Document/Exhibit Description Pages Size
1: 8-K/A Amendment to Current Report 4 25K
2: EX-2 Plan of Acquisition, Reorganization, Arrangement, 41± 154K
Liquidation or Succession
3: EX-2 Plan of Acquisition, Reorganization, Arrangement, 19± 73K
Liquidation or Succession
4: EX-99 Miscellaneous Exhibit 21± 90K
Consolidated Financial Statements
Ira A. Watson Co.
Years ended January 3, 1998, and
December 28, 1996
with Report of Independent Auditors
Contents
Audited Consolidated Financial Statements
Report of Independent Auditors 1
Consolidated Balance Sheets 2
Consolidated Statements of Operations 4
Consolidated Statements of Shareholders' Equity 6
Consolidated Statements of Cash Flows 7
Notes to Consolidated Financial Statements 9
Report of Independent Auditors
Board of Directors
Ira A. Watson Co.
We have audited the accompanying consolidated balance sheets of
Ira A. Watson Co. and subsidiary, as of January 3, 1998, and
December 28, 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for the years
then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of Ira A. Watson Co. and subsidiary, at January 3, 1998,
and December 28, 1996, and the results of their operations and
cash flows for the years then ended in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been
prepared assuming the Company will continue as a going concern.
As discussed in Note 16 to the consolidated financial statements,
the Company's recurring losses from operations have created a
cash flow problem which raises substantial doubt about its
ability to continue as a going concern. Management's plans and
actions regarding this matter are also described in Note 16. The
consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
---------------------------
Coulter & Justus, P.C.
---------------------------
March 6, 1998,
except for Note 4, as to which the date is
April 2, 1998, and Note 7, as to which the
date is May 12, 1998
Ira A. Watson Co.
Consolidated Balance Sheets
[Download Table]
January 3 December 28
1998 1996
--------- -----------
Assets
Current assets:
Cash and cash equivalents $2,121,837 $1,957,622
Short-term investment 417,107 408,026
Merchandise inventories 14,532,610 15,255,590
Refundable income taxes 10,309 195,944
Deferred income taxes 481,886 357,879
Current portion of deferred costs 93,103 98,531
Prepaid expenses and other current assets 1,234,091 1,595,020
----------- ----------
Total current assets 18,890,943 19,868,612
Other assets:
Note receivable from retirement plan 106,461 98,316
Deferred costs, less current portion 67,614 161,032
Other 25,066 21,617
----------- ----------
Total other assets 199,141 280,965
Property, plant and equipment
Land 174,327 287,903
Buildings and leasehold improvements 7,738,902 7,930,269
Fixtures and equipment 16,481,233 16,418,981
------------ ----------
24,394,462 24,637,153
Less allowances for depreciation
and amortization (18,292,631) (17,449,971)
------------- -----------
6,101,831 7,187,182
Assets under capital leases, less
accumulated amortization of $595,420
in 1997 and $498,774 in 1996 185,237 281,883
------------ -----------
Net property, plant and equipment 6,287,068 7,469,065
------------ -----------
Total assets $25,377,152 $27,618,642
[C] [C] [C]
January 3 December 28
1998 1996
------------ ------------
Liabilities and shareholders' equity
Current liabilities:
Trade accounts payable $ 4,181,675 $1,876,295
Accrued compensation 578,800 448,143
Withholding, payroll, sales and
other taxes 1,057,370 1,280,032
Other accrued liabilities 2,416,122 2,221,777
Current portion of deferred rent credits 68,857 118,857
Current portion of capital lease obligations 140,163 130,677
Current portion of long-term debt 731,056 425,142
Current portion of liabilities under the
Plan of Reorganization 2,407,642 2,176,551
------------ -----------
Total current liabilities 11,581,685 8,677,474
Other liabilities:
Deferred income taxes 481,886 357,879
Deferred rent credits, less current portion 662,237 731,094
Capital lease obligations, less
current portion - 140,077
Long-term debt, less current portion 10,302,532 10,848,058
Liabilities under the Plan of
Reorganization, less current portion - 1,206,745
------------ -----------
Total other liabilities 11,446,655 13,283,853
------------ -----------
Total liabilities 23,028,340 21,961,327
Shareholders' equity:
Capital stock 2,323,885 2,323,885
Paid-in capital 1,275,131 1,275,131
Retained earnings (accumulated deficit) (330,940) 2,970,543
------------ -----------
3,268,076 6,569,559
Less cost of 30,013 shares of common
treasury stock (793,244) (793,244)
Less cost of 2,000 shares of preferred
treasury stock (126,020) (119,000)
Total shareholders' equity 2,348,812 5,657,315
------------ -----------
Total liabilities and
shareholders' equity $25,377,152 $27,618,642
See accompanying Notes to Consolidated Financial Statements.
[Download Table]
Ira A. Watson Co.
Consolidated Statements of Operations
Year ended
January 3, 1998 December 28, 1996
--------------- -----------------
Net sales $80,440,742 $84,995,230
Cost of goods sold 54,328,227 56,173,879
------------- -------------
Gross profit 26,112,515 28,821,351
Costs and expenses:
Operating, general and
administrative expenses 20,892,433 20,574,836
Provision for depreciation
and amortization 388,925 360,588
------------- -------------
Store operating profit 4,831,157 7,885,927
Corporate(income)expenses:
Corporate operating, general
and administrative expenses 7,228,946 7,549,796
Corporate provision for
depreciation and
amortization 824,600 986,101
Interest income (52,647) (45,525)
Interest expense 1,465,018 1,339,789
------------ -------------
Net corporate expenses 9,465,917 9,830,161
------------ -------------
Operating loss (4,634,760) (1,944,234)
Interest on liabilities under
the Plan of Reorganization (194,380) (282,895)
Gain on sales of property,
plant and equipment 1,588,833 3,550
Loss on store closing (51,150) (45,335)
------------- -------------
Loss before income taxes (3,291,457) (2,268,914)
Income tax (benefit)
Current 10,026 (119,049)
Deferred - (144,728)
------------- -------------
Net income tax expense
(benefit) 10,026 (263,777)
------------ -------------
Net loss $(3,301,483) $(2,005,137)
============ =============
Net loss per Common Share $(10.14) $(6.16)
============ =============
See accompanying Notes to Consolidated Financial Statements.
Ira A. Watson Co.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
[Enlarge/Download Table]
Common Preferred
Capital Paid-In Retained Treasury Treasury
Stock Capital Earnings Stock Stock Total
-----------------------------------------------------------------------
Balance at December 31, 1995 $2,323,885 $1,275,131 $4,975,680 $(793,244) $(83,300) $7,698,152
Purchase of preferred
treasury stock - - - - (35,700) (35,700)
Net Loss - - (2,005,137) - - (2,005,137)
-----------------------------------------------------------------------
Balance at December 28, 1996 2,323,885 1,275,131 2,970,543 (793,244) (119,000) 5,657,315
Purchase of preferred
treasury stock - - - - (7,020) (7,020)
Net Loss - - (3,301,483) - - (3,301,483)
-----------------------------------------------------------------------
Balance at January 3, 1998 $2,323,885 1,275,131 $ (330,940)$(793,244)$(126,020) $2,348,812
=======================================================================
See accompanying Notes to Consolidated Financial Statements
Ira A. Watson Co.
Consolidated Statements of Cash Flows
[Download Table]
Year ended
January 3 December 28
1998 1996
-------------- ---------------
Operating activities
Receipts from customers $81,807,853 $85,693,731
Payments to suppliers (52,221,096) (55,439,866)
Operating, general and
administrative expenses (27,756,125) (28,690,406)
Interest paid (1,593,669) (1,263,265)
Interest received 53,582 44,653
Net income taxes refunded (paid) 175,609 (34,272)
------------ -------------
Net cash provided by operating
activities 466,154 310,575
Investing activities
Purchase of short-term investment (9,081) (6,355)
Proceeds from sales of property,
plant and equipment 1,845,076 24,050
Purchases of property, plant and
equipment (188,925) (577,112)
------------ -------------
Net cash provided by (used in)
investing activities 1,647,070 (559,417)
Financing activities
Purchase of preferred treasury stock (7,020) (35,700)
Proceeds from long-term borrowings - 10,777
Net change in revolving credit
balance 1,465,548 1,497,263
Principal payments on long-term
borrowings (1,705,160) (476,518)
Principal payments on capital
lease obligation (130,591) (110,970)
Advances from landlords - 207,455
Repayment of advances from
landlords (118,857) (97,458)
Payments on liabilities under
the Plan of Reorganization (1,452,929) -
------------ -----------
Net cash provided by (used in)
financing activities (1,949,009) 994,849
Increase in cash and cash
equivalents 164,215 746,027
Cash and cash equivalents at
beginning of year 1,957,622 1,211,615
----------- -----------
Cash and cash equivalents
at end of year $2,121,837 $1,957,622
Ira A. Watson Co.
Consolidated Statements of Cash Flows (continued)
Reconciliation of Net Loss to Net Cash Provided by Operating Activities
[Download Table]
Year ended
January 3 December 28
1998 1996
------------ -------------
Net loss $(3,301,483) $(2,005,137)
Adjustments to reconcile net loss
to net cash provided by operating
activities:
Interest on liabilities under the
Plan of Reorganization 194,380 282,895
Depreciation and amortization 1,213,525 1,346,689
Gains on sales of property and
equipment (1,588,833) (3,550)
Provision for deferred income
taxes (benefit) - (144,728)
Provision for bad debts 162,254 43,265
Changes in operating assets and
liabilities:
Merchandise inventories 722,980 1,131,317
Refundable income taxes 185,635 (153,321)
Other assets 187,081 (525,534)
Accounts payable 2,305,380 397,514
Accrued compensation 130,657 (117,561)
Other liabilities 254,578 58,726
----------- -----------
Net cash provided by operating
activities $ 466,154 $ 310,575
See accompanying Notes to Consolidated Financial Statements.
Ira A. Watson Co.
Notes to Consolidated Financial Statements
January 3, 1998
1. Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Ira
A. Watson Co. ("the Company") and its wholly-owned subsidiary,
Appalachian Distributing Corporation ("Appalachian"). All
significant intercompany accounts and transactions have been
eliminated in consolidation.
Year-end
The Company's fiscal year ends on the Saturday closest to
December 31 and consisted of 53 weeks for the year ended January
3, 1998 ("1997") and 52 weeks for the year ended December 28,
1996 ("1996").
Description of Business
The Company has retail operations conducted in twenty-six stores
across the southeastern United States. The majority of these
stores are located in county seat communities which do not have
major department stores. The Company's main office facility and
distribution center are located in Knoxville, Tennessee. The
Company focuses on first-line brand merchandise, although salvage
merchandise is also sold in selected locations.
Appalachian's principal business activities are real estate and
equipment investments which are leased primarily to the Company.
Merchandise Inventories
Merchandise inventories and related cost of sales are accounted
for by the retail inventory method using the first-in, first-out
(FIFO) basis.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost. The
provision for depreciation of buildings and equipment is based on
the estimated useful lives of the related assets, and leasehold
improvements are being amortized over the shorter of the lease
periods or the useful lives of the improvements. Depreciation
and amortization are computed principally by the straight-line
method.
Investment Tax Credits
Investment tax credits are accounted for by the flow-through
method.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could
differ from those estimates.
Ira A. Watson Co.
Notes to Consolidated Financial Statements (continued)
1. Accounting Policies (continued)
Earnings Per Common Share
Earnings per common share are computed based on the weighted
average number of shares of common stock outstanding during the
year, after giving effect to dividends on preferred stock (no
dividends were paid on preferred stock in 1997 or 1996). In 1997
and 1996, the weighted average number of shares used to compute
earnings per share was 325,504.
Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents.
Reclassifications
Certain amounts in the prior year have been reclassified to
conform with 1997 classifications.
2. Chapter 11 Reorganization
On February 18, 1992, the Company filed a voluntary petition for
reorganization under Chapter 11 of the Federal Bankruptcy Code in
the United States Bankruptcy Court for the Eastern District of
Tennessee (the "Bankruptcy Court"). The filing did not include
the Company's wholly-owned subsidiary, Appalachian.
As Debtor-in-Possession, the Company continued to operate its
business and manage its properties. The Company formulated a
business plan for future operations. This plan formed the basis
for the Company's proposed plan of reorganization that was
intended to enable the Company to satisfy its pre-petition
obligations and emerge from Chapter 11. This proposed plan of
reorganization developed into the Third Amended Plan of
Reorganization dated November 5, 1993 (as implemented and
approved by the Confirmation Order, the "Plan of
Reorganization"). On November 10, 1993, the Bankruptcy Court
entered an order confirming the Plan of Reorganization.
The Plan of Reorganization provided that holders of claims in
Class 1 (Norwest Bank Minnesota, N.A., and any other lender which
provided Debtor-in-Possession financing on a super priority
basis), Class 2 (Administrative Claims), Class 3 (Tax Priority
Claims), Class 8 (Executory Contract Claims), Class 9 (IAW Stock
Bonus and PAYSOP Retirement Plan) and Class 13 (Northwestern
Mutual Life) receive cash payments in an amount equal to the
allowed claims of such holders and the holder of the claim in
Class 4 (Fidelity Mutual Life Insurance Company) be repaid as
outlined in Note 6. The Plan of Reorganization provided that
holders of claims in Class 5 (unsecured creditors with allowed
claims less than $7,500) could elect payment of 60% of their
respective claims upon confirmation or become a member of Class 6
and be treated accordingly. The Plan of Reorganization provided
that holders of claims in Class 6 (unsecured creditors with
allowed claims of $7,500 or more) and certain holders of claims
in Class 6A (Bank Group Term Loan) receive annual installments
through December 1998 in amounts equal to the allowed claims of
such holders and remaining holders of claims in Class 6A be
repaid as outlined in Note 6. The Plan of Reorganization
provided that holders of claims in Class 7 (accrued vacation) be
paid in annual installments through December 1998 if
a former employee and revested if a current employee. Holders of
claims in Class 10 (First Preferred Shareholders) and Class 11
(Adjustable Rate Cumulative Preferred Series A Shareholders) will
retain their preferred stock and cumulative dividends will
continue to accrue, although no dividends will be paid until all
Classes other than Classes 4 and 6A have been paid in full.
Holders of claims in Class 12 (Common Shareholders) will retain
their common stock and no dividends will be paid until all
Classes other than Classes 4, 6A, 10 and 11 have been paid-in-
full.
In accordance with the provisions of the American Institute of
Certified Public Accountants Statement of Position 90-7 (AICPA
SOP 90-7), "Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code," the Company did not adopt fresh-start
reporting upon consummation of the Plan of Reorganization. The
Company did not qualify for fresh-start reporting because holders
of voting shares were the same before and after confirmation of
the Plan of Reorganization.
3. Chapter 11 Final Decree
On September 13, 1995, the Bankruptcy Court entered an order of
final decree that the Company's bankruptcy case was closed.
4. Reorganization Items
As discussed in Note 2, certain members of Classes 6 and 7 will
be repaid in future installments equal to their respective
allowed claims. The Plan of Reorganization did not provide for
interest to be paid on these claims. However, AICPA SOP 90-7
requires that liabilities compromised by confirmed plans be
stated at the present value of amounts to be paid, determined at
appropriate current interest rates. Accordingly, the Company
recorded the present value of the future installments using an
interest rate of 8.25% as a liability in the Consolidated Balance
Sheet and recognized a gain on debt settlement. This gain will
be offset by the recognition of interest expense in prior and
future years (see below).
A summary of liabilities payable under the Plan of Reorganization
is as follows:
January 3 December 28
1998 1996
Class 6 - due in annual installments
of $1,318,523 through December 1998 $2,402,493 $3,368,996
Class 7 - due in annual installments
of $5,574 through December 1998 5,149 14,300
----------- -----------
2,407,642 3,383,296
Less current portion 2,407,642 2,176,551
----------- -----------
Long-term portion $ - $1,206,745
The 1996 payment was made subsequent to year-end on December 31,
1996. The Company did not make the December 31, 1997, payment to
Class 6 creditors. On April 2, 1998, the Company received
approval from the Creditors Committee to defer the December 31,
1997, payment to Class 6 creditors until June 30, 1998.
The Company is required to make accelerated distributions to
Classes 6 and 6A in an amount equal to excess cash flow as
defined by the Plan of Reorganization. No accelerated
distributions were required for 1997 or 1996.
5. Capital Stock
Capital stock includes the following as of January 3, 1998, and
December 28, 1996:
First Preferred Stock, par value $100 per
share, 7% cumulative, redeemable at $103
per share:
Authorized--1,000 shares
Issued and outstanding--463 shares $ 46,300
Adjustable Rate Cumulative Preferred Stock
Series A, par value $100 per share,
dividend rate variable from 6%-12%,
redeemable at the rate of one share for
five shares of Common Stock:
Authorized--5,000 shares
Issued and outstanding--5,000 shares,
including shares held in treasury 500,000
Common Stock, no par, stated value--$5 per
share:
Authorized--500,000 shares
Issued and outstanding--355,517 shares,
including shares held in treasury 1,777,585
-----------
$2,323,885
===========
During 1996, Appalachian purchased 600 shares of Adjustable Rate
Cumulative Preferred Stock Series A from the Ira A. Watson Co.
Employee Stock Ownership (ESOP) and PAYSOP Retirement Plan ("ESOP
Plan"), respectively. The sales price was determined to be
$35,700 based on an independent appraisal of the stock as of
December 31, 1994. During 1997, an additional $7,020 was paid by
Appalachian based on an updated appraisal as of December 30,
1995. As of January 3, 1998, Appalachian has purchased a total
of 2,000 shares of this stock for $126,020.
Dividends on the shares of First Preferred and Series A
Adjustable Rate Cumulative Preferred stock are cumulative and
must be paid in the event of liquidation and before any
distribution to holders of Common Stock. The Company has not
made any dividend payments on its preferred or common stock since
1991, and the ability to pay dividends in the future is limited
by the provisions of the Company's Plan of Reorganization (Note
2) and debt agreements (Note 6). Cumulative dividends on
preferred shares that have not been declared or paid since 1991
are approximately: First Preferred - $16,205 ($35 per share) and
Series A Adjustable Rate Cumulative Preferred - $133,800 ($30 per
share).
The First Preferred and Series A Adjustable Rate Cumulative
Preferred Shareholders have liquidation preferences of $103 and
$100 per share, respectively. First Preferred Shareholders shall
be entitled to full payments before any payments are made to
Series A Adjustable Rate Cumulative Preferred Shareholders. If
net assets are not sufficient for full payment of these
liquidation preferences, the net assets shall be distributed
ratably to the Preferred Shareholders. If following the
liquidation preference distributions there are assets of the
Company remaining to be distributed, these assets would be
distributed ratably to the Common Shareholders. The First
Preferred shareholders are not entitled to any voting power,
except that these shareholders will be entitled to vote as a
separate class to elect one director in the event of two
consecutive defaults in the payment of quarterly dividends and
may elect a majority of the directors in the event of eight
consecutive defaults in the payment of quarterly dividends. Any
such privilege shall be retained, when once acquired, until all
accumulated dividends are paid. Except as any provision of the
law may otherwise require, the Series A Adjustable Rate
Cumulative Preferred Shareholders are not entitled to any voting
power.
The First Preferred Stock and Adjustable Rate Cumulative
Preferred Stock Series A are subject to redemption at any time at
the determination of the Board of Directors.
The Company's authorized capital also includes 5,000 shares of
Adjustable Rate Cumulative Preferred Stock Series B and 50,000
shares of Junior Cumulative Preferred Stock, each having a par
value of $100 per share. No shares of these stocks have been
issued. The Adjustable Rate Cumulative Preferred Stock Series B
may be converted into Common Stock at the rate of four shares of
Common for each share of Preferred. With respect to dividends,
the holders of outstanding Adjustable Rate Cumulative Preferred
Stock Series B shall be entitled to receive quarterly dividends
at a variable rate ranging from 6% to 12%. Dividends on the
Junior Cumulative Preferred Stock will be determined by the Board
of Directors.
All common stock shares held by the ESOP Plan are treated as
outstanding in computing the Company's earnings per share.
6. Leases
The Company leases land and buildings for use as retail
department stores and certain data processing and other
equipment. The land and buildings are leased under long-term
noncancelable operating leases expiring at various dates through
2010 and include contingent rentals based on sales in excess of
stipulated amounts. Several of the building leases have renewal
options for additional periods of up to thirty years. Data
processing equipment is leased under noncancelable operating
leases expiring in 1999 and a capital lease agreement expiring in
1998. The operating leases include an option to purchase at the
end of the lease term for fair market value.
Future minimum payments, by year and in the aggregate, under the
capital lease and noncancelable operating leases with initial or
remaining terms of one year or more consisted of the following at
January 3, 1998:
Capital Operating
Lease Leases
----------- -----------
1998 $151,866 $ 3,442,704
1999 - 3,309,540
2000 - 3,027,616
2001 - 2,922,984
2002 - 2,824,336
Thereafter - 12,348,158
---------- ----------
Total minimum lease payments 151,866 27,875,338
Sublease income to be received - (263,612)
---------- ----------
151,866 $27,611,726
Amounts representing interest (11,703)
---------
Present value of future minimum
lease payments $140,163
Amortization of assets under capital lease agreements is included
with depreciation expense in the financial statements. Rental
expense for all operating leases consisted of:
Year ended
January 3 December 28
1998 1996
--------- -----------
Minimum rentals $3,843,798 $3,666,466
Contingent rentals based on sales 90,999 98,598
---------- ----------
$3,934,797 $3,765,064
Certain landlords have advanced money to the Company when the
related lease was signed to assist with items such as fixtures
and other expenditures related to store openings. These advances
are to be repaid over the term of the lease through lease
payments. Advances of this nature totaled $207,455 in 1996.
These deferred rent credits are summarized as follows:
January 3 December 28
1998 1996
Portion classified as current
liability $ 68,857 $118,857
Portion classified as long-term
liability 662,237 731,094
--------- ---------
$731,094 $849,951
7. Notes Payable and Long-term Debt
Long-term debt is summarized as
follows:
January 3 December 28
1998 1996
Ira A. Watson Co. (Parent Company)
8.25% note payable to insurance
company, due in monthly installments
of $46,750, including interest,
through October 2003, when the
unpaid balance will be due, as
specified in the Plan of
Reorganization (Class 4) $ 4,634,336 $ 5,988,799
Unsecured notes payable to banks, due
in annual installments of $121,165,
plus interest at 6%, through 2001,
as specified in the Plan of
Reorganization (Class 6A) 424,078 666,409
Revolving loan and security agreement
with financial institution (see
below) 5,937,544 4,471,996
Other 21,473 23,195
------------ -----------
Total Ira A. Watson Co.
(Parent Company) long-term debt 11,017,431 11,150,399
Less portion classified as current
liability 717,184 319,432
------------ -----------
Long-term portion $10,300,247 $10,830,967
The insurance company loan agreement requires the Company to,
among other things: (a) meet certain working capital
requirements, (b) limit additional indebtedness and (c) limit the
payment of dividends on Common Stock and certain other payments.
The agreement is collateralized by property and equipment with a
cost of $5,424,004. During 1997, the Company sold a portion of
the property, plant and equipment collateralizing the agreement
resulting in net proceeds of approximately $1,700,000. These
proceeds were used principally to reduce debt outstanding under
the agreement. Also, $408,561 of the proceeds was placed in
escrow to cover income taxes and other items associated with the
transaction; this amount is included in cash and cash equivalents
in the January 3, 1998, Consolidated Balance Sheet. As no taxes
or other items will be paid for 1997 due to the Company's net
operating loss position (see Note 9), the amount will be used to
reduce debt outstanding under the agreement in 1998; accordingly,
this amount has been included in the current portion of long-term
debt.
The Company borrows operating funds under a revolving loan and
security agreement with a financial institution which was amended
March 30, 1998. The agreement now allows maximum credit,
including amounts available for the issuance of documentary
overseas letters of credit, equal to the lesser of $12,000,000 or
60% of the Company's eligible merchandise inventories. This
agreement expires in December 1999, with provisions for renewal.
Interest is payable monthly on any used portion at prime plus 2%.
This agreement also has annual facility fees of 0.5% of the
average monthly unused portion of the maximum credit and is
collateralized by a first priority security interest in all of
the Company's personal property, including merchandise
inventories, accounts receivable, cash and cash equivalents, all
other rights to payment, certain fixtures and equipment and
general intangibles. This agreement requires the Company to,
among other things, maintain a minimum adjusted tangible net
worth and not pay any dividends. The Company failed to meet this
minimum adjusted tangible net worth covenant for the quarter
ended April 4, 1998. However, the Company obtained a waiver
dated May 12, 1998 so that the loan is not in default.
The Company has obtained two standby irrevocable letters of
credit from two financial institutions providing for aggregate
credit limits of $400,000 and $200,000, respectively, for sight
drafts on overseas purchases presented by company suppliers. The
$400,000 letter of credit expires in March 1998 and is
collateralized by a $400,000 United States Treasury Bill maturing
in March 1998. This Treasury Bill has a carrying value of
$417,107 and is classified as a short-term investment in the
Consolidated Balance Sheet. The $200,000 letter of credit
expires in December 1998. Subsequent to year-end, the expiration
date of the $400,000 letter of credit and maturity of the
Treasury Bill were extended to March 1999.
January 3 December 28
1998 1996
----------- ------------
Appalachian Distributing Corporation
Notes payable to various banks, due
in monthly installments totaling
$1,722 including interest, with
the unpaid balances due on various
dates (from August 1998 to April
1999), with interest at varying
rates (from 8.25% to 8.9% at
January 3, 1998), collateralized
by the assignment of leases with
Ira A. Watson Co. and property and
equipment with a cost of $63,962 $ 16,157 $ 114,377
Notes payable repaid in 1997 - 8,424
----------- -----------
Total Appalachian Distributing
Corporation long-term debt 16,157 122,801
Less portion classified as current
liability 13,872 105,710
---------- -----------
Long-term portion $ 2,285 $ 17,091
Summary of long-term debt:
Total long-term debt of Ira A. Watson
Co. and subsidiary $11,033,588 $11,273,200
Less portion classified as current
liability 731,056 425,142
----------- -----------
Long-term portion $10,302,532 $10,848,058
Scheduled maturities of long-term debt for the next five years as
of January 3, 1998, are as follows:
Appalachian
Ira A. Distributing
Watson Co. Corporation Total
----------------------------------------
1998 $ 717,184 $13,872 $ 731,056
1999 6,156,119 2,285 6,158,404
2000 214,259 - 214,259
2001 161,660 - 161,660
2002 109,829 - 109,829
Thereafter 3,658,380 - 3,658,380
------------------------------------------
$11,017,431 $16,157 $11,033,588
8. Income Taxes
For tax purposes at January 3, 1998, the Company has net
operating loss, general business credit and alternative minimum
tax credit carryovers. These carryovers expire as follows:
[Enlarge/Download Table]
Net Operating Loss Carryover General Alternative
Alternative Business Minimum
Year Year of Regular Minimum Credit Tax Credit
Generated Expiration Tax Tax Carryover Carryover
-----------------------------------------------------------------------------
1983 1998 $ - $ - $ 16,636 $ -
1984 1999 - - 102,653 -
1985 2000 - - 92,611 -
1987 n/a - - - 15,276
1988 n/a - - - 86,474
1989 n/a - - - 13,749
1993 n/a - - - 20,486
1994 n/a - - - 28,324
1996 2011 1,503,389 1,033,927 - -
1997 2012 2,804,120 2,804,120 - -
--------- --------- --------- ---------
$4,307,509 $3,838,047 $211,900 $164,309
For financial statement purposes, a valuation allowance of
$1,924,140 has been recognized to offset a portion of the
deferred tax assets related to these carryovers. The valuation
allowance was increased $1,183,247 in 1997 and $534,681 in 1996.
Carryovers of $78,457 were used to reduce deferred income tax
liabilities in 1996.
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 Company's
deferred tax assets and liabilities are as follows:
January 3 December 28
1998 1996
----------- -------------
Deferred tax liabilities:
Tax over book depreciation $ 380,592 $ 535,440
Gains on debt settlements 38,355 111,272
Prepaid expenses deducted for tax
purposes 209,170 212,787
Other 80,472 104,757
---------- ---------
Total deferred tax liabilities 708,589 964,256
Deferred tax assets:
Capitalized inventory costs 343,158 357,306
Vacation accruals 82,984 106,550
Health claims accruals 106,288 96,798
Tax credit carryovers 2,011,339 1,079,335
Other 88,960 65,160
---------- ---------
Total deferred tax assets 2,632,729 1,705,149
Valuation allowance for deferred tax
assets (1,924,140) (740,893)
Net deferred tax assets 708,589 964,256
Net deferred taxes $ - $ -
Significant components of the provision for income tax expense
(benefit) are as follows:
1997 1996
--------- --------
Current:
Federal $ - $(140,359)
State 10,026 21,310
----------- ----------
Total current 10,026 (119,049)
Deferred:
Federal - (137,815)
State - (6,913)
--------- ----------
Total deferred - (144,728)
Net income tax expense (benefit) $ 10,026 $(263,777)
========== ============
The net income tax benefit is less than the amount that would
result from applying U. S. statutory rates to loss before income
taxes due mainly to reserves being established for tax carryovers
being generated.
9. Benefit Plans
The Company has a noncontributory employee stock bonus (ESOP) and
PAYSOP retirement plan which covers substantially all permanent
employees. In each plan year during which there are sufficient
profits, the Company contributes an amount equal to 1% of
eligible participants' compensation. Additional amounts may be
contributed at the option of the Company. The Company has not
made contributions to this plan for 1997 or 1996. The Company
has a $83,711 note receivable from this plan at January 3, 1998,
under which interest at prime plus 1% (10.25% at January 3,
1998), is payable annually and the outstanding principal is due
in December 1999. Interest accrued since 1995 totaling $22,750
(including $8,144 in 1997 and $7,227 in 1996) is included in the
note receivable on the Consolidated Balance Sheet.
The Company also has a profit sharing plan established pursuant
to Section 401(k) of the Internal Revenue Code which also covers
substantially all permanent employees. Under the terms of this
plan, Company contributions are at the discretion of management.
Company contributions totaled $18,170 in 1997 and $23,799 in
1996.
The Company has a self-funded plan for employee accident and
health insurance. A liability has been established for those
claims incurred but not paid prior to year-end. The Company's
risk is $75,000 per covered employee up to an annual maximum of
$1,559,034. An insurance company has insured $2,000,000 of
claims exceeding $1,559,034 with a maximum of $500,000 per
employee, with the Company at risk on all claims exceeding the
$2,000,000 insured amount. Expense of this Plan was $933,064 in
1996 and $770,403 in 1996.
10. Cash and Cash Equivalents
As of January 3, 1998, the Company has cash and cash equivalents
on deposit with financial institutions and cash funds as follows:
Carrying Financial Institution
Amount Balance
---------- ------------------------
Insured (FDIC) $ 925,316 $ 794,353
Uninsured 984,966 1,839,104
Cash funds 211,555 -
---------- ------------
$2,121,837 $2,633,457
The financial institution balance exceeds the carrying amount due
primarily to checks which have been recorded by the Company but
have not been processed by the financial institution.
11. Incentive Stock Option Plan
The Company has an incentive stock option plan under which
options may be granted to certain key employees to purchase
shares of the Company's common stock. Under the terms of the
Plan, 30,000 shares of stock are reserved for issuance. No
options have been granted as of January 3, 1998.
12. Deferred Costs
Deferred costs consist principally of costs associated with
obtaining loan agreements. These costs are being amortized over
the term of the related debt agreement using the straight-line
method. The unamortized portion of these costs is summarized as
follows:
January 3 December 28
1998 1996
---------- ------------
Total deferred costs $649,298 $693,025
Less accumulated amortization 488,581 433,462
--------- --------
Net deferred costs 160,717 259,563
Less current portion 93,103 98,531
--------- --------
Long-term portion $ 67,614 $161,032
13. Advertising Costs
Advertising costs are expensed as incurred and range from 4% to
5% of purchases at retail.
14. Private Label Credit Card
During 1996, the Company entered into a credit card program and
security agreement with a financial institution that provided for
the issuance of a private label credit card. The agreement
provides for the Company to sell the related charge card
receivable with full recourse to the financial institution at a
defined discount rate over the term of the agreement (1.25% and
1.4% during the 1997 and 1996, respectively). The Company bears
the loss on all charge card receivables deemed uncollectible and
established a reserve for these accounts of $105,000 (uncollected
balance of approximately $1,980,000) as of January 3, 1998, and
$43,265 (uncollected balance of approximately $1,700,000) as of
December 28, 1996. The Company does not require collateral from
these customers. Costs associated with the establishment and
maintenance of the credit card program are expensed as incurred.
15. Loss on Store Closings
The Company closed two stores in 1997. Costs associated with the
closings of $51,150 were recognized in 1997, including results of
operations from October 7, 1997, until the date the stores were
actually closed (net sales of $1,375,444).
The Company closed one store in 1996. Costs associated with the
closing of $45,335 were recognized during 1996, including results
of operations from March 7, 1996, until the date the store was
actually closed (net sales of $666,426).
16. Continuing Operations
Operating losses in 1997, 1996 and 1995 caused by declining net
sales and margins have caused the Company to experience cash flow
problems. The ability of the Company to continue as a going
concern is dependent on management's ability to restore
profitable operations and maintain adequate financing until cash
flow from operations is sufficient.
Management has implemented revised merchandising and marketing
strategies to enhance the Company's operations. In addition to
the stores closed in 1997, the Company has closed an additional
store in 1998 and is considering additional closings. The stores
being closed have consistently had operating losses. Also,
organizational downsizing and other cost reductions implemented
after January 3, 1998, are expected to help restore profitable
operations. Finally, subsequent to January 3, 1998, the Company
has been able to obtain revisions and/or waivers of financial
covenants in its revolving loan and security agreements in order
for the loans to continue to be not in default.
In addition to the above actions, management has made contingency
plans which they do not expect to utilize unless the benefits of
the above strategies are not realized as expected. In order to
ensure that cash flow needs are met, discussions with viable
sources of equity financing, the Company's banks and potential
new sources of debt financing are being actively conducted by
management.
Management is confident the above actions will enable the Company
to resume profitable operations and continue as a going concern.
17. Contingency
During 1997, the Company received a $367,500 claim against the
Company for future wages by an employee asserting a breach of an
employment contract. Management believes, according to the terms
of the employee's contract, there is little merit to the claim
and intends to vigorously defend their position. No amounts have
been recorded by the Company as the amount of loss, if any, is
not presently determinable.
Dates Referenced Herein
| Referenced-On Page |
|---|
| This ‘8-K/A’ Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| Filed on: | | 9/11/98 | | | | | | | None on these Dates |
| | 6/30/98 | | 10 |
| For Period End: | | 6/29/98 |
| | 5/12/98 | | 3 | | 10 |
| | 4/4/98 | | 10 |
| | 4/2/98 | | 3 | | 10 |
| | 3/30/98 | | 10 |
| | 3/6/98 | | 3 |
| | 1/3/98 | | 1 | | 10 |
| | 12/31/97 | | 10 |
| | 10/7/97 | | 10 |
| | 12/31/96 | | 10 |
| | 12/28/96 | | 1 | | 10 |
| | 3/7/96 | | 10 |
| | 12/31/95 | | 7 |
| | 12/30/95 | | 10 |
| | 9/13/95 | | 10 |
| | 12/31/94 | | 10 |
| | 11/10/93 | | 10 |
| | 11/5/93 | | 10 |
| | 2/18/92 | | 10 |
| List all Filings |
↑Top
Filing Submission 0000804125-98-000011 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)
Copyright © 2024 Fran Finnegan & Company LLC – All Rights Reserved.
About — Privacy — Redactions — Help —
Fri., Apr. 19, 6:22:40.3pm ET 