changes in operating assets and liabilities
Customer receivables, net 15,528 4,438 71,718 39,048
Merchandise inventories 44,618 (9,935) 113,697 12,188
Accounts payable and accrued expenses 12,554 (4,139) (96,325) (49,166)
Other, net 7,453 (28,273) 11,158 (31,239)
-------- -------- -------- --------
Net cash provided (used)
by operating activities 55,408 (40,652) 44,841 (39,863)
-------- -------- -------- --------
Investing activities
Purchases of property and equipment (6,988) (14,387) (15,420) (21,741)
-------- -------- -------- --------
Financing activities
Net change in financing under
receivables based facility (11,859) 52,582 (69,554) 59,961
Net change in financing under
working capital facility (37,076) 39,936
Retirements of long-term debt and
capital lease obligations (1,531) (808) (2,727) (1,615)
Issuances of common stock 507 426 507 641
-------- -------- -------- --------
Net cash provided (used)
by financing activities (49,959) 52,200 (31,838) 58,987
-------- -------- -------- --------
Net decrease in cash (1,539) (2,839) (2,417) (2,617)
Cash at the beginning of the period 17,440 18,414 18,318 18,192
-------- -------- -------- --------
Cash at the end of the period $ 15,901 $ 15,575 $ 15,901 $ 15,575
======== ======== ======== ========
See Accompanying Notes to Consolidated Financial Statements.
28
BROADWAY STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis of Reporting
The consolidated financial statements have been prepared in accordance
with the instructions to Form 10-Q of the Securities and Exchange Commission and
should be read in the context of the Summary of Significant Accounting Policies
and Financial Review contained in the Company's Annual Report on Form 10-K for
the fifty-two week period ended January 28, 1995. In the opinion of the
Company's management, these statements contain all adjustments, all of which are
of a normal recurring nature, necessary for the amounts shown to be fairly
stated as of July 29, 1995 and July 30, 1994 and for the thirteen and twenty-six
week periods then ended. The Balance Sheet as of January 28, 1995 is as
included in the Company's Form 10-K report for the year ended January 28, 1995.
Earnings Per Share of Common Stock
Earnings per share are computed on the basis of the weighted average
number of shares outstanding during the period, including dilutive stock options
and all 35.0 million shares of Common Stock expected to be issued in accordance
with the plan of reorganization (the "POR") approved in connection with the
Company's emergence from bankruptcy on October 8, 1992 (the "Emergence Date").
As of July 29, 1995, 1.0 million shares of common stock remained reserved for
issuance in accordance with the POR.
Inventories
The last-in, first-out ("LIFO") method of accounting resulted in charges
to cost of goods sold of $1.0 million and $2.0 million for the thirteen and
twenty-six week periods ended July 29, 1995, and $.5 million and $1.0 million
in the comparative prior year periods. If all inventories had been valued on a
first-in, first-out basis, they would have been lower by $12.3 million, $14.3
million and $9.8 million at July 29, 1995, January 28, 1995 and July 30, 1994
respectively.