SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K/A
[X] Annual report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (Fee Required) For the fiscal
year ended January 27, 1996.
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (No FeE Required)
For the transition period from to
Commission file number
Brendle's Incorporated
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
North Carolina 56-497852
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1919 North Bridge Street, Elkin, North Carolina 28621
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(910) 526-5600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange
on Which Registered
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $1.00 par value per share
(TITLE OF CLASS)
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. |X|
To the Board of Directors and Shareholders
of Brendle's Incorporated
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Brendle's Incorporated
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in shareholders' equity and of
consolidated cash flows present fairly, in all material respects, the financial
position of Brendle's Incorporated (the Company) at January 27, 1996 and January
28, 1995, and the results of its operations and its cash flows for each of the
three fiscal years in the period ended January 27, 1996, 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, on April 16, 1996, Brendle's Incorporated filed a
voluntary petition for relief under Chapter 11, Title 11, of the United States
Code (the "Bankruptcy Code") in the U.S. Bankruptcy Court for the Middle
District of North Carolina. The filing and issues surrounding it raise
substantial doubt about the entity's ability to continue as a going concern. The
continued viability of the Company in its present form is dependent upon, among
other factors, the Company's ability to generate sufficient cash from operations
or other sources that will meet ongoing obligations over a sustained period.
Management's plans in regard to these matters are also described in Note 1. The
accompanying financial statements do not include any adjustments relating to the
recoverability and classification of reported asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern, nor do these financial statements include
any adjustments relating to the recoverability and classification of reported
asset amounts or adjustments relating to the establishment, settlement and
classification of liabilities that may be required in connection with
restructuring the Company under the Bankruptcy Code.
PRICE WATERHOUSE LLP
Winston-Salem, North Carolina
March 29, 1996, except as to Notes 1 and 8, which are as of April 30, 1996.
F-1
BRENDLE'S INCORPORATED
BALANCE SHEETS
(In thousands, except share data)
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JANUARY 27, JANUARY 28,
1996 1995
---- ----
ASSETS
Current assets:
Cash and temporary cash investments (Note 3) $ 1,380 $ 1,781
Receivables (Note 4) 1,295 971
Merchandise inventories (Note 3) 50,147 48,451
Other current assets 1,211 1,361
Total current assets 54,033 52,564
Property and equipment, less accumulated depreciation
and amortization (Notes 3 and 5) 7,387 8,776
Other assets 568 788
$ 61,988 $ 62,128
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving credit facility (Note 8) $ 22,275 $ 15,368
Accounts payable - trade 8,141 5,245
Current portion of capitalized lease obligations (Note 7) 168 1,241
Current portion of other long-term liabilities 288 139
Current portion of restructuring reserve (Note 6) 206 445
Other accrued liabilities 3,862 2,620
Total current liabilities 34,940 25,058
Capitalized lease obligations, less current portion (Note 7) 282 449
Restructuring reserve, less current portion (Note 6) 867 980
Other long-term liabilities 1,093 1,284
Total liabilities 37,182 27,771
Shareholders' equity:
Common stock, $1 par value, 20,000,000 shares authorized, 12,756,284 shares
issued and outstanding at January 27, 1996 and 12,758,717 shares issued
and
outstanding at January 28, 1995 12,756 12,759
Capital in excess of par value 20,895 20,896
Retained earnings (deficit) (8,845) 702
Total shareholders' equity 24,806 34,357
$ 61,988 $ 62,128
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-2
BRENDLE'S INCORPORATED
STATEMENTS OF OPERATIONS
(In thousands, except per share data)
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FISCAL YEAR ENDED
JANUARY 27, JANUARY 28, JANUARY 29,
1996 1995 1994
---- ---- ----
Net sales $ 154,242 $ 166,278 $ 170,345
Other income 339 242 728
Total revenues 154,581 166,520 171,073
Costs and expenses:
Cost of merchandise sold 114,952 123,851 125,015
Selling, operating and
administrative expenses 45,167 43,026 43,571
Depreciation and amortization 3,190 3,561 4,877
Interest expense 3,394 2,484 383
Capitalized lease interest expense 168 454 756
Provision for restructuring (Note 6) -- 3,473 16,090
(Gain) on life insurance (Note 14) (2,601) -- --
(Gain) loss on sale of property and
equipment (Note 15) (1,026) 75 --
163,244 176,924 190,692
Loss before provision for income taxes
and extraordinary item (8,663) (10,404) (19,619)
Provision for income taxes (Note 10) -- -- --
Loss before extraordinary item (8,663) (10,404) (19,619)
Extraordinary item - gain from forgiveness
of debt (Note 2) -- 32,367 --
Net income (loss) $ (8,663) $ 21,963 $ (19,619)
Net income (loss) per share: (Note 3)
Loss before extraordinary item $ (.68) $ (.89) $ (2.36)
Extraordinary item - gain from forgiveness
of debt (Note 2) -- 2.77 --
Net income (loss) per share $ (.68) $ 1.88 $ (2.36)
Weighted average number of shares outstanding 12,757 11,671 8,297
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-3
BRENDLE'S INCORPORATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands, except share data)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON COMMON CAPITAL IN RETAINED TOTAL
STOCK STOCK EXCESS OF EARNINGS SHAREHOLDERS'
SHARES AMOUNT PAR VALUE (DEFICIT) EQUITY
Balance, January 30, 1993 8,289,276 $ 8,289 $ 18,111 $ (1,634) $ 24,766
Net loss - - - (19,619) (19,619)
Reclassification from other
deferred credit (Note 9) - - - 302 302
Issuance of stock 10,178 10 1 - 11
Balance, January 29, 1994 8,299,454 8,299 18,112 (20,951) 5,460
Net income - - - 21,963 21,963
Reclassification from other
deferred credit (Note 9) - - - (310) (310)
Issuance of stock 4,469,701 4,470 2,793 - 7,263
Retirement of stock (10,438) (10) (9) - (19)
Balance, January 28, 1995 12,758,717 12,759 20,896 702 34,357
Net income - - - (8,663) (8,663)
Reclassification from other
deferred credit (Notes 9 and 14) - - - (884) (884)
Retirement of stock (2,433) (3) (1) - (4)
Balance, January 27, 1996 12,756,284 $ 12,756 $ 20,895 $ (8,845) $ 24,806
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-4
BRENDLE'S INCORPORATED
STATEMENTS OF CASH FLOWS
(In thousands)
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FISCAL YEAR ENDED
JANUARY 27, JANUARY 28, JANUARY 29,
1996 1995 1994
---- ---- ----
Operating activities:
Net income (loss) $ (8,663) $ 21,963 $ (19,619)
Items not requiring (providing) cash:
Depreciation and amortization 3,190 3,561 4,877
(Gain) loss on sale of property and equipment (1,026) 75 11,839
Restructuring reserve (352) 916 (4,109)
Extraordinary item - gain from forgiveness of debt -- (32,367) --
Changes in assets and liabilities:
Accounts receivable (324) 509 4,856
Merchandise inventories (1,696) 5,682 3,760
Other current assets 150 (391) 4,664
Accounts payable and other liabilities 3,150 2,159 (4,278)
Cash provided (used) by operating activities (5,571) 2,107 1,990
Investing activities:
Additions to property and equipment (1,956) (870) (823)
Proceeds from sale of property and equipment 1,181 4,225 8,704
Other 220 (349) 529
Cash provided (used) by investing activities (555) 3,006 8,410
Financing activities:
Payment of labilities subject to compromise -- (56,119) --
Increase (decrease) in capitalized lease obligations (1,240) 1,690 (1,356)
Net borrowings on revolving credit facility 6,907 15,368 (10,875)
Increase (decrease) in other long-term liabilities 62 974 --
Issuance of common stock -- -- 11
Retirement of common stock (3) (10) --
Decrease in capital in excess of par value (1) (9) --
Cash (used) provided by financing activities 5,725 (38,106) (12,220)
Net decrease in cash and temporary cash investments (401) (32,993) (1,820)
Cash and temporary cash investments - beginning of year 1,781 34,774 36,594
Cash and temporary cash investments - end of year $ 1,380 $ 1,781 $ 34,774
Supplemental disclosures of cash flow information:
Interest paid during the year $ 2,982 $ 2,547 $ 383
Supplemental disclosure of non-cash financing activities:
The Company has recorded liabilities associated with the potential repurchase
of common stock from certain shareholders in the event of their death. At
January 27, 1996 such liabilities totaled $1,413,000 with a corresponding
cumulative reduction in retained earnings. (At January 27, 1996, $988,000 has
been recorded in other accrued liabilities while $425,000 has been recorded
in other long-term liabilities). At January 28, 1995 and January 29, 1994
such liabilities totaled $529,000 and $521,000, respectively, with
corresponding cumulative reductions in retained earnings. (At January 28,
1995 the amount was included in other long-term liabilities, while at January
29, 1994 the amount was included in liabilities subject to compromise).
During fiscal year 1995, the company issued 4,469,201 shares of common stock
valued at $7,263,000 to creditors under the terms of its Plan of
Reorganization which resulted in an increase in capital in excess of par
value of $2,793,000.
The accompanying Notes to Financial Statements are an integral part of these
statements.
F-5
BRENDLE'S INCORPORATED
NOTES TO FINANCIAL STATEMENTS
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NOTE 1 - PROCEEDINGS UNDER CHAPTER 11
On April 16, 1996 (the "Petition Date"), Brendle's Incorporated (the "Company")
filed a voluntary petition for relief under Chapter 11 of the Federal Bankruptcy
Code (the "Bankruptcy Code") in the U.S. Bankruptcy Court for the Middle
District of North Carolina (the "Bankruptcy Court"), and is currently operating
as a Debtor-in-Possession ("DIP"). As a Debtor-in-Possession, the Company is
authorized to operate its business, but may not engage in transactions outside
of the normal course of business without approval, after notice and hearing, of
the Bankruptcy Court. A creditors' committee will be formed, which will have the
right to review and object to business transactions outside the ordinary course
and participate in any plan or plans of reorganization.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The continued viability of the Company
under Chapter 11 and subsequent to Chapter 11 is dependent upon, among other
factors, confirmation of a plan of reorganization and the ability to generate
sufficient cash from operations and financing sources to meet obligations.
As of the Petition Date, actions to collect prepetition indebtedness were stayed
and other contractual obligations could not be enforced against the Company.
Certain prepetition liabilities are subject to approval by the Bankruptcy Court
for payment in the ordinary course of business.
The Bankruptcy Code allows the debtor to either assume or reject certain
executory contracts, subject to Bankruptcy Court approval. Parties to contracts,
which are rejected, are entitled to file claims for losses or damages sustained
as a result of the rejection.
Management is in the process of evaluating markets and has indicated its
intention to close 18 of its 30 stores, reduce corporate office staffing and
implement other cost control measures. Management has announced its intention,
subject to Board of Directors and Bankruptcy Court approval, to reformat the
Company's stores in an attempt to market the Company as a destination shopping
point. The Company will focus on jewelry, housewares, small appliances,
ready-to-assemble furniture, gifts, crafts, party goods and health and fitness
items. Management believes these changes in the Company's focus and merchandise
mix will facilitate the Company's return to profitability.
NOTE 2 - PREVIOUS EMERGENCE FROM CHAPTER 11
On November 22, 1992, the Company and its primary operating subsidiary,
Brendle's Stores, Inc., filed a voluntary petition for relief under Chapter 11
of the Bankruptcy Code in the Bankruptcy Court.
On December 23, 1993, the Bankruptcy Court confirmed the Company's plan of
reorganization (the "Plan") contingent upon the Company's obtaining exit
financing in order to fund payments to creditors under the Plan. The Company
obtained this reorganization revolving credit facility (the "Credit Facility")
for $45,000,000 from Foothill Capital Corporation on April 21, 1994 ("Foothill")
(See Note 8). Interest is paid monthly with the facility expiring on April 29,
1999. On April 29, 1994, the Company disbursed $45,382,000 in payment of secured
and general unsecured claims. This payment was funded through cash on hand and
borrowings under the Credit Facility.
F-6
BRENDLE'S INCORPORATED
NOTES TO FINANCIAL STATEMENTS
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In addition on April 29, 1994, Brendle's Incorporated issued 4,469,201 shares of
Brendle's Incorporated Common Stock to Arnold Zahn (the "Escrow Agent"). These
shares were issued to creditors as the remaining claim amounts were reconciled.
As of January 27, 1996 all shares had been issued to creditors. See discussion
of specific provisions related to claim payments under "General Unsecured
Claims" below.
EXTRAORDINARY GAIN
An extraordinary gain of $32,367,000 on the forgiveness of prepetition debt was
recorded during fiscal 1995. The extraordinary gain did not reduce the Company's
net operating loss carryforwards for income tax purposes, and accordingly had no
income tax effect. The extraordinary gain has been included in the Company's
results of operations for the year ended January 28, 1995.
The federal income tax law generally limits the use of net operating loss
carryforwards in the event of a change in ownership of a company. Further, such
net operating loss carryforwards are generally reduced where the debts of a
company are reduced, and cancellation of indebtedness income is realized.
However under the tax laws in effect at the date of this reorganization, such
reduction in net operating loss carryforwards could be avoided where stock is
issued to creditors in a Chapter 11 proceeding in exchange for debt reduction.
The limitation due to a change in ownership generally occurs when more than 50%
of the outstanding shares change hands in any three year period. Complex rules
govern the measurement of this 50% change. It is management's view that no
change in ownership which warrants the limitation of net operating loss
carryforwards has occurred as a result of the Plan.
As a general rule the cancellation of debt requires a taxpayer to reduce tax
attributes to the extent of the cancellation of debt income. At the date of this
reorganization, an exception to the general rule existed which allowed the
Company to avoid a reduction in net operating loss carryforwards by issuing
stock to creditors in exchange for debt reduction. For this "stock for debt
exception" to apply, among other tests; 1) the stock issued must not be "nominal
or token", 2) the stock must not be redeemable, and 3) the distribution of
shares must be fairly proportionate to the amount of debt reduction for each
creditor. It is the Company's view that these tests were met, and that the
issuance of Common Stock to creditors called for by the Plan had the result of
preventing any reduction of the net operating loss carryforwards of the Company.
The Plan provided for the following:
SECURED CLAIMS
The Bank Group received the sum of $16,000,000 less all amounts paid to the Bank
Group by the Company subsequent to July 8, 1993 in full and complete
satisfaction of the allowed secured portion of their claim. The Brenco and
Douglas D. Brendle secured claims were treated similarly, receiving a recovery
in the same proportion as the Bank Group's recovery. The balance of the Bank
Group claim, approximately $35,000,000 was treated as a general unsecured claim.
F-7
BRENDLE'S INCORPORATED
NOTES TO FINANCIAL STATEMENTS
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GENERAL UNSECURED CLAIMS
Holders of unsecured claims received the following for their claims in
accordance with the Plan (a) the claim-holder's pro rata share of a total
distribution to all general unsecured claim holders of 35% of the issued and
outstanding Common Stock of the reorganized Company; and (b) the opportunity to
elect one of the following options: (i) a cash payment equal to 52% of the
amount of the general unsecured claim ("the cash option"); or (ii) a
reorganization note in a principal amount equal to 80% of the general unsecured
claim, bearing interest at the rate of 8% per annum and payable over ten years
("the note option").
During the balloting, all of the holders of unsecured claims elected the cash
option with the exception of holders of approximately $161,000 in unsecured
claims.
COMMON STOCK
The holders of the outstanding shares of the Company's existing Common Stock
retained their stock and are entitled to all the rights and privileges of
shareholders.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
The Company is a retail merchandiser operating catalog showrooms in four states.
The Company's consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the payment of
liabilities in the ordinary course of business. The continued viability of the
Company is dependent upon, among other factors, the ability to generate
sufficient cash from operations and financing sources to meet obligations. The
consolidated financial statements do not include any adjustments or
reclassifications that might be necessary should the Company be unable to
continue as a going concern. (See Note 1.)
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. During fiscal 1995, all subsidiaries of Brendle's Incorporated
were merged into the parent company. The merger of the subsidiaries had no
financial statement impact since all intercompany balances and transactions are
eliminated in consolidation.
CASH AND TEMPORARY CASH INVESTMENTS
Temporary cash investments are defined as short-term investments having an
original maturity of three months or less.
MERCHANDISE INVENTORIES
Merchandise inventories are stated at the lower of cost or market, with cost
being determined by the last-in, first-out (LIFO) method. The stated LIFO value
of merchandise inventories approximates replacement cost.
F-8
BRENDLE'S INCORPORATED
NOTES TO FINANCIAL STATEMENTS
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PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance and
repairs which do not improve or extend the life of an asset are charged to
expense as incurred. Major renewals and betterments are capitalized. Upon
retirement or sale of an asset, its cost and related accumulated depreciation or
amortization are removed from the property accounts and any gain or loss is
recorded as income or expense.
Depreciation and amortization of property and equipment owned or leased under
capital leases are provided on the straight-line method over their estimated
useful lives.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NET INCOME (LOSS) PER SHARE
Net income or loss per share is computed using the weighted average number of
common shares outstanding during each period.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments," requires disclosure about the fair value of
certain instruments. Cash, receivables, the revolving credit facility, accounts
payable, and accrued liabilities are reflected in the financial statements at
fair value because of the short-term maturity of these instruments. The
difference between the carrying amount and the fair value of other long-term
liabilities and the restructuring reserve is immaterial for disclosure proposes.
INCOME TAXES
Income taxes are provided based upon income reported for financial statement
purposes. See discussion of deferred income taxes in Note 10.
ISSUANCE OF STOCK
During fiscal 1995, 4,469,701 shares were issued to the Company's creditors in
accordance with the plan of reorganization.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with current year
classification.
F-9
BRENDLE'S INCORPORATED
NOTES TO FINANCIAL STATEMENTS
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NOTE 4 - RECEIVABLES
Receivables consist of the following:
JANUARY 27, JANUARY 28,
(IN THOUSANDS) 1996 1995
- -------------- ---- ----
Customer $ 124 $ 127
Advertising rebates 345 342
Other 945 602
1,414 1,071
Less allowance for doubtful accounts 119 100
Total $ 1,295 $ 971
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
ESTIMATED JANUARY 27, JANUARY 28,
(IN THOUSANDS) USEFUL LIFE 1996 1995
- -------------- ----------- ---- ----
Land and improvements $ 434 $ 434
Buildings:
Capitalized leases 10 to 25 years 10,021 10,703
Owned 19 to 25 years 1,705 1,818
11,726 12,521
Property and equipment:
Furniture, fixtures and equipment 5 to 10 years 23,698 23,590
Leasehold improvements 10 years 9,851 9,666
Transportation equipment 3 to 7 years 674 681
Construction in progress - 17 334
34,240 34,271
46,400 47,226
Less - Accumulated depreciation
and amortization 39,013 38,450
$ 7,387 $ 8,776
Accumulated depreciation and amortization includes $9,843,000 at January 27,
1996 and $10,112,000 at January 28, 1995 relating to capital leases. The charge
to operations resulting from amortization of capital leases is included in
depreciation and amortization expense in the statements of operations.
F-10
BRENDLE'S INCORPORATED
NOTES TO FINANCIAL STATEMENTS
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NOTE 6 - RESTRUCTURING CHARGES
During fiscal 1995, the Company recorded charges of $3,473,000 for
restructuring. These charges are comprised of professional fees, severance
packages for certain employees which left as a result of the Company's
reorganization and other costs associated with the completion of the November
1992 Chapter 11 proceedings. No such restructuring charges were incurred during
fiscal 1996.
Unpaid restructuring costs were $1,073,000 and $1,425,000 at January 27, 1996
and January 28, 1995, respectively.
NOTE 7 - CONTINGENCIES
The Company has capital and operating lease commitments for stores, equipment
and its corporate headquarters facility expiring on varying dates from fiscal
1997 to 2006. The leases generally include renewal options and rental escalation
clauses. Future minimum lease commitments, including leases with affiliates (See
Note 12) at January 27, 1996 are as follows:
(IN THOUSANDS) CAPITALIZED OPERATING
FISCAL YEAR LEASES LEASES
1997 $ 235 $ 5,721
1998 226 4,854
1999 100 3,426
2000 - 2,888
2001 - 2,294
Thereafter - 3,843
Total minimum lease payments 561 $ 23,026
Less - Amount representing interest 111
Present value of capitalized lease obligations 450
Less - Current maturities 168
Long-term capitalized lease obligations $ 282
NOTE 8 - REVOLVING CREDIT FACILITY
On April 30, 1996, the Company received approval from the Bankruptcy Court
related to the debtor-in- possession financing agreement (the "DIP Facility")
dated April 30, 1996 with Foothill Capital Corporation that established a
revolving credit facility in the maximum amount of $25,000,000. The DIP Facility
has a first priority security interest in and lien upon any and all of the
Company's assets, junior in priority only to any valid, perfected and
enforceable liens in existence on the Petition Date that are senior in priority
to the security interests and liens of Foothill granted pursuant to the Credit
Facility (described below). The terms of the DIP Facility call for maximum
borrowing availability to be reduced to $15,000,000 by June 2, 1996. The DIP
Facility will be used first to retire the Credit Facility and second, to the
extent necessary, by the Company to support its operations.
F-11
BRENDLE'S INCORPORATED
NOTES TO FINANCIAL STATEMENTS
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As discussed in Note 2, on April 21, 1994, the Company entered into a five year,
$45,000,000 revolving credit facility. The Credit Facility was used to fund the
negotiated Plan payments to creditors, with the balance of the facility to be
used to fund working capital requirements, inventory purchases, capital
expenditures, and other general corporate purposes. The Credit Facility includes
restrictions on capital expenditures as well as standard covenants found in
similar agreements. The Company was in compliance with such covenants at January
27, 1996 and January 28, 1995. However, as further discussed in Note 1, on April
16, 1996, the Company filed a voluntary petition for relief under Chapter 11 of
the Bankruptcy Code. This resulted in a violation of such covenants. All
borrowings under the Credit Facility have been reflected as current liabilities
in the balance sheet as of January 27, 1996 and January 28, 1995.
Under the Credit Facility, the lender agrees to make revolving loans and issue
or guarantee letters of credit for the Company. The Credit Facility includes a
sublimit of $10,000,000 for documentary and stand-by letters of credit. The
Company had borrowed $22,275,000 and $15,368,000 against the Credit Facility at
January 27, 1996 and January 28, 1995, respectively. The weighted average
interest rate on borrowings against the Credit Facility was 10.31% and 9.21%
during the years ended January 27, 1996 and January 28, 1995, respectively.
The Credit Facility provides that each loan shall bear interest at a rate of
prime plus two percent. Interest on these loans is payable monthly in arrears on
the first day of each month. Also under the Credit Facility, the Company pays an
unused line fee for an amount equal to one-half of one percent per annum on the
unused portion of the Credit Facility and a letter of credit fee equal to two
and one-half percent per annum on the average daily balance of the aggregate
undrawn letters of credit and letter of credit guarantees outstanding during the
immediately preceding month and certain other fees. The Credit Facility requires
an annual facility fee equal to one-half of one percent of the maximum amount of
the facility payable on each anniversary of the Credit Facility closing date and
a monthly servicing fee of $3,500 per month.
The Company paid an initial, one-time fee of $450,000 in order to establish the
Credit Facility. Total unused lines of credit fees under the Credit Facility
amounted to $113,000 and $86,000 for years ended January 27, 1996 and January
28, 1995, respectively. Total unused letters of credit fees under the Credit
Facility amounted to $34,000 and $20,000 for the years ended January 27, 1996
and January 28, 1995, respectively.
Under the previous financing arrangement with CIT, the Company has unused lines
of credit fees of $71,000 and no unused letters of credit fees for the year
ended January 29, 1994.
NOTE 9 - SHAREHOLDERS' EQUITY
In April 1986, four shareholders of the Company entered into an agreement
whereby they cannot transfer or sell their Common Stock to any unrelated party
(as defined) without the written consent of the other parties to the agreement.
In addition, in the event of the death of one of the four shareholders, the
Company can be required to purchase their Common Stock at fair value up to the
life insurance proceeds, consisting of policies with a face value of $5,250,000,
$5,000,000, $3,070,000 and $3,000,000, respectively. Outstanding borrowings
against the cash surrender value of these policies were approximately $1,419,000
and $1,835,000 at the January 27, 1996 and January 28, 1995, respectively.
F-12
BRENDLE'S INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company has recorded liabilities associated with the potential repurchase of
Common Stock from these shareholders of $1,413,000 and $529,000 at January 27,
1996 and January 28, 1995, respectively. These liabilities are offset with a
corresponding cumulative reduction in retained earnings. At January 27, 1996,
$988,000 has been recorded in other accrued liabilities while $425,000 has been
recorded in other long-term liabilities. At January 28, 1995, the entire
$529,000 was recorded in other long-term liabilities. See discussion in Note 14
concerning the death of one of the four shareholders and the corresponding
financial statement impact.
NOTE 10 - PROVISION FOR INCOME TAXES
At January 27, 1996, the Company has net operating loss carryforwards of
approximately $74,000,000. Utilization of such carryforwards is dependent upon
the realization of taxable income by the Company and will begin to expire in
fiscal 2007. Management has analyzed its net operating loss carryforwards and
believes that it is more likely than not that these carryforwards may expire
before they are realized. Accordingly, a valuation allowance of $27,453,000 and
$26,930,000 has been recorded against the related deferred tax assets at January
27, 1996 and January 28, 1995, respectively. As these loss carryforwards have
been generated over the last several years , and the Company has continued to
generate taxable losses, no current or deferred income tax provision or benefit
was recorded in fiscal 1996, 1995 and 1994.
FISCAL FISCAL FISCAL
(IN THOUSANDS) 1996 1995 1994
- -------------- ---- ---- ----
The components of the deferred provision for income taxes are as follows:
Deferred income taxes:
Depreciation $ (497) $ (601) $ (1,728)
Capital lease book charges (over) under
rental charges for tax purposes 315 918 (37)
Additional inventory costs capitalized
for tax purposes 21 37 30
Deferred compensation 25 20 4
Provision for store closings -- 208 --
Restructuring reserve 134 876 1,561
Other 19 411 89
Interaction of net operating loss carryforward (17) (1,869) 81
$ -- $ -- $ --
F-13
BRENDLE'S INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the deferred tax liabilities and assets are as follows:
FISCAL FISCAL
(IN THOUSANDS) 1996 1995
- -------------- ---- ----
Deferred tax liabilities:
Book-tax basis difference in property and equipment $ 228 $ 228
Other 79 81
Gross deferred tax liabilities 307 309
Deferred tax assets:
Net operating loss carryforward 28,048 24,920
Reorganization cost 408 541
Capital leases for books 114 428
Additional inventory costs capitalized for tax purposes 486 508
Other (1,296) 842
Gross deferred tax assets 27,760 27,239
Valuation allowance for deferred tax assets 27,453 26,930
Net deferred tax assets 307 309
Net deferred taxes $ -- $ --
The following is a reconciliation of the effective income tax rate with the
statutory rate:
FISCAL FISCAL FISCAL
1996 1995 1994
---- ---- ----
Statutory federal income tax rate (34)% (34)% (34)%
Limitation of tax loss carrybacks 34 34 34
- - -
F-14
BRENDLE'S INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
In February 1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109). SFAS 109 mandates the use of the liability method in accounting for
deferred income taxes. SFAS 109 is effective for fiscal year 1994 and permits
restatement of earlier years or presentation of the cumulative effect of the
change in the year of adoption. The Company has adopted SFAS 109 prospectively
in fiscal 1994 and the adoption has not materially impacted the Company's
financial condition or results of operations and has not resulted in a material
cumulative effect of a change in accounting principles.
No income tax payments were made in fiscal 1996, 1995 and 1994.
NOTE 11 - EMPLOYEE BENEFIT PLANS
The Company had a defined contribution profit-sharing plan covering
substantially all employees who had met certain age and length of service
requirements. Effective September 17, 1993, all assets of the defined
contribution profit sharing plan were merged with the defined contribution
retirement savings plan. Contributions to the profit-sharing plan were
determined by the Board of Directors. No contribution was made for fiscal year
1994.
The Company has a defined contribution retirement savings plan (the "Savings
Plan"), a voluntary compensation deferral plan under Section 401(k) of the
Internal Revenue Code. The Savings Plan allows participants to contribute up to
15% of their annual compensation to the Savings Plan. As of January 31, 1993,
the Board of Directors of the Company adopted an amendment to the Savings Plan
whereby the employer matching contribution was discontinued with respect to
salary reduction contributions made for compensation earned after January 31,
1993. The Company has made no contributions in fiscal 1996 or 1995 and
contributed the minimum contribution of $40,000 for fiscal year 1994.
The Brendle's Incorporated 1990 Stock Option Plan approved by the shareholders
on May 31, 1990, authorizes the grant of stock options for the purchase of up to
300,000 shares of Common Stock to be made to unaffiliated directors, officers
and other key employees of the Company in order to provide incentives to remain
in the employment of the Company. The plan permits the issuance of incentive
stock options, nonqualified stock options and stock appreciation rights
("Right") in tandem with stock options. Incentive stock options may be granted
at not less than 100%, and nonqualified stock options may be granted at not less
than 95%, of market value. Options granted are exercisable only after one year
of continuous employment with the Company immediately following the date of
grant. The Stock Option Committee may prescribe longer time periods and
additional requirements with respect to the exercise of a stock option or Right.
F-15
BRENDLE'S INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Brendle's Incorporated 1986 Incentive Stock Option Plan, as adopted by the
shareholders of the Company on January 31, 1986, authorizes the grant of both
incentive stock options and nonqualified options to purchase up to 400,000
shares of Common Stock to officers and other key employees of the Company.
Incentive stock options may be granted at not less than 100%, and nonqualified
options at not less that 95%, of market value. Options granted to date become
exercisable at the rate of 20% annually, subject to continuous employment with
the Company, beginning one year and expiring six years from the date of grant.
On April 10, 1986, the shareholders of the Company adopted the Brendle's
Incorporated 1986 Nonqualified Stock Option Plan, which authorizes the grant of
stock options to non-employee directors of the Company for the purchase of up to
10,000 shares of Common Stock. All of these options have been granted as of
January 27, 1996.
On December 1, 1994, the shareholders of the Company granted stock options for
the purchase of 500,000 shares of Common Stock to officers and other key
employees of the Company in order to provide incentives to remain in the
employment of the Company. These options were issued under both the 1986 and the
1990 Brendle's Incorporated Stock Option Plans.
The following table summarizes the changes in stock options for the plans for
the three years ended January 27, 1996.
Shares subject to option:
NUMBER PER SHARE
OF SHARES OPTION PRICE
Balance, January 30, 1993 196,000 $5.50-$14.50
Granted -- --
Exercised -- --
Cancelled 25,680 $7.00-$14.50
Balance, January 29, 1994 170,320 $5.50-$14.50
Granted 500,000 $.625
Exercised --
Cancelled 153,250 $.625-$14.50
Balance, January 28, 1995 517,070 $.625-$14.50
Granted --
Exercised --
Cancelled 163,570
Balance, January 27, 1996 353,500 $.625
Exercisable at end of year 353,500
Shares reserved for future grant:
Beginning of year 192,930
End of year 356,500
F-16
BRENDLE'S INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Effective February 1, 1988, the Company entered into deferred compensation
agreements with three former employees. The agreements provide monthly payments
for a period of fifteen years commencing on the respective retirement dates. The
present value of the obligations totaled $352,000 for fiscal year ended January
27, 1996, of which $35,000 is included in the current portion of other long-term
liabilities and $317,000 in other long-term liabilities on the accompanying
balance sheet. The present value of the obligations totalled $384,000 for fiscal
year ended January 28, 1995, of which $32,000 is included in the current portion
of other long-term liabilities and $352,000 in other long-term liabilities on
the accompanying balance sheet.
Effective August 18, 1989, the Board of Directors of the Company adopted the
Brendle's Key Employee Stock Appreciation Rights Plan and the Brendle's
Incorporated Unaffiliated Directors Stock Appreciation Rights Plan. The Key
Employee SAR Plan and the Unaffiliated Directors' SAR Plan provide for the
issuance of up to a maximum of 75,000 and 15,000 stock appreciation rights,
respectively. The Company had no outstanding stock appreciation rights under the
plans at January 27, 1996 or January 28, 1995. Furthermore, there was no
compensation expense related to the stock appreciation rights for the three
years ended January 27, 1996.
NOTE 12 - RELATED PARTIES
The Company had capital and operating lease commitments with affiliates of
certain current and former executive officers for stores, equipment and its
corporate headquarters facility during fiscal 1995. All capital lease
commitments with affiliates expired during fiscal 1996 and were renewed as
operating leases. Real estate leases, as amended, generally provide for renewal
options and escalation of rent to reflect 60% of any increase in the Consumer
Price Index at the lease extension dates. Additionally, certain of these leases
provide for contingent rental payments in that annual rental payments are the
greater of a base rental amount or a defined percentage of the sales of a
particular location.
Future minimum lease commitments to affiliates at January 27, 1996 are as
follows:
(IN THOUSANDS) OPERATING
FISCAL YEAR LEASES
1997 $ 2,164
1998 1,348
1999 832
2000 682
2001 454
Thereafter --
Total minimum lease payments $ 5,480
Lease payments to affiliates of the Company were $2,251,000, $2,312,000 and
$2,501,000 for the years ended January 27, 1996, January 28, 1995 and January
29, 1994, respectively.
F-17
BRENDLE'S INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13 - ADVERTISING COSTS
In fiscal 1996, the Company adopted the provisions of the Accounting Standards
Executive Committee's Statement of Position 93-7, "Reporting on Advertising
Costs" (SOP 93-7). The Company expenses advertising costs the first time the
advertising takes place. Adoption of SOP 93-7 did not have a material impact on
the Company's results of operations. The Company had prepaid advertising of
$186,000 and $304,000 at January 27, 1996 and January 28, 1995, respectively.
Advertising expense charged to income was $6,655,000, $5,929,000, and $9,977,000
for the years ended January 27, 1996, January 28, 1995, and January 29, 1994,
respectively.
NOTE 14 - GAIN ON INSURANCE POLICY
As discussed in Note 9, one of the four shareholders, passed away on September
29, 1995. The Company subsequently received life insurance proceeds of
$3,000,000, less outstanding loans on the policy of $445,000, for net proceeds
of $2,555,000. Pursuant to the shareholders' agreement and as detailed in Note
9, the estate of the shareholder can require the Company to purchase the
shareholder's Common Stock at fair value up to the life insurance proceeds. The
fair value of the deceased shareholder's Common Stock was determined to be
$988,000 based on the average closing market price of the Company's Common Stock
for the twenty days preceding the shareholder's death. This average market price
was computed as $0.5163 per share and the deceased shareholder owned 1,912,667
shares of the Company's Common Stock. Accordingly, at January 27, 1996 the
Company recorded a liability of $988,000 in other accrued liabilities for the
potential purchase of this Common Stock with a corresponding cumulative
reduction in retained earnings. The remaining gain of $46,000, net of
outstanding loans, is the result of the death of another officer of the Company.
NOTE 15 - GAIN ON SALE OF PROPERTY AND EQUIPMENT
The Company recorded a gain on the sale of facilities of $1,026,000 in the
current year. This gain is primarily comprised of $963,000 in proceeds received
by the Company to surrender its lease on the close of the Chapel Hill, N.C.
store in September, 1995. The remaining $63,000 is the result of other
miscellaneous transactions during fiscal 1996.
F-18