ITEM 1. BUSINESS
GENERAL - -------
Roberds, Inc.(1) is a leading retailer of a broad range of home furnishing products, including furniture, bedding, major appliances, and high technology consumer electronics. During 1999, the Company operated in three geographic segments: the Ohio market, which includes six stores in the greater Dayton, Ohio area and a single megastore in Cincinnati, Ohio; the greater Atlanta, Georgia market, which includes nine stores; and the greater Tampa, Florida market, which included eight stores.
On January 19, 2000, the Company filed for protection under Chapter 11 of the Federal bankruptcy laws, and announced that it was closing its Tampa, Florida market and the Cincinnati, Ohio store, and offering for sale the Atlanta (Buckhead), Georgia store facility. The Company announced that it would focus its efforts on turning around the financial performance in its remaining markets, Dayton, Ohio and Atlanta, Georgia. The Company is operating as a debtor-in-possession under case number 00-30194, Southern District of Ohio, Western Division, Dayton, Ohio.
The Company was incorporated in 1971 under the laws of the State of Ohio. Its executive offices are located at 1100 East Central Avenue, Dayton, Ohio 45449-1888, its mailing address is P.O. Box 8729, Dayton, Ohio 45401-8729, and its telephone number is (937) 859-5127. The Company's common shares trade on the Nasdaq SmallCap Market, under the symbol "RBDSQ." As described in Item 5 below, trading in the Company's shares was halted by Nasdaq following the Company's announcement that it would seek protection under the federal bankruptcy laws.
FORWARD-LOOKING STATEMENTS - --------------------------
In the interest of providing the Company's shareholders and potential investors with information concerning management's assessment of the outlook for the Company, this report contains certain "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Readers should bear in mind that statements relating to the Company's business prospects, as distinct from historical facts, are forward-looking statements which, by their very nature, involve numerous risks and uncertainties. For discussion of certain of such risks and uncertainties, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Forward-Looking Statements."
OPERATING STRATEGY - ------------------
The Company's objective is to be the leading retailer of furniture, bedding, major appliances, and high technology consumer electronics products in each of its markets. Key elements of the Company's operating strategy include the following:
DISTINCTIVE PRODUCT MIX. The Company's product mix is a key element of its operating strategy. Roberds' product mix is distinctive within the retailing industry, and management believes it provides Roberds with several competitive advantages over retailers offering only one or two of the Company's product categories. The Company's major appliance and consumer electronics product lines generate significant store traffic, sales volume, and gross profit dollars,
- --------------------- (1) Roberds, Inc. is also referred to herein as "the Company," "Registrant," and "Roberds."
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enabling Roberds to price its furniture products more aggressively than competing furniture retailers. The Company's higher-margin furniture and bedding products enable it to offer its appliance and consumer electronics products at prices equal to or below those of its competitors. The Company believes that its mix of products provides a strategic advantage over certain of its competitors.
Management believes that the Company's product mix generates significant operating efficiencies. Such efficiencies result from the higher level of sales per store generated by the Company's diverse product mix, providing Roberds with significant leverage of its fixed costs, including distribution, warehousing, store facilities, advertising, and general and administrative expenses. The Company's product mix enables Roberds to offer complementary products in a single package in a way in which many of its competitors cannot, and offers cross-selling opportunities that do not exist for many of the Company's competitors.
PRODUCT PRICING STRATEGY. The Company's product pricing strategy is to offer its merchandise at competitive prices throughout the year. Roberds shops its competition regularly, and attempts to set its prices equal to or below those of its competitors. At the time of sale, and for 30 days thereafter, the Company guarantees to its customers that its prices are equal to or below those of its competitors.
BROAD SELECTION OF NAME-BRAND MERCHANDISE. The Company sells name-brand products generally recognized by consumers, including many higher quality brands. The Company's stores, which average approximately 60,000 square feet in size, are larger than the stores of many of its competitors. This enables the Company to attractively display a wide variety of products that appeal to a broad range of consumer tastes, incomes, and age groups. As a result, Roberds can offer its customers "one-stop" shopping for almost every home furnishing product, thereby facilitating the purchasing process and reducing the need for comparison shopping.
STORE CONCENTRATION AND EFFICIENCIES. Roberds operates in metropolitan areas of at least one million people. The Company has concentrated multiple stores in order to enhance name recognition, achieve market penetration, and gain economies of scale in distribution, advertising, and management costs. The Company advertises in newspapers, on television and radio, and through direct mail, and is able to benefit from the advertising efficiencies of locating multiple stores within its geographic marketing areas. The Company's "hub and spoke" warehouse and delivery functions also create operating leverage by serving multiple stores from a regional facility.
CORPORATE COMMITMENT TO CUSTOMER SERVICE. The Company gives managers full authority to respond to customer issues. Unlike many of its competitors, Roberds employs commissioned, trained, professional sales associates, who are knowledgeable about the products they sell, and almost all of whom are employed full time by the Company. On in-stock merchandise, the Company offers delivery within two days, for a reasonable charge, seven days per week. Roberds offers same-day and next-day delivery service on selected merchandise. Roberds has a competitive policy on replacements and returns. Roberds removes the customer's old merchandise free of charge. In addition, Roberds offers service contracts that provide additional warranty coverage beyond that which is provided by the manufacturer.
OPERATIONS. The Company has experienced operating losses in each of the last four years. The Company is implementing a series of changes in its operating strategy and the day-to-day execution of its business that are designed to improve its operating results. These changes are outlined throughout this Report, and are summarized below in Management's Discussion and Analysis of Financial Condition and Results of Operations-Outlook.
EXPANSION STRATEGY - ------------------
ENTRY INTO NEW MARKETS. The Company has no plans to enter new markets during 2000.
RELOCATION OR EXPANSION WITHIN EXISTING MARKETS. The Company believes that the growth of the Atlanta, Georgia area may present opportunities to relocate one or more of its existing Atlanta area stores, and may also present opportunities for new locations. The Company is exploring such relocations and expansions during for possible implementation
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in 2001 and beyond. However, the Company's ability to relocate or expand is constrained by its financial condition and its line of credit.
STORE RENOVATIONS. The Company periodically renovates and upgrades its existing stores to keep them fresh and to support changes in its product offerings. In October 1999, Roberds opened a state-of-the-art electronics display in its Norcross, Georgia store. During the third quarter of 1999, the Company opened a Roberds Mattress Outlet in a vacant building in the parking lot of the Forest Park, Georgia store. In addition, the two clearance centers that had been operating within existing stores in the Atlanta market were consolidated into a single, new clearance center located in space adjacent to the full-line Forest Park store.
GENERAL. The Company's growth depends, in part, on its ability to expand into new markets and, to a lesser extent, its ability to open new stores within its existing market areas. There is no assurance that the Company will be able to locate favorable store sites and arrange favorable leases for new stores; open new stores in a timely manner; or hire, train, and integrate employees and managers in those new stores; or that the Company will have access to sufficient financial resources to permit further expansion. Similarly, there can be no assurance that the Company can enter new markets successfully.
MERCHANDISING AND PRODUCT LINES - -------------------------------
DISTINCTIVE FORMAT. Roberds' merchandising format, combining furniture, bedding, major appliances, and high technology consumer electronics products in the same store, is an important aspect of the Company's operations and a point of significant differentiation from its competitors. The Company's traditional stores are larger than the stores of most of its competitors, averaging approximately 60,000 square feet in size. These larger stores allow the Company to attractively display a wide selection of products and allow flexibility in expanding and contracting merchandise categories to meet changing consumer tastes and to introduce new products. Roberds' stores are organized into specialized departments, each offering a wide selection of merchandise. The breadth of merchandise within each product line is designed to provide customers with a varied selection and to reduce the need for customers to comparison shop.
Roberds' furniture merchandise is priced to achieve gross margins that are attractive for the Company, but competitive with those of other furniture retailers. The Company's appliance and consumer electronics businesses have lower margins, higher turnover, and tend to be somewhat more seasonal and cyclical than furniture sales. However, the competitively priced appliance and consumer electronics products generate customer traffic for the higher margin furniture items and allow the Company to spread its operating expenses over a larger base of sales. In addition, management believes the Company's major appliance and high technology consumer electronics product offerings increase the frequency of customer visits and create consumer loyalty, which leads customers to shop for furniture at Roberds.
FURNITURE PRODUCTS. Roberds carries a broad selection of name-brand furniture products. In addition, the Company offers a broad range of special-order products. Unlike many other retailers, Roberds uses the same pricing formula for special-order merchandise as it does for in-stock merchandise. Furniture sold by the Company includes traditional, American country, eighteenth century, and contemporary styles, and includes living room, dining room, and bedroom furniture, tables, lamps, dinettes, reclining furniture, sleep sofas, desks, and chairs. The Company offers extensive selections of both upholstered and leather furniture, as well as casegoods. Roberds also sells furniture accessory items including pictures, mirrors, vases, mantle pieces, wall hangings, and related goods. Furniture brands carried by Roberds represent the middle to upper-middle range of price, and include Action by Lane, Broyhill, Chromcraft, Flexsteel, Kincaid, Natuzzi, and Pennsylvania House, among others.
BEDDING PRODUCTS. The Company offers products from Sealy, Serta, and Simmons, the three largest manufacturers of bedding sold in the United States, as well as Stearns & Foster. Bedding products include wooden and brass bed
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frames, mattresses, box springs, water beds, and futons. The brand names sold by the Company cover the full range of bedding quality, except that the Company does not compete in the private-label segment.
MAJOR APPLIANCE PRODUCTS. Roberds' major appliance products include refrigerators, freezers, ranges, washers, dryers, dishwashers, trash compactors, disposals, room air conditioners, microwave ovens, dehumidifiers, and vacuum cleaners. The Company also sells some specialty appliance products such as under-counter refrigerators, built-in appliances, and cooktops. Roberds carries the major appliance brands sold in the United States, ranging in price from moderately low to very high. Major appliance brands carried by the Company include Amana, Frigidaire, General Electric, JennAir, KitchenAid, Maytag, and Whirlpool, among others.
HIGH TECHNOLOGY CONSUMER ELECTRONICS PRODUCTS. High technology consumer electronics products sold by the Company include portable, console, and big screen televisions; VCRs; camcorders; stereo systems and audio components; and satellite systems. The Company focuses its efforts on large, big-ticket electronics products, in particular, home theater systems and components, rather than the small-ticket items carried by many mass merchants. The Company offers products from most of the major consumer electronics manufacturers, ranging in price from lower-middle to high. Consumer electronics brands carried by the Company include Bose, JVC, Mitsubishi, Pioneer, RCA, Sony, Toshiba, and Zenith, among others.
Roberds has dedicated "home theater" displays in its stores. This merchandising concept blends stereo televisions with supplemental audio equipment, to give the consumer a movie viewing experience comparable to that enjoyed in theaters. Because of its ability to offer these products together with complementary furniture products, particularly entertainment centers and recliners and other "motion" furniture, Roberds believes that it is well positioned to capitalize on the home theater merchandising concept. The Company has added high-definition television ("HDTV") and plasma television to its product line, and has identified digital products as a source for revenue growth.
OTHER. Selected floor-covering products are offered in the Ohio market.
ADVERTISING AND PROMOTION - -------------------------
Roberds employs a combination of newspaper, broadcast, and direct mail advertisements. Newspaper advertisements typically account for the majority of gross advertising expenditures, with broadcast, direct mail, and other forms of advertising constituting the balance. The Company uses a combination of newspaper "run of press" advertising, contained in the body of the newspaper, and "preprint" advertising, which is inserted into the newspaper. The Company advertises continuously during the year, but most heavily during peak retailing seasons such as Thanksgiving and Christmas and for other special promotional programs. Roberds utilizes broadcast advertising primarily Wednesday through Sunday, in newspapers primarily Friday through Sunday, and runs direct mail programs periodically. Roberds runs a variety of promotional programs that range in duration from one to fourteen days.
The Company has an in-house advertising department for the planning, preparation, and production of advertising, and for coordinating advertising with the Company's merchandising policies and programs. The Company employs an advertising agency for the production of broadcast advertising and for assistance in developing its overall advertising strategy. Advertising for all market areas is developed around common themes and promotions, but product prices are varied by market to meet each market's needs and to maintain Roberds' commitment to be competitively priced.
CUSTOMER PROFILE - ----------------
Roberds targets consumers who are 25 to 54 years of age, are married, and have annual household incomes greater than $30,000. The Company believes such customers are typically interested in purchasing high-quality merchandise at prices that provide good value. Management also believes that Roberds has a high proportion of repeat shoppers.
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CUSTOMER SERVICE AND CONVENIENCE - --------------------------------
The Company stresses superior customer service. Store managers have broad discretion to meet customers' needs. Roberds' stores are open 362 days each year. The stores are open from 10:00 a.m. to 9:00 p.m., Monday through Saturday, and 11:00 a.m. to 6:00 p.m., Sundays, providing ample opportunity for customers to shop. Store hours are extended during peak selling seasons. Roberds employs commissioned, trained, professional sales associates who are knowledgeable about the products they sell, and almost all of whom are employed full time by the Company.
When a customer is interested in an item of merchandise that is carried in stock, sales associates determine the item's availability from real-time computer terminals located throughout the selling area. Similarly, if a customer special-orders merchandise, the Company's computer system allows the customer to know at any time the status of the order and the expected delivery date. Customer inquiries after the sale are generally referred first to the salesperson who made the sale, so as to maintain a friendly customer relationship and encourage customer satisfaction and loyalty.
For furniture, major appliances, and consumer electronics products, Roberds offers third-party service contracts that provide additional warranty coverage beyond that which is provided by the manufacturer. The terms of the extended warranty contracts range from nine months to ten years. Roberds provides service for everything it sells. Roberds performs its own furniture and bedding repair service in all markets. Appliance and electronics repair services are provided with a combination of in-house staff and outside providers with whom Roberds has working relationships.
HOME DELIVERY SYSTEM - --------------------
Roberds believes that its system for delivery of merchandise to its customers is convenient for the customer and a strategic advantage. At the time of purchase, customers can elect to take in-stock merchandise with them or schedule it for delivery. Over 80 percent of the merchandise sold is delivered. If the customer wants to arrange a delivery, it is scheduled at the time of sale, on the sales floor, when the customer specifies a date for delivery. Full delivery service is available Monday through Saturday, to provide maximum convenience for the customer, and Sunday delivery service is offered throughout most of the year. Typically, the customer can schedule deliveries of in-stock merchandise within two days after the sale, and the Company offers same-day and next-day delivery on selected products.
Roberds operates a delivery fleet with distinctive trucks displaying the Roberds logo. All delivery crews are Roberds employees wearing Company uniforms. Delivery teams operate on a commissioned pay system. Management believes that, as a result of the commission system, the Company's delivery personnel are highly motivated to complete the delivery successfully on the first attempt and to satisfy the customer.
PURCHASING AND VENDOR RELATIONS - -------------------------------
Roberds' buying operations are organized along its four major merchandise lines. The buyers review inventory and sales reports on a daily basis and place orders based on analysis of past sales and existing inventory levels in the geographic market areas. The buyers also adjust product pricing and advertising to meet competitive needs in each geographic region.
Virtually all furniture, bedding, and major appliances are purchased from North American manufacturers. Consumer electronics products are purchased either from domestic manufacturers or domestic suppliers representing European or Asian manufacturers. Roberds is a member of NATM Buying Corp., a large national buying group organized to purchase consumer electronics and major appliances. Roberds believes its membership in NATM enables it to obtain better product pricing, larger volume discounts, and more advertising rebates than it could obtain independently.
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Vendors provide the Company with substantial incentives in the form of cash discounts, volume rebates, promotional payments, and cooperative advertising funds. The aggregate amount of these incentives was approximately $12.3 million in 1999, $16.4 million in 1998, and $16.7 million in 1997. The decline in incentives in 1999, as compared to 1998, was primarily due to a decline in the volume of purchases by the Company, and a shift by the Company to products that do not carry such incentives but have lower acquisition costs. There can be no assurance that vendor incentives will continue at the current level. A delay or reduction in, or discontinuance of, these vendor incentives could have a material adverse effect on the Company.
Access to certain vendors and brand names is important to the Company's continued success. The loss of a significant or well-known vendor, such as General Electric or Broyhill, could have a material adverse effect on the Company.
DISTRIBUTION - ------------
The Company operates a single distribution center in each of its market areas. All merchandise is initially received into, and controlled in, a central warehouse in each market. Smaller merchandise items, such as small televisions and VCRs, which can be picked up by the customer, are then redistributed to the stores for customer pick-up. Each store maintains warehouse space to facilitate such customer pick-ups. Management believes this "hub and spoke" arrangement allows for prompt product delivery and efficient distribution.
The Company tags and barcodes all merchandise at the time of arrival in its warehouse centers. The movement of merchandise through the warehouse is tracked by the Company's barcode process. The Company cycle-counts inventory on a scheduled basis and performs physical inventories periodically.
MANAGEMENT INFORMATION SYSTEMS - ------------------------------
Roberds utilizes a fully integrated, enterprise-wide management information system for inventory, merchandising, and certain accounting functions. The system was purchased from, and is maintained by, the largest software provider to the furniture retailing industry. During 1999, the Company upgraded its hardware and software to accommodate growth, gain efficiencies, and become Year 2000 compliant.
Each store is equipped with a system allowing Company sales personnel and buyers to track merchandise inventories on a real-time basis. In addition, the merchandising systems are designed to integrate fully the key retailing functions of merchandise planning, purchase order management, merchandise distribution, receiving, order entry, and inventory control.
Sales data is captured at the time of sale by the Company's sales personnel, using point-of-sale terminals on the showroom floor, and is transmitted to the Company's regional processing centers, where it is compiled to produce daily and weekly management reports. The data is organized by department class, item, style, and store, and enables management to regularly monitor the sales performance of all products within each store and market. The system also captures data regarding the customer, and maintains an on-line customer data base with addresses and purchasing history for each customer.
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CUSTOMER CREDIT PROGRAMS - ------------------------
The Company offers qualified customers a private-label charge card administered by GE Card Services ("GE"), formerly known as Banc One Private Label Credit Services. According to GE, at December 31, 1999, the Company had more than 420,000 private-label charge card accounts that generated sales of approximately $131 million in 1999. Such sales represent approximately 46 percent of the Company's net sales and service revenues for 1999. The credit approval and servicing process is administered by GE, which issues customer account cards embossed with the Roberds logo. Roberds receives income from such accounts, based on the difference between: (i) the interest rate charged to the customer, and (ii) GE's cost of funds plus an administrative charge. As part of its arrangement with GE, Roberds funds a reserve account designed to cover a portion of the bad debt losses incurred by GE. All credit losses in excess of the reserve account are the responsibility of GE. To the extent the Company utilizes GE for programs other than its standard 90-days, same-as-cash program, the Company pays a fee to GE for such programs.
As a result of this arrangement, Roberds holds no significant consumer receivables and bears no credit risk beyond the fixed amount contributed to GE's bad debt reserve. Because a significant portion of the Company's sales are financed by consumers, the lack of availability of consumer credit programs, or a significant increase in the cost of such programs, could have a material adverse effect on the Company. GE is the sole provider of consumer financing to the Company's customers.
Roberd Insurance Agency, Inc., a wholly owned subsidiary of the Company, is qualified as an insurance agency under Ohio law. It earns a commission on credit insurance sold by the Company to its customers.
COMPETITION - -----------
The retail sale of furniture, bedding, major appliances, and consumer electronics products in the United States is highly competitive and, for furniture and bedding products, is highly fragmented. There are large numbers of local, regional, and national chains of department stores, specialty retailers, and mass and catalog merchandisers, as well as mail-order and internet merchandisers, competing in each of the Company's product categories and within its geographic markets. Many of these competitors are publicly held and have financial and other resources substantially greater than those of the Company. Further, many of the Company's competitors, particularly in the appliance and electronics product categories, have suffered severe financial problems. From time to time, this has caused the Company to have to compete against retailers that are liquidating merchandise or operating under the protection of the bankruptcy laws. In the major appliance and consumer electronics categories, there has been significant expansion into the Company's markets by publicly held national "superstore" chains, which has greatly increased the competitive environment in those product categories. In general, these competitive conditions have led to heavy advertising, severe price competition, and extensive use of "same-as-cash" programs. The Company expects such competition to continue.
One national furniture retailer entered the Dayton market in January 1999. A regional appliance and electronics retailer entered the Cincinnati, Ohio and Richmond, Indiana markets in 1999. Several national retailers operating in the Company's markets have continued to expand within those markets. Several national department store chains are experimenting with freestanding furniture, appliance, and electronics formats, and some of those retailers have entered the Company's markets. These competitors may generate additional competition in the furniture segment.
The industry competes on the basis of price; credit offerings; merchandise selection, presentation, and availability; and service. The Company competes on price by constantly shopping its competition within its geographic markets and maintaining a competitive pricing approach. Because of its distinctive product mix, Roberds can price its merchandise on the sales floor at or below the competition. The Company believes it competes favorably on merchandise selection because, at an average of 60,000 square feet of showroom size, its stores are larger than those of many of its competitors, thus enabling Roberds to attractively display a broader range of merchandise in each of its four product categories. The Company believes that it provides superior customer service through its full-time, commissioned sales staff, effective delivery of merchandise, and effective handling of special orders.
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SEASONALITY - -----------
The Company typically experiences an increase in its overall sales and profitability in the fourth quarter. This increase is driven by an increase in the sales of consumer electronics and furniture products associated with the holiday season. At the same time, major appliance sales typically decline in the fourth quarter. Operating results for the full year are highly dependent upon the success of the Company's operations in the fourth quarter.
CYCLICALITY - -----------
The market for furniture, bedding, major appliances, and consumer electronics products has historically been cyclical, fluctuating significantly with general economic cycles. During economic downturns, these product lines tend to experience longer periods of recession and greater declines than the general economy. The Company believes that the industry is significantly influenced by economic conditions generally and particularly by the level of housing activity, interest rates, consumer confidence, personal discretionary spending, and credit availability. There can be no assurance that a prolonged economic downturn would not have a material adverse effect on the Company.
BACKLOG - -------
The Company's backlog of sales (sales orders written but not yet delivered) was approximately $6.4 million at December 31, 1999, compared to $8.9 million at December 31, 1998.
EMPLOYEES - ---------
At January 31, 2000, the Company had approximately 1,700 employees, substantially all of whom were full time, including approximately 520 in sales and sales management, 500 in office and administrative capacities, and 680 in warehouse, service, and delivery functions. The Company has never experienced a work stoppage due to labor difficulties. The Company considers its relations with its employees to be good.
In May 1999, the commissioned sales associates in the Company's Ohio region voted to be represented by the United Food and Commercial Workers, Local 1099 ("UFCW"). Effective October 3, 1999, the Company and the UFCW entered into a three-year agreement covering wages and working conditions for approximately 180 commissioned sales associates in the Ohio region. The Company does not believe that the contract will have any significant effect on the Company's financial position or operating results.
In November 1999, the drivers and helpers at the Company's Fairborn, Ohio distribution center voted to be represented by Teamsters Local 957. The Company is negotiating an agreement with the Teamsters. It is not possible to predict the outcome of the negotiations or the effect of an agreement, if any, on the Company's financial position or operating results.
SUBSIDIARIES - ------------
Roberd Insurance Agency, Inc. is a wholly owned subsidiary of the Company, is a licensed insurance agency under Ohio law, and earns a commission on credit insurance sold by the Company.
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TRADEMARKS AND LICENSES - -----------------------
The trademarks ROBERDS(R), THE BIG ONE(R), EMPLOYEE PRICE SALE(R), BACK DOOR SALE(R), ROBERDS GRAND FURNITURE APPLIANCES ELECTRONICS(R), BOTTOM LINE . . . IT COSTS LESS AT ROBERDS(R), and DOUBLE THE DIFFERENCE(R) are registered by the Company with the United States Patent and Trademark Office. Roberds has an application pending to register HOME THEATER SOLUTIONS @ ROBERDS(TM), and has an application pending to renew its registration Of AMERICA'S NAME BRAND HEADQUARTERS(TM), which expired. Roberds does not license any intellectual property to other parties. Roberds does not license any intellectual property from others, except for computer software, principally for use in the Company's management information system described elsewhere in this Report, and the trademarks of certain of its vendors that permit Roberds to utilize their trademarks in connection with the promotion and sale of the vendors' products.
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ITEM 2.
ITEM 2. PROPERTIES
Roberds' facilities are strategically located on major thoroughfares and many are near interstate highways. Many stores are free-standing facilities, and all have ample parking. The following table sets forth information regarding the Company's stores and warehouses in each of its markets, at December 31, 1999:
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(1) Facilities leased from entities controlled by one or more of the Initial Shareholders. See Item 13 of this Report, Certain Relationships and Related Transactions. (2) The facilities in Marietta, Georgia include approximately 14,000 square feet, and in Forest Park, Georgia approximately 8,000 square feet, not included in the table above, leased, or available to lease, to third party commercial and retail tenants. (3) The Douglasville, Georgia store includes approximately 17,000 square feet not included in the table above, leased to third parties. (4) In January 2000, the Company announced that these stores would be closed as part of its filing under Chapter 11 of the Federal bankruptcy laws and its plan to reorganize.
In October 1999, portions of the Norcross, Georgia store were renovated into a state-of-the-art high-technology electronics product display. In addition, the portion of the store that had been used as a clearance center was renovated into a new display area, primarily for bedding products. The merchandise that had been displayed in the clearance area was relocated to the Forest Park, Georgia store.
In the third quarter of 1999, the Company relocated and expanded the clearance center that had been located in the Forest Park, Georgia complex, into new space within the complex that had been available for rent to third parties. The Company opened Roberds Mattress Outlet in the former clearance space. Upon completion of these changes and upgrades, the Company occupied the entire Forest Park complex, except for approximately 8,000 square feet leased or available for lease to third parties.
The stores leased from unaffiliated third parties generally involve an initial lease term of ten to fifteen years, followed by a series of options to extend. While most of these leased stores have rent escalation clauses, the majority have no percentage-rent clauses.
As indicated in the table above, the Company leases seven of its properties from the Initial Shareholders(2) or entities controlled by one or more of them. These properties include many of the Company's highest volume stores. The leases on these properties expire in the years 2004 through 2017. Upon the expiration of these leases, there can be no assurance that the Company can reach agreement with the Initial Shareholders on the terms for the renewal of the leases or that the Initial Shareholders will be willing to renew the leases.
At December 31, 1999, the Company was in default on substantially all real property leases because timely payment was not made. As a result, in most cases, landlords have the right to cancel the lease and take possession of the property. The Company may also be subject to penalties. As part of the bankruptcy proceedings, all executory contracts, including lease obligations, may be assumed or rejected. The Company is currently in the process of reviewing leases for assumption or rejection.
- --------------------- (2) The Company's Initial Shareholders were Messrs. Kenneth W. Fletcher, Donald C. Wright, and Howard W. Smith, who held all of the Company's outstanding common shares immediately prior to the initial public offering in 1993. Upon Mr. Fletcher's death in January 1999, his shares moved into the hands of his estate and into a trust for the benefit of his spouse. Further references in this Report to the Initial Shareholders include the estate and trust as the context requires. See also Item 12 of this Report, Security Ownership of Certain Beneficial Owners and Management.
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ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
GENERAL - -------
In 1994, the Ohio Bureau of Workers' Compensation ("Bureau") completed an examination of the Company's 1992 and 1993 workers' compensation returns. After adjustments, the Bureau assessed $871,000 against the Company, based on the Bureau's reclassification of the majority of the Company's Ohio employees into higher rate classifications. After a series of administrative and judicial appeals by the Company, in August 1999 the Ohio Supreme Court ruled against the Company in its final appeal. In 1998, the Company paid the $871,000 principal amount of the 1992-1993 assessment. The Company has accrued $168,000 of interest owed on the 1992-1993 assessment, which it expects to pay in 2000, as well as the estimated amount of additional taxes that would be caused by a reclassification of employees for the period from January 1994 through June 1996, consistent with the Bureau's position for 1992-93.
In the ordinary course of its business, the Company is from time to time a party in certain legal proceedings. In the opinion of management, the Company is not party to any litigation, other than those described in this Item 3, that would have a material adverse effect on its operations or financial condition if the proceeding was determined adversely to the Company.
On January 19, 2000, the Company filed for protection under Chapter 11 of the Federal bankruptcy laws. It is not clear how long the Company may have to remain under the protection of such laws, or whether the Company can successfully emerge from bankruptcy protection.
ENVIRONMENTAL - -------------
In 1985, a partnership between Kenneth W. Fletcher and Donald C. Wright (two of the Company's Initial Shareholders), acquired a 21-acre parcel of land in Springfield, Ohio ("Parcel") from an unaffiliated party. The Parcel included a building and parking area previously operated by an unaffiliated party as a retail store. In 1985, the Company remodeled the building and leased the Parcel from the partnership as the location of its Springfield, Ohio store.
In 1990, the partnership was informed by the United States Environmental Protection Agency ("EPA") that the Parcel had been operated by a previous owner as an industrial landfill and that the EPA intended to investigate the Parcel. In 1990, a contractor for the EPA examined the Parcel and took surface and shallow soil samples but, contrary to the work plan that had been prepared by EPA, did not take groundwater samples. Testing of the soil samples revealed elevated concentrations of certain semi-volatile organic compounds. The Ohio EPA subsequently criticized the contractor's soil testing methods and its failure to take groundwater samples.
In 1993, the Company and the partnership engaged an environmental consultant to conduct certain tests of the Parcel to attempt to determine the location of the landfill, its proximity to the Company's store, and certain other information. The consultant issued its report in 1994. Among other things, it concluded that the building in which the store operates is not located on, or immediately adjacent to, the site of the former landfill.
In 1994, Messrs. Fletcher and Wright withdrew the Springfield property from the Fletcher-Wright partnership and contributed it to Springfield Properties, Inc., an Ohio corporation owned by Messrs. Fletcher and Wright. The lease between Roberds, Inc. and Fletcher-Wright was assigned to, and assumed by, Springfield Properties, Inc.
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In 1995, Springfield Properties, Inc. was contacted by a consultant to the EPA and informed that the consultant had been engaged by the EPA to "re-score" the Parcel for purposes of determining its priority for potential clean-up. In 1996, the Company obtained a copy of the consultant's report. That report summarized the history of the Parcel and the work of the various environmental consultants to date. It concluded that the Parcel poses certain risks of contamination, but did not recommend any further action with respect to the Parcel.
It is not possible to predict whether the EPA will take further action, whether remediation will be required, or the costs of remediation if required. The EPA takes the position that a tenant can be liable for remediation costs, even if the tenant did not contribute to the contamination of a site. However, the Company is not aware of any circumstances in which a court has found a tenant liable for remediation costs when the tenant did not contribute to the contamination or fail to report contamination known to the tenant. At this point, neither the Company, the partnership, nor Springfield Properties, Inc. plans to take any further action with respect to the environmental issues associated with the Parcel, unless the EPA initiates additional activity.
The Springfield site also included a gas station and car wash that were operated for many years by a third-party tenant, under an agreement with the Fletcher-Wright partnership. The Company was not a party to that agreement. In December 1998, that operator abandoned the facilities and informed Springfield Properties, Inc. that it did not intend to upgrade the underground gasoline tanks that were on the site to comply with federal and state regulations requiring such an upgrade. Late in 1999, Springfield Properties, Inc. removed the abandoned tanks and demolished the former gas station and car wash.
Certain other properties leased by the Company may contain, or have contained, asbestos materials or petroleum underground storage tanks, but the Company does not believe that any such circumstances are likely to have a material adverse effect on the Company, and there are no active EPA investigations of these facilities. The Company has removed asbestos and underground storage tanks in connection with its acquisition and renovation of certain of its properties. To the best of the Company's knowledge, such work has been done in compliance with applicable environmental regulations and protocols.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 1999.
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 15 of 128
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's shares trade on the Nasdaq SmallCap Market, under the symbol "RBDSQ." The following table sets forth the high, low, and closing prices for trading in the Company's common shares, as reported on The Nasdaq Stock Market, for each quarter in fiscal 1999 and 1998.
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- - ---- High $3.33 $3.13 $2.19 $2.63
Low 1.69 1.88 1.00 0.50
Close 2.31 2.00 1.25 1.44
- ---- High $4.50 $3.50 $4.25 $3.00
Low 2.13 2.38 1.50 1.50
Close 3.00 2.63 2.50 2.06
Such quotations include inter-dealer prices, without retail markup, markdown, or commission, and may not necessarily reflect actual transactions. At the close of trading on January 31, 2000, the Company had approximately 245 shareholders of record. Based upon the quantity of shareholder materials provided to brokerage houses and individual shareholders requesting such materials, the Company estimates that the total number of record and beneficial shareholders at January 31, 2000 was approximately 1,700.
In October 1998, Nasdaq informed the Company that it failed to meet one of the requirements for continued listing on the Nasdaq National Market tier, specifically the requirement that at least $5 million of stock be held by individuals other than officers, directors, and those who own more than ten percent of the Company's outstanding shares. In June 1999, following an appeal by the Company, trading of the Company's stock was moved from the Nasdaq National Market tier to the Nasdaq SmallCap Market. In August 1999, Nasdaq formally approved the Company's stock for listing on the Nasdaq SmallCap Market.
Following the Company's announcement on January 18, 2000 that it would file for protection under Chapter 11 of the Federal bankruptcy laws, Nasdaq suspended trading in the Company's stock. In February 2000, the Company responded to Nasdaq's request for information about the bankruptcy filing and the Company's prospects for the future. The Company expects Nasdaq to convene a hearing on the trading halt, though the timing of such hearing is not known. Nasdaq has not indicated when, or if, it will permit the Company's stock to resume trading.
Through the initial public offering of its common shares in 1993, the Company paid dividends from time to time. In 1998, the Company settled an examination of its 1993 and 1994 federal income tax returns, and accrued $225,000 payable to the Initial Shareholders as the result of that settlement, pursuant to the Tax Indemnification Agreement entered into at the time of the initial public offering. A portion of that accrual was paid during 1999, and a portion remains unpaid and subject to the bankruptcy proceedings. See Notes to the Consolidated Financial Statements included elsewhere in this Report.
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Other than reimbursements made pursuant to the Tax Indemnification Agreement, the Company has declared no dividends since the initial public offering of its common shares, and the Board of Directors contemplates no dividends. The Company's revolving line of credit contains a covenant prohibiting the payment of dividends. Therefore, no retained earnings were available for dividends at December 31, 1999.
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ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The operations statement data and the balance sheet data presented below have been derived from the Company's consolidated financial statements and should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and Notes thereto, and the independent auditor's report thereon, included elsewhere herein. Certain reclassifications have been made in the prior years' selected financial data to conform to the classifications used in 1999. These reclassifications had no effect on the net (loss) earnings or shareholders' equity as previously reported.
OPERATIONS STATEMENT DATA: - --------------------------- (In thousands, except per share data)
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 18 of 128
BALANCE SHEET DATA (AT PERIOD END): (In thousands)
1) For 1999, includes $36,222 in debt, excluding capitalized lease obligations, reclassified from long-term to current liabilities (Note D). 2) Total selling square footage includes selling and office space within each store, but excludes warehouse space. 3) Comparable store sales are computed monthly for each period presented by comparing the sales in a month (for those stores that were open for the entire month in the current year and the entire comparable month in the prior year) with the sales for the comparable month in the prior year. 4) Inventory turnover is calculated by dividing cost of sales for the period by the average of the beginning and ending inventory balances for the period.
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 19 of 128
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (All dollar amounts in thousands, except per share data)
RESULTS OF OPERATIONS - ---------------------
The following table sets forth the results of operations as a percentage of sales for the last three years:
YEAR ENDED DECEMBER 31 1999 1998 1997
Net sales and service revenues 100.0% 100.0% 100.0% Cost of sales and services 65.9 68.6 67.5 ----- ----- ----- Gross profit 34.1 31.4 32.5 Selling, delivery and administrative expenses 39.0 34.6 32.7 Interest expense, net 2.4 2.2 2.2 Finance participation income (0.9) (1.0) (1.0) Other income, net (1.5) (1.0) (1.0) ----- ----- ----- (Loss) before income taxes (benefit) (4.9) (3.4) (0.4) Income taxes (benefit) -- 1.7 (0.1) ----- ----- ----- Net (loss) (4.9)% (5.1)% (0.3)% ===== ===== =====
Sales by the Company's three market areas as a percentage of total sales for each of the last three years were as follows:
YEAR ENDED DECEMBER 31
1999 1998 1997
Ohio 46% 49% 50%
Georgia 33 31 30
Florida 21 20 20 --- --- --- 100% 100% 100% === === ===
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 20 of 128
Sales by major product category as a percentage of total sales for each of the last three years were as follows:
YEAR ENDED DECEMBER 31 1999 1998 1997
Furniture ........................... 42% 38% 37%
Bedding ............................. 13 13 13
Major appliances .................... 21 24 25
Consumer electronics ................ 18 18 19
Extended warranty contracts and other 6 7 6 --- --- ---
100% 100% 100% === === ===
1999 COMPARED TO 1998. Sales in 1999 were $287,008, compared to $318,710 in 1998, a 9.9% decrease. All stores were comparable in 1999. For 1999, the percentage decreases in sales in the Company's three market areas were as follows: Ohio (16%); Georgia (4%); and Florida (5%). During the third quarter of 1999, the Company was involved in the negotiation of a labor contract with its sales force in the Ohio region, the Company's largest region. During the negotiations, the union called for a boycott of the Company's Ohio stores, and the sales associates were distracted by the bargaining, contributing to the decline in Ohio sales. The labor contract has since been finalized. As a whole, the Company believes that a highly competitive retail environment exists for its major product lines. Distribution channels, particularly with electronics and appliances, continue to expand to include national retailers, adding further competitive pressures. These competitive factors also contributed to the decline in comparable store sales (see "Business-Competition").
Furniture sales continued to increase as a percentage of total sales as the Company continued to increase its emphasis on this higher margin category to mitigate competitive pressures. The decline in major appliance sales as a percentage of total sales reflects a highly competitive retailing environment, expanded distribution channels in the industry, and a lack of new products in this category. It is anticipated that the appliance category will remain under pressure during 2000.
Gross profit for 1999 was $97,944, or 34.1% of sales, compared to $100,213, or 31.4% of sales, for 1998. The majority of the gross profit percentage improvement in 1999 reflected an increase in the percentage of furniture sales to total sales, which generated higher gross profit than other categories. Additionally, furniture gross profit margins improved over 1998 due to better pricing controls and fewer liquidations of discontinued merchandise. The gross margin percentage in the fourth quarter of 1999 was positively affected by a liquidation of LIFO inventory and a reduction in inventory shrinkage, which was partially offset by a reduction in vendor incentives. Contributing to the gross margin percentage improvement in 1999 was a decrease in the LIFO inventory reserve of $298 versus an increase in the reserve of $1,211 in 1998.
Gross margins percentages for 1999 by category, were approximately 40% for furniture, 46% for bedding, 22% for major appliances, and 17% for consumer electronics. The gross margin percentages for 1999 increased for furniture as compared to 1998, while margins for bedding, consumer electronics, and major appliances held relatively steady. Product prices and margins in consumer electronics and appliances continued to be under pressure during 1999, as a result of competitive conditions in these categories.
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 21 of 128
Selling, delivery, and administrative expenses increased to $111,874, or 39.0% of sales in 1999, compared to $110,358, or 34.6% of sales, in 1998. The increase in expense in 1999 as compared to 1998 was primarily attributable to increased advertising and workers' compensation expense. The increase in expenses as a percentage of sales for 1999, as compared to 1998, was primarily due to the effects of fixed costs in light of the Company's decline in store sales and an increase in advertising expense.
Interest expense, net of interest income, decreased to $6,991 for 1999, as compared to $7,224 in 1998. The decrease in interest expense in 1999 resulted primarily from a reduction in merchandise inventories, which resulted in a decrease in the related indebtedness incurred to carry such inventories.
Finance participation income, which consists of income from the Company's private-label credit card program, decreased to $2,528, or 0.9% of sales, in 1999, compared to $3,032, or 1.0% of sales, in 1998. Finance participation decreased in 1999 compared to 1998 as a result of ongoing changes in the use of income-generating finance programs compared to longer-term, same-as-cash programs that generate financing expense. Such shifts may occur again in the future, thereby affecting the Company's finance participation income.
Other income, net, which consists primarily of cash discounts and rental income from tenants, was $4,415, or 1.5% of sales, in 1999, compared to $3,536, or 1.0% of sales, for 1998. The increase in other income for 1999 was primarily due to the receipt of life insurance proceeds of $1,102 resulting from the death of the Company's chairman.
Loss before income taxes increased to $(13,978) in 1999, from $(10,801) in 1998 as a result of the above-mentioned items. There was no income tax expense for 1999 as compared to income tax expense of $5,322, or approximately 49% of the loss before taxes, in 1998. The provision for income taxes in 1998 reflects an increase in the valuation reserve provided for deferred tax assets resulting in the elimination of all deferred tax assets at December 31, 1998. The increase in the reserve was deemed necessary as a result of the uncertainty of the recoverability of such future tax benefits.
As a result of the Company's continued declining sales in 1999, the resulting sustained losses and inability to generate sufficient cash flow from operations, and the failure to meet its debt covenant requirements, in January 2000 the Company initiated a restructuring effort and filed for protection under the United States Bankruptcy laws (see Note A).
1998 COMPARED TO 1997. Sales in 1998 were $318,710, compared to $341,703 in 1997, a 6.7% decrease. Comparable store sales in 1998 decreased by 4.6 %. The decline in total sales includes the effect of closing the Decatur, Georgia store in December 1997 ($7,728) and, to a lesser extent, the withdrawal from the personal computer business in the Ohio market area ($4,303).
For 1998, the percentage increases (decreases) in sales in the Company's three market areas were as follows:
TOTAL COMPARABLE STORES STORES
Ohio (8)% (8)%
Georgia (4) 3
Florida (8) (8)
Overall, the Company believes that a highly competitive retail environment for big-ticket goods, combined with an industry wide softness in consumer electronics and high consumer debt, contributed to the decrease in comparable store sales. See "Business Competition."
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 22 of 128
In March 1997, the Company entered into an agreement to sell third-party extended warranty contracts. Revenues and the related costs of the contracts entered into after the effective date of the agreement are being recognized at the time the third-party contracts are sold. Revenues and selling costs related to contracts sold prior to the effective date of the agreement are recognized over the remaining lives of the contracts, and the expenses related to service costs are recognized as incurred. Total sales were positively affected by this new agreement by approximately 0.5% in 1998.
Gross profit for 1998 was $100,213, or 31.4% of sales, compared to $110,949, or 32.5% of sales, for 1997. The majority of the decline in gross profit margin percentage in 1998 reflects the liquidation at reduced selling prices of certain aged inventories and inventories from certain vendors that were being de-emphasized or discontinued. Also contributing to the gross margin percentage decline was an increase in the LIFO inventory reserve of $1,211 versus a decrease in the reserve of $239 in 1997. Partially offsetting the decline in gross margin percentage were the above-mentioned sales of third-party extended warranty contracts, which favorably affected gross margins as a percentage of sales by approximately 0.2% in 1998. The effect of the sale of third-party warranty contracts on gross margin as a percentage of sales became comparable in the second quarter of 1998.
Gross margin percentages for 1998 by category were approximately 34% for furniture, 45% for bedding, 21% for major appliances, and 17% for consumer electronics. The gross margin percentages for 1998 decreased for furniture as compared to 1997, while margins for bedding, consumer electronics, and major appliances held relatively steady. Contributing to the decline in gross margin percentage for furniture was the above mentioned liquidation of certain aged and de-emphasized merchandise and the increase in the LIFO reserve. This liquidation is now complete. Product prices and margins in consumer electronics and appliances continued to be under pressure during 1998, as a result of competitive conditions in these categories.
Selling, delivery, and administrative expenses decreased to $110,358, or 34.6% of sales in 1998, compared to $111,642, or 32.7% of sales, in 1997. The increase in expenses as a percentage of sales for 1998, as compared to 1997, was primarily due to increases in selling and warehouse expenses to support the clearance of aged and discontinued merchandise and, to a lesser extent, increases in provisions for certain employee benefits and the effect of fixed costs in light of the Company's decline in comparable store sales. Selling, delivery and administrative expenses for 1998 reflect: (a) reduced net advertising and promotional credit expenses; (b) a one-time refund of premiums of $1,053 and a 75% rate reduction for the first half of 1998 to all participants in the State of Ohio workers' compensation fund; (c) a reduction in worker's compensation expense as a result of a change to insured programs in Georgia and Florida; (d) a decrease in professional fees for outside consulting services; and (e) a reduction in property insurance expenses due to a change in insurance carriers.
Interest expense, net of interest income, decreased to $7,224 for 1998, as compared to $7,545 in 1997. The decrease in interest expense in 1998 resulted primarily from a reduction in merchandise inventories, which resulted in a decrease in the related indebtedness incurred to carry such inventories.
Finance participation income, which consists of income from the Company's private-label credit card program, decreased to $3,032, or 1.0% of sales, in 1998, compared to $3,217, or 1.0% of sales, in 1997. Finance participation decreased in 1998 as compared to 1997 as a result of ongoing changes in the use of income-generating finance programs compared to longer-term, same-as-cash programs that generate financing expense. Such shifts may occur again in the future, thereby affecting the Company's finance participation income.
Other income, net, which consists primarily of cash discounts and rental income from tenants, was $3,536, or 1.0% of sales, in 1998, compared to $3,495, or 1.0% of sales, for 1997. The increase in other income for 1998 is a result of the Company taking advantage of various cash discounts offered by its vendors.
Loss before income taxes (benefit) increased to $(10,801) in 1998, from $(1,526) in 1997. Income tax expense for 1998 was $5,322, or approximately 49% of the loss before taxes, as compared to income tax benefit of $425, or 28% of loss before taxes, in 1997. The disproportionate provision for income taxes in 1998 reflects an increase in the valuation
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reserve provided for deferred tax assets resulting in the elimination of all deferred tax assets at December 31, 1998. The reserve was deemed necessary as a result of the uncertainty of the recoverability of such future tax benefits.
LIQUIDITY AND CAPITAL RESOURCES - -------------------------------
Cash increased to $2,177 at December 31, 1999, compared to $932 at December 31, 1998. The Company generated $5,444 of cash from operating activities during 1999. Cash of $7,575 was provided from a reduction in merchandise inventories due to limited vendor credit during the fourth quarter and to align inventory with declining sales. Cash was also generated from: (a) the receipt of a tax refund; (b) an increase in customer deposits resulting from delayed product deliveries; (c) an increase in accounts payable due to liquidity issues; (d) proceeds from a life insurance policy received after the death of the Chairman; (e) a reduction in prepaid rent expense; and (f) a reduction in vendor receivables due primarily to lower volume purchases. These funds were utilized in part by reductions of $1,844 in accrued expenses and $2,579 in the balance of deferred warranty revenue. As a result of the above factors, the Company paid down debt by $1,330.
During 1999, the Company's capital expenditures totaled $3,087. These expenditures primarily represented normal replacement and upgrade projects, including the conversion of the former clearance space in the Norcross, Georgia store into an expanded bedding center, the renovation of the electronics area in that store into a state-of-the-art electronics display, and the consolidation of the Company's two existing clearance centers in Atlanta, Georgia into the Forest Park center. In addition, the Company took delivery of a new enterprise-wide computer hardware and software system, financed by a $1,558 capital lease. The Company has no other significant expansion or capital expenditure plans for 2000 other than normal replacement, repair and upgrade projects. The Company acquired approximately $2,800 of vehicles and warehouse equipment during 1999, which were financed by operating leases.
In March 1999, the Company refinanced its revolving line of credit. The amount available under the line was limited to the lesser of: (a) $30,000 or (b) an amount based upon a percentage of eligible inventory and receivables, which varies seasonally. At December 31, 1999, $18,985 was available under the line, of which $19,135 was outstanding. The line of credit bore interest at either the bank's base rate (8.75% at December 31, 1999) or LIBOR plus 2.25% (8.60% at December 31, 1999). The line of credit included certain restrictive covenants including, among others, limitations on capital expenditures and the aggregate amount of funded debt. The line prohibited the payment of dividends. The line also required the maintenance of a minimum fixed-charge-coverage ratio.
On January 19, 2000, the Company filed a voluntary petition for reorganization under Chapter 11 of the United States bankruptcy laws. In February 2000, the Company entered into a debtor-in-possession credit facility and the existing credit facility described above was repaid. As a result of various covenant violations, mortgage loans are classified as current. The debtor-in-possession credit facility will be classified as long-term (see Note A).
One of the mortgage notes payable contains a balloon payment which is due in September 2000.
YEAR 2000 READINESS DISCLOSURE - ------------------------------
The Company has so far experienced no significant problems caused by the calendar year rollover to Year 2000. However, there still may be unknown Year 2000 issues the Company or its suppliers may experience throughout the upcoming year. The costs related to the conversion of the credit-card processing system were insignificant. The costs to upgrade the software and hardware for its primary management information system were approximately $1,800, of which $1,558 was financed through a capital lease. The majority of the expenditures were for hardware upgrades to accommodate new software.
The Company has upgraded several secondary information systems, such as payroll, delivery, telephone, personal computer, and service department systems, to be Year 2000 compliant. The majority of the costs were for software to
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 24 of 128
incorporate the Company's service departments into the primary management information system. These costs were approximately $500.
OUTLOOK - -------
In January 2000 the Company announced the closing of its Tampa, Florida market and the Cincinnati, Ohio store, and offering for sale its Atlanta (Buckhead), Georgia store facility. During 2000, the Company will continue to focus on improving business operations and customer service in its remaining markets in Dayton, Ohio and Atlanta, Georgia. Areas of focus include improved selling-floor disciplines, improving warehouse operations and delivery performance, improving the management of inventory, improving asset utilization, reducing operating expenses, and turning around comparable store sales. These efforts have required operating expenditures that adversely affected the Company's financial results for 1999. The Company believes these initiatives will yield improvement in the Company's operations during 2000 and beyond.
The Company's financial performance is influenced by product availability, consumer confidence, interest rates, consumer debt, the general level of housing activity, and the general level of economic activity in the United States. Although the Company has seen a modest reduction in competitors' use of same-as-cash promotions, consumers continue to respond best to deep-discount price and finance promotions. This competitive situation is expected to continue to put pressure on comparable store sales, gross margins, promotional finance expenses, and operating results. If the economy slows, the competition can be expected to be even more aggressive.
There are a number of changes in the competitive environment in the Company's markets. One national furniture retailer entered the Dayton market in January 1999. A regional appliance and electronics retailer entered the Cincinnati, Ohio and Richmond, Indiana markets in 1999. Several national retailers operating in the Company's markets have continued to expand within those markets. Several national department store chains are experimenting with freestanding furniture, appliance, and electronics formats, and some of those retailers have entered the Company's markets. These competitors may generate additional competition in the furniture segment.
The Company expects the first quarter of 2000 to reflect a significant decrease in net sales compared to the first quarter of 1999, due to limited product availability resulting from the bankruptcy proceedings and the change of credit facilities (see Note A). The Company expects increased merchandise availability near the end of the first quarter, but there can be no assurance that the level of inventory available under its line of credit and trade credit arrangements will be adequate to sustain sales growth during subsequent periods.
INFLATION - ---------
The Company does not believe that inflation had any significant impact on its operations in 1999, 1998, or 1997.
SEASONALITY - -----------
The Company typically experiences an increase in its overall sales in the fourth quarter. This increase is driven by an increase in the sales of consumer electronics and furniture products associated with the holiday season. At the same time, major appliance sales typically decline in the fourth quarter. As a result, operating results for the full year are highly dependent upon the success of the Company's operations in the fourth quarter.
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The following tables show the Company's quarterly net sales, gross profit, net (loss), and (loss) per common share for the last two years.
-------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER Net sales and service revenues $ 72,433 $ 68,950 $ 70,810 $ 74,815
Gross profit 25,595 25,314 23,953 23,082
Net loss (210) (1,656) (3,347) (8,765)
Basic and diluted loss per share (0.03) (0.27) (0.54) (1.42)
-------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER Net sales and service revenues $ 78,512 $ 73,894 $ 78,696 $ 87,608
Gross profit 24,681 23,096 25,460 26,976
Net loss (1,972) (1,218) (1,150) (11,783)
Basic and diluted loss per share (0.33) (0.20) (0.19) (1.93)
FORWARD LOOKING STATEMENTS - --------------------------
In the interest of providing the Company's shareholders and potential investors with information concerning management's assessment of the outlook for the Company, this report contains certain "forward-looking" statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Readers should bear in mind that statements relating to the Company's business prospects, as distinct from historical facts, are forward-looking statements, which, by their very nature, involve numerous risks and uncertainties. Factors that could cause the Company's actual results to differ materially from management's expectations include, but are not limited to:
A. Changes in economic conditions in the United States, including but not limited to the general level of economic activity, levels of housing activity, interest rates, the availability of consumer credit, consumer confidence, and inflation.
B. Changes in the economic conditions in the market areas in which the Company operates, such as a strike or shutdown of a major employer or industry.
C. Unusual weather patterns, such as unusually hot or cool summers, which can affect the sale of refrigeration products, or unusually cold winters, which can affect consumers' desire and ability to shop for the Company's products. Acts of God, such as floods, hurricanes, or tornadoes, that interrupt the Company's ability to sell or deliver merchan-
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dise, interrupt consumers' ability to shop, or destroy a major Company facility, in particular a warehouse or computer facility.
D. Changes in the competitive environment in the Company's market areas, including the bankruptcy or liquidation of existing competitors.
E. The entry into the Company's lines of business and market areas by new, larger, well-financed competitors, which may have the ability to withstand intense price competition over extended periods of time.
F. The availability and cost of adequate, appropriate newspaper, television, and pre-printed advertising. A strike or work stoppage affecting the Company's media outlets.
G. Adverse results in litigation matters.
H. Difficulties in hiring, training, and retaining a capable work force at reasonable levels of compensation. Difficulties in hiring and retaining an effective senior management group. Business interruptions due to union activities. An attempt to organize additional portions of the Company's work force.
I. The availability of appropriate sites for expansion, on favorable terms, and the long-term receptivity of consumers to new store formats and locations.
J. Access to lines of credit and real estate mortgage financing sources at favorable rates of interest, terms, and conditions.
K. Access to additional equity capital.
L. Access to extended-payment financing sources (e.g., "twelve months same as cash") at a favorable cost to the Company and with favorable rates of approval by the financing source. Access to private-label financing sources (e.g., "Roberds charge card") that provide favorable rates of interest to the customer, favorable rates of return to the Company, and favorable rates of approval by the financing source.
M. Rapid changes in products, particularly electronics products, such that the Company bears the risk of obsolescence or the consumer withdraws from the market until such time as the product category has stabilized.
N. Shifts in the mix of the Company's sales between its higher-margin products (bedding and furniture) and its lower-margin products (electronics and appliances), which may result from changes in consumer priorities, competitive factors, or other factors.
O. The absence of new products in the Company's product categories that would drive additional consumer interest and purchases.
P. Adverse changes in the cost or availability of the products the Company sells. Rapid increases in the price of the Company's products, which cannot be passed on to consumers as the result of competitive pressures.
Q. The loss, or significant reduction in the availability, of certain key name-brand products. Decisions by vendors to curtail the availability of certain product presently sold by the Company, or to make products that are presently sold by the Company available to certain competitors that do not presently have access to such products. Changes in import duties or restrictions affecting the Company's ability to import certain products.
R. Changes in income tax rates or structures that may affect the Company's tax burden or consumers' ability to purchase or finance big-ticket goods or new housing. Significant increases in real estate tax rates affecting the Company's properties.
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S. Changes in government regulations affecting the Company, its products, its advertising, or its work force, including changes in the minimum wage. Changes in government regulations affecting the Company's employee benefit plans or workers' compensation arrangements.
T. New competition from alternative sales media and channels of distribution, such as catalog mail order, telemarketing, television shopping services, and online media.
U. Changes in highway or street configurations such that the Company's stores become less accessible to consumers. Changes in consumer use or ownership of "second homes."
V. Changes in the cost or availability of liability, property, and health insurance.
W. Ability to emerge successfully from bankruptcy protection.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements for the three years ended December 31, 1999, the Notes thereto, and the Independent Auditors' Report thereon are as follows:
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INDEPENDENT AUDITORS' REPORT
Board of Directors Roberds, Inc. Dayton, Ohio
We have audited the accompanying consolidated balance sheets of Roberds, Inc. (Debtor) and subsidiary (the "Company") as of December 31, 1999 and 1998, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States of America. 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, such financial statements present fairly, in all material respects, the financial position of the Company at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note A, on January 19, 2000, the Company filed for reorganization under Chapter 11 of the federal bankruptcy laws. The accompanying financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such financial statements do not purport to show (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to pre-petition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (c) as to stockholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (d) as to operations, the effect of any changes that may be made in its business.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A, the Company's recurring losses from operations and negative working capital raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also discussed in Note A. The financial statements do not include adjustments that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP Dayton, Ohio February 25, 2000
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 29 of 128
ROBERDS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - ----------------------------------------
See notes to consolidated financial statements.
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 30 of 128
ROBERDS, INC. AND SUBSIDIARY - ----------------------------
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) - --------------
See notes to consolidated financial statements.
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 31 of 128
ROBERDS, INC. AND SUBSIDIARY - ----------------------------
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) - -------------------------------------
See notes to consolidated financial statements.
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 32 of 128
ROBERDS, INC. AND SUBSIDIARY - ----------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS) - --------------
See notes to consolidated financial statements.
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 33 of 128
ROBERDS, INC. AND SUBSIDIARY - ----------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS) --------------
See notes to consolidated financial statements
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 34 of 128
ROBERDS, INC. AND SUBSIDIARY - ----------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) - -----------------------------------------------
A. SUBSEQUENT EVENTS AND GOING CONCERN MATTERS
PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY LAWS. On January 19, 2000, the Company ("Debtor") filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy laws, in the Southern District of Ohio, Western Division, case number 00-30194 ("Chapter 11 Case"). The Debtor is currently operating the business as debtor-in-possession.
In general, collection of the Debtor's pre-petition obligations, executory contracts, and indebtedness is stayed during the bankruptcy proceedings. Substantially all pre-petition liabilities are subject to settlement under a plan of reorganization. Although the Debtor expects to file a plan to provide for emergence from bankruptcy and liquidation of pre-petition obligations, there can be no assurance that such a plan will be approved by the creditors or confirmed by the Bankruptcy Court, or that any such plan will be consummated. The Debtor has the exclusive right to submit a plan of reorganization for 120 days following the filing of the petition. The court may grant extensions of time to file the plan. If the Debtor fails to file a plan of reorganization during such period or if such plan is not accepted by the creditors and equity holders, any party in interest may subsequently file its own plan of reorganization for the Debtor. A plan of reorganization could result in holders of the common shares receiving no value for their interest. Therefore, the value of the Debtor's common shares is highly speculative.
The bankruptcy court has entered orders granting authority to the Debtor to pay pre-petition employee wages, salaries, benefits, and other employee obligations, and to honor certain pre-petition customer service obligations, including deposits, refunds, warranties, returns and gift certificates.
In February 2000 the Company entered into a debtor-in-possession credit facility (the "DIP Facility"). Under this agreement, the Company may borrow up to $25 million, subject to certain limitations, to fund ongoing working capital needs while it operates under bankruptcy court protection. Financial covenants include maintenance of a minimum ratio of inventory to post-petition trade payables, limitations on capital expenditures, and compliance with cash flow budgets. The DIP Facility includes a $3 million sub-facility for standby and trade letters of credit. Interest rates on the DIP Facility are based on either the Base Rate as to Prime Rate Loans plus 0.25% or the adjusted Eurodollar Rate plus 2.75%, at the borrower's option. The DIP Facility is secured by substantially all assets of the Company, subject to certain liens permitted by the DIP Facility.
Borrowings under the DIP Facility are based on a formula which considers eligible inventories, eligible accounts receivable, eligible fair market value of owned or liquidated real properties, and trade letters of credit obligations. The DIP Facility contains certain restrictive covenants that limit capital expenditures, prohibit dividends, and limit total indebtedness. The DIP Facility expires the earlier of May 2002 or the effective date of the plan of reorganization.
The bankruptcy court approved the DIP Facility on an interim basis with a final hearing expected in March 2000. The Company believes the DIP Facility should provide adequate liquidity to conduct its operations during bankruptcy.
RESTRUCTURING PLAN. As a result of the Company's decreased net sales in 1999, the resulting negative cash flow from operations and the failure to meets its debt covenants, in January 2000 the Company began a restructuring effort. In late January 2000, the Company began the process of closing all eight stores and the distribution center in Florida and the Roberds Grand store in Cincinnati, Ohio, and listed for sale one store facility in Atlanta, Georgia. The Company also began a reduction of its corporate staff.
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 35 of 128
During the first quarter of 2000, the Company expects to record the following estimated charge for the restructuring:
Lease and other termination costs $ 5,629 Fixed asset impairment 12,221 -------- Total restructuring charge $ 17,850 ========
Inventory liquidations $ 1,200 ========
Lease and other termination costs include contractual rent, estimated lease termination costs, and other real estate costs consisting primarily of utilities, common area maintenance fees and real estate taxes, reduced by estimated sublease income. The Company will pay lease termination fees as it is able to negotiate such terminations or as it rejects such leases under the bankruptcy proceedings. At December 31, 1999 the leases on the locations to be closed vary in length, with expiration dates from June 2005 to November 2010. The ultimate timing of lease termination payments will depend on the Company's ability to negotiate acceptable lease exit terms. Other costs include estimated debt and lease termination fees.
Property and equipment associated with the restructuring will be written-down to reflect estimated fair value. Management anticipates selling or abandoning substantially all owned and leased property and equipment associated with the markets to be closed.
Approximately 500 employees were terminated pursuant to the restructuring. Employee severance costs are not expected to be significant, and will be paid or accrued in the first quarter of 2000.
The Company will record a loss of approximately $1,200 on the February 2000 sale of inventory to a liquidator in the Florida market and Cincinnati. This loss will be included in cost of sales.
The Company is continuing to assess its operations as it develops a plan of reorganization. Additional restructuring costs may be incurred as the plan is developed.
GOING CONCERN MATTERS. The accompanying consolidated financial statements have been prepared on a going concern basis of accounting and do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The Company's recent losses and negative cash flows from operations, and the bankruptcy case raise substantial doubt about the Company's ability to continue as a going concern. As discussed above, management intends to submit a plan for reorganization to the court. The ability of the Company to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, (i) the Company's ability to obtain and comply with debtor-in-possession financing agreements, (ii) confirmation of a plan of reorganization by the court, (iii) the Company's ability to achieve profitable operations after such confirmation, and (iv) the Company's ability to generate sufficient cash from operations to meet its obligations.
Management believes that the plan of reorganization, as it is being developed and subject to approval of the bankruptcy court, and the DIP Facility, along with cash provided by operations, will provide sufficient liquidity to allow the Company to continue as a going concern; however, there can be no assurance that the sources of liquidity will be available or sufficient to meet the Company's needs. The consolidated financial statements do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 36 of 128
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The accompanying consolidated financial statements include the accounts of Roberds, Inc. and its wholly-owned subsidiary, Roberd Insurance Agency, Inc. (the "Company"). All significant intercompany transactions and balances have been eliminated.
OPERATIONS. The Company operates retail stores in three geographic market areas selling furniture, bedding, appliances and electronics. At December 31, 1999, the Company operated 24 large-format stores, with seven in the Ohio market, including six in Dayton and one megastore in Cincinnati, nine in the Atlanta, Georgia market, and eight in the Tampa, Florida market (see Note A).
CASH AND CASH EQUIVALENTS. Cash equivalents include all highly liquid investments with a maturity of three months or less when purchased. The State of Florida requires the Company to maintain deposits to partially fund its extended warranty and product maintenance contracts and its self insured liability for workers' compensation. Such deposits are included in certificates of deposit - restricted.
MERCHANDISE INVENTORIES. Merchandise inventories are valued at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method, except for electronics which are valued using the first-in, first-out (FIFO) method. Electronics represented approximately 25% of merchandise inventories at December 31, 1999 and 24% at December 31, 1998. If the FIFO method had been used for all inventory, inventory values would have been approximately $3,019 higher at December 31, 1999 and $3,317 higher at December 31, 1998. The significant reduction of inventory levels during the fourth quarter of 1999 resulted in liquidations of various LIFO layers.
PRE-OPENING COSTS. Costs incurred in the opening of new stores are expensed as incurred.
PROPERTY AND EQUIPMENT. Property, equipment and improvements, including capital leases, are depreciated or amortized over their estimated useful lives or the lease term using the straight-line method. The lives, by category, generally are as follows:
Buildings and improvements 10 to 40 years Leasehold improvements 10 years Furniture, fixtures and office equipment 3 to 5 years Computer equipment 3 to 8 years Warehouse equipment and vehicles 3 to 10 years
EXTENDED WARRANTY AND PRODUCT MAINTENANCE CONTRACTS. Contracts with terms from nine months to ten years are sold to supplement or extend manufacturers' warranties on appliances, electronics and furniture products. In 1997, the Company began to sell third-party extended warranty contracts. Revenues and the related costs of the contracts entered into after the effective date of the agreement are being recognized at the time the third-party contracts are sold. Deferred warranty revenue and selling costs related to contracts sold prior to the effective date of the agreement are recognized over the remaining lives of the contracts, and the expenses related to service costs are recognized as incurred.
REVENUE RECOGNITION. Merchandise inventory sales are recognized when the risk of ownership transfers and goods are delivered to the customer.
ADVERTISING. Advertising production costs, primarily those associated with television advertising, are expensed the first time the related advertising is utilized.
EARLY PAYMENT DISCOUNTS. Discounts received from vendors for early payment have been classified as other income in the consolidated statements of operations.
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 37 of 128
USE OF ESTIMATES. 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, and 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 (LOSS) PER COMMON SHARE. In 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." Diluted loss per share is computed by dividing the net loss by the weighted average number of common shares outstanding during the year, adjusted for the dilutive effect, if any, of the Company's stock-based incentive plans. For the years ended December 31, 1999, 1998, and 1997, stock options outstanding under the Company's stock-based incentive plans were anti-dilutive.
STOCK OPTIONS. The Company measures cost for stock options issued to employees using the method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees."
PENDING ACCOUNTING PRONOUNCEMENT. In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This pronouncement will be effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company is still in the process of analyzing the impact of the adoption of this statement.
RECLASSIFICATIONS. Certain reclassifications have been made in the 1998 and 1997 financial statements to conform to the classifications used in 1999. These reclassifications had no effect on the results of operations or shareholders' equity as previously reported.
C. ACCOUNTS RECEIVABLE FROM VENDORS AND OTHER
Accounts receivable from vendors and others consist primarily of amounts due from vendors for various rebate and cooperative advertising programs and for merchandise inventory returns.
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 38 of 128
D. LONG-TERM DEBT
In March 1999, the Company refinanced its revolving line of credit. The amount available under the line was limited to the lesser of: (a) $30,000 or (b) an amount based upon a percentage of eligible inventory and receivables, which varies seasonally. At December 31, 1999, $18,985 was available under the line, of which $19,135 was outstanding. The line of credit bore interest at either the bank's base rate (8.75% at December 31, 1999) or LIBOR plus 2.25% (8.60% at December 31, 1999).The line of credit included certain restrictive covenants including, among others, limitations on capital expenditures and the aggregate amount of funded debt. The line prohibited the payment of dividends. The line also required the maintenance of a minimum fixed-charge-coverage ratio.
On January 19, 2000, the Company filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Laws. In February 2000, the Company entered into a debtor-in-possession credit facility and the existing credit facility was repaid. Essentially all of the Company's assets are pledged as collateral for the Company's indebtedness. As a result of various covenant violations, mortgage loans are classified as current. The debtor-in-possession credit facility will be classified as long-term (see Note A).
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 39 of 128
E. LEASING ACTIVITIES
The Company leases the majority of its retail locations, including some from entities controlled by one or more of the initial shareholders. Most leases include renewal options. In addition, the Company leases the majority of its vehicles from third parties under operating leases. These vehicle leases generally include contingent rentals based upon mileage.
Minimum commitments for leases with remaining terms in excess of one year are as follows:
OPERATING LEASES CAPITAL LEASES RELATED RELATED YEAR ENDING DECEMBER 31 PARTIES OTHER PARTIES OTHER
2000 $ 721 $ 6,006 $ 1,919 $ 590 2001 721 5,823 1,919 590 2002 721 5,676 1,919 246 2003 721 5,007 1,919 - 2004 605 4,050 1,919 - 2005 and later 5,422 11,620 10,244 - ------- ------- ------- ------- Total $ 8,911 $38,182 19,839 1,426 ======= ======= ======= ======= Less amount representing interest 9,040 141 ------- ------- Capital lease obligations $10,799 $ 1,285 ======= =======
At December 31, 1999, the Company was in default on substantially all real property leases because timely payment was not made. As a result, in most cases, landlords have the right to cancel the lease and take possession of the property. The Company may also be subject to penalties. As part of the bankruptcy proceedings, all executory contracts, including lease obligations, may be assumed or rejected. The Company is currently in the process of reviewing leases for assumption or rejection.
Rent expense for all operating leases was approximately $8,279, $8,067, and $8,391, for the years ended December 31, 1999, 1998 and 1997, which included approximately $750, $721, and $721, for the years ended December 31, 1999, 1998 and 1997, to related parties. Rent expense also included $218, $246, and $262, of contingent rentals based upon vehicle mileage for the years ended December 31, 1999, 1998 and 1997.
Capital leases included in building and improvements totaled $13,641 at December 31, 1999 and 1998. The capital lease included in computer equipment totaled $1,558 at December 31, 1999. Accumulated amortization related to the capitalized leases is $5,658 at December 31, 1999 and $4,474 at December 31, 1998.
Certain leases include scheduled rent increases that have been recognized on a straight-line basis over the term of the leases. The accumulated difference between rent expense and cash payments is included in liabilities as deferred rent.
F. SHAREHOLDERS' EQUITY
The Company's stock-based compensation plans are described below.
EMPLOYEE STOCK PURCHASE PLAN. The Company's employee stock purchase plan is qualified under the Internal Revenue Code and permits employees to purchase shares at a price equal to 85% of the lower of: (i) the fair market value of the shares at the commencement of each six-month option period or (ii) the fair market value of the shares at the close of the option period. A maximum of 500,000 shares may be issued under the plan. With certain exceptions, all employees of the Company may participate in the plan and pay for their options through payroll deductions.
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 40 of 128
Subsequent to the Company's bankruptcy filing in January 2000, the Company terminated the plan and is winding up its affairs.
The Company issued 84,157 shares at $1.56 per share under the plan during 1999; 31,715 shares at $2.34 per share and 37,574 shares at $2.39 per share under the plan during 1998; and 18,221 shares at $7.23 per share and 19,517 shares at $4.52 per share under the plan during 1997.
1993 OUTSIDE DIRECTOR STOCK OPTION PLAN. The Company has a director's stock option plan for outside directors of the Company. Grants are made at the market price of the stock at the date of grant. The Company has outstanding options on 6,000 common shares, at $13.00 per share. All of the outstanding options were exercisable; however, none have been exercised. During 1999, options expired on 2,000 shares at $9.25 per share. At December 31, 1998, the plan expired though the outstanding options remain exercisable through 2003.
1993 STOCK INCENTIVE PLAN. The Company's stock incentive plan provides that options on up to 3,000,000 shares may be granted to employees of the Company. Grants are made at the market price of the stock at the date of grant. One-fourth of the options become exercisable on each anniversary of the grant. Any options which are not exercisable by an employee at the termination of employment are canceled.
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 41 of 128
A summary of option transactions under the stock incentive plan is as follows:
WEIGHTED AVERAGE SHARES EXERCISE PRICE Outstanding December 31, 1996 239,500 $ 10.46
Granted 151,000 5.10 Canceled (39,500) 10.49 --------- Outstanding December 31, 1997 351,000 8.15
Granted 830,778 2.28 Canceled (107,000) 5.43 --------- Outstanding December 31, 1998 1,074,778 3.89
Granted 200,783 1.76 Canceled (314,522) 3.36 --------- Outstanding December 31, 1999 961,039 3.60 =========
The following table shows various information about stock options outstanding at December 31, 1999:
At December 31, 1999, 2,038,461 shares were available for future grants under the stock incentive plan.
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 42 of 128
The Company applies APB Opinion 25 "Accounting for Stock Issued to Employees" and related Interpretations to measure the cost of stock options issued to employees. Accordingly, no compensation cost has been recognized for the stock option or employee stock purchase plans. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for the awards under those plans consistent with the method of FASB Statement 123 "Accounting for Stock Based Compensation," the effect on the Company's net loss and loss per share would have been as follows:
YEAR ENDED DECEMBER 31 1999 1998 1997 Net loss As reported ($13,978) ($16,123) ($1,101) Pro forma (14,167) (16,241) (1,199) Net loss per share As reported ($2.26) ($2.66) ($0.18) Pro forma (2.29) (2.68) (0.20)
G. NET SALES AND SERVICE REVENUE
Net sales and service revenue includes the following products:
YEAR ENDED DECEMBER 31 1999 1998 1997 Furniture $120,615 $122,383 $125,154 Bedding 37,876 42,342 43,015 Appliances 59,514 75,155 85,814 Electronics 50,363 57,693 65,859 Other 18,640 21,137 21,861 -------- -------- -------- $287,008 $318,710 $341,703 ======== ======== ========
Total 1999 sales include the following sales for the Florida and Cincinnati markets which will be closed in 2000 (see Note A): $52,449 for furniture; $15,545 for bedding; $16,666 for appliances; $17,553 for electronics; and $5,433 for other.
H. FINANCE PARTICIPATION
The Company earns a finance participation fee on credit sales placed through a private-label revolving credit plan. Receivables from this plan are held by the bank without recourse to the Company. Sales under the private label plan as a percentage of consolidated net sales was approximately 46 percent in the year ended December 31, 1999, 41 percent in 1998, and 40 percent in 1997. Because a significant portion of the Company's sales are financed by consumers, the lack of availability of consumer credit programs, or a significant increase in the cost of such programs, could have a material adverse effect on the Company.
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 43 of 128
I. INCOME TAXES
Deferred taxes reflect the effects of temporary differences between carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The principal current and non-current deferred income tax assets are as follows:
DECEMBER 31 1999 1998 Deferred tax assets: Deferred warranty revenue $ 1,027 $ 2,032 Merchandise inventories 651 787 Capital lease obligations 874 860 Depreciation 2,506 924 Workers' compensation accrual 701 973 Vacation accrual 484 527 Deferred rent 717 568 Other 719 528 Net operating loss carryforwards 7,393 2,608 Valuation allowance (15,072) (9,807) --------- --------- Net deferred tax asset $ - $ - ========= =========
Income taxes (benefit) consist of the following:
YEAR ENDED DECEMBER 31 1999 1998 1997 Currently payable (refundable): Federal $ - ($2,279) ($1,985) State and local - (155) 50 -------- -------- -------- (2,434) (1,935)
Deferred federal and state - 7,756 1,510 -------- -------- -------- $ - $5,322 ($ 425) ======== ======== ========
A reconciliation between the statutory federal income tax rate and the effective tax rate follows:
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 44 of 128
The current period reflects no provision for income tax benefits because the Company has the ability to only carry losses forward. Based on the Company's recent performance, a valuation allowance is necessary. The disproportionate provision for income taxes in 1998 reflects an increase in the valuation reserve provided for deferred tax benefits. The reserve was deemed necessary as a result of the uncertainty of the recoverability of such tax benefits. The income tax benefit in 1997 reflects minimum taxes imposed by certain jurisdictions and a valuation reserve for certain state operating loss carryforwards. At December 31, 1999, the Company's federal net operating loss carryforward was approximately $18,383, which expires in 2018 and 2019.
In connection with the initial public offering of stock in 1993, the initial shareholders of the Company entered into a Tax Indemnification Agreement that requires the Company to reimburse them for certain additional taxes that they may have to pay for any adjustments in taxable income in years prior to the offering. In addition, the agreement requires the initial shareholders to reimburse the Company for certain decreases in taxes that are refunded to them for adjustments in taxable income. The Company also agreed to conduct, at its expense, the defense of, or the negotiations in settlement with respect to, any challenge to the S Corporation status in prior years.
Through the initial public offering of its common shares in 1993, the Company paid dividends from time to time. In 1998, the Company settled an examination of its 1993 and 1994 federal income tax returns, and accrued $225 payable to the Initial Shareholders as the result of that settlement, pursuant to the Tax Indemnification Agreement entered into at the time of the initial public offering. A portion of that accrual was paid during 1999, and a portion remains unpaid and subject to the bankruptcy proceedings.
J. EMPLOYEE BENEFIT PLANS
The Company has a profit sharing plan for all eligible employees. Contributions to the plan are made under guidelines established in the Roberds, Inc. Executive Compensation Plan. Profit sharing plan expense was $87 in the year ended December 31, 1999, $82 in 1998, and $80 in 1997.
The Company has a self-insured group health and welfare benefit plan. This plan operates through an independent trust and offers major medical, dental and disability insurance coverage to all eligible employees. The Company provides life insurance for all employees at no cost to the employees. The Company's expense under the health and welfare benefit plan was approximately $512 in the year ended December 31, 1999, $779 in 1998, and $484 in 1997.
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 45 of 128
K. BUSINESS SEGMENTS - --------------------
The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 131 "Disclosures about Segments of an Enterprise and Related Information." The statement requires disclosure of segment information based upon the way management organizes segments within the Company for making operating decisions and assessing performance. The Company has identified the three geographic market areas in which it operates as segments. A summary of the Company's operations by segment for the years ended December 31, 1999, 1998 and 1997 are as follows:
EARNINGS (LOSS) DEPRECIATION INTEREST BEFORE INCOME AND EXPENSE, NET SALES TAXES AMORTIZATION NET 1999 (NOTES A AND G) - ------------------- Ohio $ 131,904 ($ 3,273) $ 4,494 $ 3,316 Georgia 94,321 (5,200) 2,521 2,503 Florida 60,783 (5,505) 1,299 1,172 --------- --------- --------- --------- $ 287,008 ($ 13,978) $ 8,314 $ 6,991 ========= ========= ========= ========= - ---- Ohio $ 156,310 $ 2,502 $ 4,614 $ 3,532 Georgia 98,568 (5,144) 2,628 2,521 Florida 63,832 (8,159) 1,553 1,171 --------- --------- --------- --------- $ 318,710 ($ 10,801) $ 8,795 $ 7,224 ========= ========= ========= ========= - ---- Ohio $ 169,557 $ 5,161 $ 4,644 $ 3,670 Georgia 103,063 (4,212) 2,969 2,665 Florida 69,083 (2,475) 1,412 1,210 --------- --------- --------- --------- $ 341,703 ($ 1,526) $ 9,025 $ 7,545 ========= ========= ========= =========
Included in the operating results of the Company's segments are certain corporate and non-segment expenses that have been allocated to the segments. The Company does not report identifiable assets by operating segment. As a result, such disclosures have been omitted from the segment data.
L. LITIGATION AND OTHER PROCEEDINGS
In 1994, the Ohio Bureau of Workers' Compensation ("Bureau") completed an examination of the Company's 1992 and 1993 workers' compensation returns. After adjustments, the Bureau assessed $871 against the Company, based on the Bureau's reclassification of the majority of the Company's Ohio employees into higher rate classifications. After a series of administrative and judicial appeals by the Company, in August 1999 the Ohio Supreme Court ruled against the Company in its final appeal. In 1998, the Company paid the $871 principal amount of the 1992-1993 assessment. The Company has accrued $168 of interest owed on the 1992-1993 assessment, which it expects to pay in 2000, as well as the estimated amount of additional taxes that would be caused by a reclassification of employees for the period from January 1994 through June 1996, consistent with the Bureau's position for 1992-93.
In the ordinary course of its business, the Company is from time to time a party in certain legal proceedings. In the opinion of management, the Company is not party to any litigation, other than those described herein, that would have a material adverse effect on its operations or financial condition if the proceeding was determined adversely to the Company.
On January 19, 2000, the Company filed for protection under Chapter 11 of the Federal bankruptcy laws. It is not clear how long the Company may have to remain under the protection of such laws, or whether the Company can successfully emerge from bankruptcy protection.
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 46 of 128
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 47 of 128
PART III
Certain information required by Part III of this Report is omitted because the Company will file a definitive proxy statement, pursuant to Regulation 14A, for its 2000 annual meeting of shareholders ("2000 Proxy Statement"), not later than 120 days after the end of the fiscal year covered by this Report, and certain information included in the 2000 Proxy Statement is incorporated herein by reference.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Information concerning the Company's directors is contained in the "Election of Directors" section of the Company's 2000 Proxy Statement and is incorporated herein by reference.
The following information concerning executive officers of the Company is provided pursuant to instruction 3, item 401(b), Regulation S-K, at January 31, 2000. The Company is not aware of any family relationship between any executive officers or directors of the Company. Executive officers serve at the discretion of the Board of Directors.
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 48 of 128
* Positions eliminated in February and March 2000.
MELVIN H. BASKIN was elected Chief Executive Officer in July 1998 and has been a Director since February 1999. He also served as President from July through October 1998. From July 1997 through July 1998, he was Chief Operating Officer, Farm Stores, Inc., Miami, Florida. From May 1997 through July 1997, he was President, Breuner's Home Furnishings Corp., Lancaster, Pennsylvania, and from June 1996 through July 1997 was President-Eastern Division of Breuner's. From 1993 through May 1996, he was President, Alex & Ivy Country Division, The Bombay Company, Inc., Fort Worth, Texas.
ROBERT M. WILSON was elected President and Chief Administrative Officer in October 1998. He has been General Counsel, Secretary, and a Director since 1993. He served as Chief Financial Officer of Roberds from 1988 through July 1999, and was Executive Vice President from 1988 through October 1998. He was Treasurer from 1993 through May 1995, and Assistant Treasurer from May 1995 through May 1997.
BILLY D. BENTON was elected Executive Vice President--General Merchandise Manager in April 1999. Prior thereto, he was Executive Vice President-Operations from May 1997 through April 1999. From October 1996 through May 1997, he consulted with several businesses and explored a number of business opportunities. From January through October 1996, Mr. Benton was National Director of Retail Marketing for Levitz Furniture Corporation, Boca Raton, Florida. From August 1995 through January 1996, he was Eastern Division President. From 1992 through August 1995, he was Vice President-General Manager, Southeast Region. Levitz filed for protection under Chapter 11 of the bankruptcy laws in September 1997.
R. BRIAN GOOD was elected Senior Vice President-Stores in November 1998. From April 1998 through November 1998, he was Senior Divisional Vice President, Good's division of Breuner's Home Furnishings Corp., Lancaster, Pennsylvania. From June 1996 through April 1998, he was Senior Regional Vice President of the Good's division. From January through June 1996, he was Senior Vice President of Sales and Marketing, Good's Furniture, Inc. From 1990 through January 1996, he was Vice President of Sales of Good's.
STEVEN S. KLUG was elected Senior Vice President-General Merchandise Manager in January 2000. He was Senior Vice President-Appliances and Electronics from October 1999 through January 2000. From March 1995 through November 1999, he was Senior Vice President-General Merchandise Manager, HomePlace, Cleveland, Ohio, with responsibility for the furniture and floor covering categories, and for store planning and visual presentation. HomePlace filed for protection under the bankruptcy laws in January 1998. Early in 1995, Mr. Klug was seeking employment.
GEARRY D. DAVENPORT was elected Chief Financial Officer in July 1999. From 1993 through July 1999, he was Chief Financial Officer, Lindemann Produce, LLC, and its predecessors, Reno, Nevada, a produce distributor. He also served as a director of Lindemann from 1993 through February 1999.
STEVEN DOMINGUEZ was elected Vice President-Store Planning and Accessories in January 2000. He was Vice President-Visual Merchandising from February 1999 through January 2000. From January 1997 through November 1998, he was Director of Visual Merchandising, Breuner's Home Furnishings Corporation, Lancaster, Pennsylvania. From April 1995 through December 1996, he was Visual Merchandising Associate, Huffman Koos, Nanuet, New York. From 1984 through April 1995, he was a consultant in visual merchandising and graphic design.
WAYNE B. HAWKINS was elected Treasurer in May 1995, and Assistant Secretary in May 1997. Prior thereto, he was Assistant Treasurer since 1994.
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JONATHAN W. HOUSE was elected Vice President-Warehousing, Distribution and Logistics in May 1998. Prior thereto, he served as a consultant to the Company since March 1998. From November 1996 through March 1998, he was a Senior Consulting Project Manager in logistics, NCR Corporation, Dayton, Ohio. Prior thereto, he served in the United States Army primarily in logistics functions and commands, retiring as a Colonel in November 1996. From 1994 through November 1996, he was Commander and Deputy Commander, Defense Electronics Supply Center, Dayton, Ohio.
SANDRA J. JACKSON was elected Vice President-Advertising and Marketing in April 1999. From January 1999 through April 1999, she explored business opportunities. From January 1998 through January 1999, she was Creative Services Director, Caldor Department Store, Norwalk, Connecticut. From January 1997 through January 1998, she was Creative Manager, Cadmus Communication, Atlanta, Georgia. From 1986 through January 1997, she was Creative Services Director, Federated Department Stores, Inc., Atlanta, Georgia.
WAYNE P. MCCOLLUM was elected Chief Information Officer in November 1998. From November 1997 through November 1998, he was Vice President of Information Technology, Farm Stores, Inc., Miami, Florida. From April 1997 through November 1997, he explored business opportunities. From August 1995 through April 1997, he was Chief Information Officer and later Chief Operating Officer, Rampage Clothing Company, Los Angeles, California. From 1993 through August 1995, he was Senior Consultant, Electronic Data Systems, Dallas, Texas, specializing in retail clients.
THEODORE D. PALMER was elected Vice President-Store Operations and Control in April 1999. From October 1998 through April 1999, he was Distribution Director in the Company's Tampa market. From September 1996 through October 1998, he was a store manager in the Company's Tampa market. From 1991 through September 1996, he was Vice President/General Manager, Kane's Furniture, Tampa, Florida
M. SCOTT TAYLOR was elected Vice President-Human Resources in November 1998. From October 1996 through November 1998, he was Vice President-Stores, Farm Stores, Inc., Miami, Florida. From April 1995 through October 1996, he was Director-Executive Placement, Sunglass Hut International, Coral Gables, Florida. From 1991 through April 1995, he was Human Resource Manager, T.J. Maxx, Dedham, Massachusetts.
DANIEL L. THOBE was elected Vice President, Controller, and Chief Accounting Officer in November 1999. From June 1997 through November 1999, he was Vice President and Corporate Controller, Breuner's Home Furnishings Corporation, Lancaster, Pennsylvania. From September 1996 through June 1997, he was Divisional Vice President and Controller, The Bon-Ton Stores, Inc., York, Pennsylvania. From 1973 through August 1996, he was associated with Sears, Roebuck and Company, Hoffman Estates, Illinois, in a variety of management positions, most recently as National Director of Capital Accounting and Control.
MICHAEL VAN AUTREVE was elected Vice President-Bedding and Flooring in January 2000, and prior thereto had been Vice President-Bedding since 1988.
The Company's future performance will depend to a significant extent upon the efforts and abilities of certain members of senior management. The loss of the services of any member of senior management could have a material adverse effect on the Company.
At January 31, 2000, the Initial Shareholders, and their spouses, owned approximately 48.6 percent of the Company's outstanding shares. As a result, they may be in a position to control the election of the entire Board of Directors of the Company and control the outcome of all actions requiring shareholder approval, thereby ensuring their ability to control the future direction and management of the Company.
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The Company's Amended Articles of Incorporation and Regulations contain certain provisions that may discourage acquisition bids for the Company and could limit the price that certain investors might be willing to pay for the Company's common shares. Among others, these provisions include the classification of the Board of Directors, certain restrictions on shareholders' ability to remove directors, certain "fair price" provisions adopted by the Company under Ohio law, and the Company's adoption of certain restrictions on shareholders' ability to bring matters before meetings of shareholders. In addition, the Company has the ability to issue preferred shares, which could serve to discourage acquisition bids for the Company's common shares.
The common shares held by the Initial Shareholders are not registered for sale under the Securities Act of 1933; however, such shares can be sold under SEC Rule 144 and other provisions of the securities laws. In addition, shares that may be acquired by directors and executive officers of the Company through certain benefit plans are registered for resale by such directors and executive officers. Sales of substantial numbers of shares by the Company, the Initial Shareholders, or other officers or directors, or the perception that such sales could occur, could adversely affect the market price of the Company's stock.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by reference to the "Executive Compensation" section of the Company's 2000 Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by reference to the "Security Ownership of Certain Beneficial Owners and Management" section of the Company's 2000 Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated herein by reference to the "Certain Relationships and Related Transactions" section of the Company's 2000 Proxy Statement.
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PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS ------ --------------------
The following financial statements are filed as part of this Report and are attached hereto:
Independent Auditors' Report.
Consolidated Balance Sheets at December 31, 1999 and 1998.
Consolidated Statements of Operations for the years ended December 31, 1999, 1998, and 1997.
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1999, 1998, and 1997.
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998, and 1997.
Notes to Consolidated Financial Statements for the years ended December 31, 1999, 1998 and 1997.
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(a)(2) FINANCIAL STATEMENT SCHEDULES ------------------------------------
The following financial statement schedule of the Company, for the three years ended December 31, 1999, is filed as part of this Report and should be read in conjunction with the consolidated financial statements of Roberds, Inc. for the periods then ended:
Independent Auditors' Report
Schedule II, Valuation and qualifying accounts
Schedules not listed above are omitted because they are not applicable, are not required, or the information required to be set forth therein is included in the Consolidated Financial Statements or the notes thereto.
INDEPENDENT AUDITORS' REPORT - ----------------------------
Board of Directors Roberds, Inc. Dayton, Ohio
We have audited the consolidated financial statements of Roberds, Inc. and subsidiary ("Company") as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999, and have issued our report thereon dated February 25, 2000, which report includes explanatory paragraphs describing uncertainties relating to bankruptcy proceedings and matters that raise substantial doubt about the Company's ability to continue as a going concern. Such financial statements and report are included elsewhere in this Annual Report on Form 10-K. Our audits also included the financial statement schedule of Roberds, Inc. and subsidiary, listed in Item 14(a)(2) of this Annual Report on Form 10-K. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.
DELOITTE & TOUCHE LLP Dayton, Ohio February 25, 2000
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ROBERDS, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS)
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(a)(3) EXHIBITS ----------------
3.1 Amended Articles of Incorporation of Registrant, filed January 10, 1994, as Exhibit 4.1 to Registrant's Form S-8, Registration File No. 33-73900, and incorporated herein by reference.
3.2 Amended Code of Regulations of Registrant, filed January 10, 1994, as Exhibit 4.1 to Registrant's Form S-8, Registration File No. 33-73900, and incorporated herein by reference.
4.1 Amended Articles of Incorporation of Registrant (filed as Exhibit 3.1).
4.2 Amended Code of Regulations of Registrant (filed as Exhibit 3.2).
4.3.1 Amended specimen certificate for Registrant's Common Shares, reflecting the change in stock transfer agent to National City Bank, Cleveland, Ohio, effective November 1, 1995, filed as Exhibit 4.3.1 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and incorporated herein by reference.
4.4 Excluded from the exhibits are certain agreements relating to long term debt which, individually, do not exceed 10% of the total assets of Registrant. Registrant hereby undertakes to furnish a copy of such agreements upon request by the Commission.
10.1# Roberds, Inc. 1993 Stock Incentive Plan, filed October 1, 1993 as Exhibit 10.1 to Registrant's Form S-1, Registration File No. 33-69876, and incorporated herein by reference.
10.1.1# Amendment to Roberds, Inc. 1993 Stock Incentive Plan, filed as Exhibit 99.1 to Registrant's Form S-8, File No. 33-97262, filed September 25, 1995, and incorporated herein by reference.
10.1.2# Amendment to Roberds, Inc. 1993 Stock Incentive Plan, referred to in Exhibit 10.1, effective as of November 1, 1996, and filed as Exhibit 10.1.2 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, and incorporated herein by reference.
*10.1.3# Amendment to Roberds, Inc. 1993 Stock Incentive Plan, referred to in Exhibit 10.1, effective as of April 30, 1999, filed herewith.
10.2# Roberds, Inc. Employee Stock Purchase Plan, filed October 1, 1993 as Exhibit 10.2 to Registrant's Form S-1, Registration File No. 33-69876, and incorporated herein by reference.
10.2.1# Amendment to Roberds, Inc. Employee Stock Purchase Plan, referred to in Exhibit 10.2, effective as of November 1, 1996, and filed as Exhibit 10.2.1 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, and incorporated herein by reference.
10.2.2# Amendment to Roberds, Inc. Employee Stock Purchase Plan, referred to in Exhibit 10.2, effective as of May 13, 1997, and filed as Exhibit 99.1 to Registrant's Form S-8, Registration File No. 333-37829, and incorporated herein by reference. In January 2000, the Company terminated the plan and began to wind up its affairs.
10.3# Roberds, Inc. 1993 Outside Director Stock Option Plan, filed October 1, 1993 as Exhibit 10.3 to Registrant's Form S-1, Registration File No. 33-69876, and incorporated herein by reference.
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10.3.1# Amendment to Roberds, Inc. 1993 Outside Director Stock Option Plan, referred to in Exhibit 10.3, effective as of November 1, 1996, and filed as Exhibit 10.3.1 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, and incorporated herein by reference. The plan expired in 1998, though options issued under the plan remain exercisable through 2003.
10.3.2# Roberds, Inc. Profit Sharing and Employee Retirement Savings Plan, as amended, filed as Exhibit 99 to Registrant's Form S-8, Registration File No. 33-81086, and incorporated herein by reference.
10.3.2.1# Roberds, Inc. Profit Sharing and Employee Retirement Savings Plan, as adopted March 26, 1997, and filed as Exhibit 99 to Registrant's Form S-8, Registration File No. 333-43977, and incorporated herein by reference.
10.3.3# Roberds, Inc. Amended and Restated Deferred Compensation Plan for Outside Directors, effective 1996, filed as Exhibit 10.3.2 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and incorporated herein by reference.
10.3.3.1# Amendment to Roberds, Inc. Amended and Restated Deferred Compensation Plan for Outside Directors, referred to in Exhibit 10.3.3, effective as of February 27, 1996, and filed as Exhibit 10.3.3.1 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, and incorporated herein by reference.
10.3.3.2# Amendment to Roberds, Inc. Amended and Restated Deferred Compensation Plan for Outside Directors, referred to in Exhibit 10.3.3, effective as of November 1, 1996, and filed as Exhibit 99.1 to Registrant's Form S-8, Registration File No. 333-19903, and filed as Exhibit 10.3.3.2 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, and incorporated herein by reference. The plan was terminated by the filing for bankruptcy protection in January 2000, and its affairs have been wound up.
10.4.1 Lease Agreement dated April 1, 1990 among Registrant, Kenneth W. Fletcher and Donald C. Wright, relating to Registrant's facility located at 1000 East Central Avenue, West Carrollton, Ohio, and amendments thereto, filed October 1, 1993 as Exhibit 10.4.1 to Registrant's Form S-1, Registration File No. 33-69876, and incorporated herein by reference.
10.4.1.1 Assignment and Assumption Agreement in connection with the transfer of ownership of Registrant's facility located at 1000 East Central Avenue, West Carrollton, Ohio from Kenneth W. Fletcher and Donald C. Wright, an Ohio general partnership, to Kenneth W. Fletcher, individually, and assigning Registrant's related lease of the property to Mr. Fletcher, all effective January 1, 1995, and filed as Exhibit 10.4.1.1 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference.
10.4.1.2 Assignment and Assumption Agreement in connection with the transfer of ownership of Registrant's facility located at 1000 East Central Avenue, West Carrollton, Ohio from Kenneth W. Fletcher, individually, to DAF Investments LTD., an Ohio limited liability company controlled by Mr. Fletcher, and assigning Registrant's related lease of the property to DAF Investments LTD., all effective January 1, 1995, and filed as Exhibit 10.4.1.2 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference.
10.4.1.3 Assignment and Assumption of Lease in connection with the transfer of ownership of Registrant's facility located at 1000 East Central Avenue, West Carrollton, Ohio from DAF Investments LTD., an Ohio limited liability company controlled by Mr. Kenneth W. Fletcher, to DAF West Carrollton Plaza, LTD., an Ohio limited liability company controlled by Mr. Fletcher, and assigning Registrant's related lease of the property to DAF West Carrollton Plaza, LTD., effective January 14, 1997, and
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filed as Exhibit 10.4.1.3 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, and incorporated herein by reference.
10.4.2 Lease Agreement dated April 1, 1990 among Registrant, Kenneth W. Fletcher and Donald C. Wright, relating to Registrant's facility located at 1100 East Central Avenue, West Carrollton, Ohio, and amendments thereto, filed October 1, 1993 as Exhibit 10.4.2 to Registrant's Form S-1, Registration File No. 33-69876, and incorporated herein by reference.
10.4.2.1 Assignment and Assumption Agreement in connection with the transfer of ownership of Registrant's facility located at 1100 East Central Avenue, West Carrollton, Ohio from Kenneth W. Fletcher and Donald C. Wright, an Ohio general partnership, to Kenneth W. Fletcher, individually, and assigning Registrant's related lease of the property to Mr. Fletcher, all effective January 1, 1995, and filed as Exhibit 10.4.2.1 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference.
10.4.2.2 Assignment and Assumption Agreement in connection with the transfer of ownership of Registrant's facility located at 1100 East Central Avenue, West Carrollton, Ohio from Kenneth W. Fletcher, individually, to DAF Investments LTD., an Ohio limited liability company controlled by Mr. Fletcher, and assigning Registrant's related lease of the property to DAF Investments LTD., all effective January 1, 1995, and filed as Exhibit 10.4.2.2 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference.
10.4.2.3 Assignment and Assumption of Lease in connection with the transfer of ownership of Registrant's facility located at 1100 East Central Avenue, West Carrollton, Ohio from DAF Investments LTD., an Ohio limited liability company controlled by Mr. Kenneth W. Fletcher, to DAF West Carrollton Plaza, LTD., an Ohio limited liability company controlled by Mr. Fletcher, and assigning Registrant's related lease of the property to DAF West Carrollton Plaza, LTD., effective January 14, 1997, and filed as Exhibit 10.4.2.3 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, and incorporated herein by reference.
10.4.3 Lease Agreement dated June 1, 1988 among Registrant, Kenneth W. Fletcher and Donald C. Wright, relating to Registrant's Piqua, Ohio facility, and amendments thereto, filed October 1, 1993 as Exhibit 10.4.3 to Registrant's Form S-1, Registration File No. 33-69876, and incorporated herein by reference.
10.4.3.1 Assignment and Assumption Agreement in connection with the transfer of ownership of Registrant's Piqua, Ohio facility from Kenneth W. Fletcher and Donald C. Wright, an Ohio general partnership, to Donald C. Wright, individually, and assigning Registrant's related lease of the property to Mr. Wright, all effective January 1, 1995 and filed as Exhibit 10.4.3.1 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference.
10.4.4 Lease Agreement dated April 1, 1988 among Registrant, Kenneth W. Fletcher and Donald C. Wright, relating to Registrant's Richmond, Indiana facility, and amendments thereto, filed October 1, 1993 as Exhibit 10.4.4 to Registrant's Form S-1, Registration File No. 33-69876, incorporated herein by reference.
10.4.4.1 Assignment and Assumption Agreement in connection with the transfer of ownership of Registrant's Richmond, Indiana facility from Kenneth W. Fletcher and Donald C. Wright, an Ohio general partnership, to Donald C. Wright, individually, and assigning Registrant's related lease of the property to Mr. Wright, all effective January 1, 1995, and filed as Exhibit 10.4.4.1 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference.
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10.4.5 Lease Agreement dated March 1, 1992 among Registrant, Kenneth W. Fletcher and Donald C. Wright, relating to Registrant's Springfield, Ohio facility, and amendments thereto, filed October 1, 1993 as Exhibit 10.4.5 to Registrant's Form S-1, Registration File No. 33-69876, and incorporated herein by reference.
10.4.5.1 Assignment and Assumption of Leases transferring ownership of Registrant's Springfield, Ohio facility from Kenneth W. Fletcher and Donald C. Wright, an Ohio general partnership, to Springfield Properties, Inc., an Ohio corporation owned by Messrs. Fletcher and Wright, and assigning Registrant's related lease of the property to Springfield Properties, Inc., all effective November 16, 1994, and filed as Exhibit 10.4.5.1 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994, and incorporated herein by reference.
10.4.6 Lease Agreement dated March 1, 1987 between Registrant and Howard Investments, a partnership owned by the Initial Shareholders, relating to Registrant's Norcross, Georgia facility, filed October 1, 1993 as Exhibit 10.4.6 to Registrant's Form S-1, Registration File No. 33-69876, and incorporated herein by reference.
10.4.6.1 Amendments to Lease Agreement between Registrant and Howard Investments, referred to in Exhibit 10.4.6, effective December 20, 1995, pursuant to a sale of the property by Howard Investments to 800 Broadway and Ponce de Leon Stores, which are unrelated to the Company and the Initial Shareholders, filed as Exhibit 10.4.6.1 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and incorporated herein by reference.
10.4.7 Lease Agreement dated March 1, 1987 between Registrant and Howard Investments, a partnership owned by the Initial Shareholders, relating to Registrant's Marietta, Georgia facility, filed October 1, 1993 as Exhibit 10.4.7 to Registrant's Form S-1, Registration File No. 33-69876, and incorporated herein by reference.
10.4.8 Lease Agreement dated November 1, 1987 between Registrant and Howard Investments, a partnership owned by the Principal Shareholders, relating to Registrant's Forest Park, Georgia facility, and amendments thereto, filed October 1, 1993 as Exhibit 10.4.8 to Registrant's Form S-1, Registration File No. 33-69876, and incorporated herein by reference.
10.5 Tax Indemnification Agreement among Kenneth W. Fletcher, Donald C. Wright, Howard W. Smith, and Registrant, filed October 1, 1993 as Exhibit 10.5 to Registrant's Form S-1, Registration File No. 33-69876, and incorporated herein by reference.
10.6.3.5 Second Amendment to Amended and Restated Business Loan Agreement between Bank One, Dayton, NA and Registrant, dated December 31, 1996, filed as Exhibit 10.6.3.5 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, and incorporated herein by reference.
10.6.3.6 Amendment to Second Amended and Restated Business Loan Agreement between Bank One, Dayton, NA and Registrant, dated February 27, 1997, amending the agreement referred to in Exhibit 10.6.3, filed as Exhibit 10.6.3.6 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, and incorporated herein by reference.
10.6.3.7.1 Second Amendment to Second Amended and Restated Business Loan Agreement between Bank One, NA, successor by merger of Bank One, Dayton, NA, and Registrant, dated as of June 30, 1997, amending the agreement referred to in Exhibit 10.6.3, filed as Exhibit 10 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, and incorporated herein by reference.
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10.6.3.7.2 Third Amendment to Second Amended and Restated Business Loan Agreement between Bank One, NA, successor by merger of Bank One, Dayton, NA, and Registrant, dated as of June 30, 1998, amending the agreement referred to in Exhibit 10.6.3, filed as Exhibit 10 to Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, and incorporated herein by reference.
10.6.3.7.3 Fourth Amendment to Second Amended and Restated Business Loan Agreement between Bank One, NA, successor by merger of Bank One, Dayton, NA, and Registrant, dated as of December 31, 1998, amending the agreement referred to in Exhibit 10.6.3, filed as Exhibit 10.6.3.7.3 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference.
10.7 Amended and Restated Private Label Revolving Plan Agreement between Registrant and Bank One, Dayton, N.A., filed October 1, 1993 as Exhibit 10.7 to Registrant's Form S-1, Registration File No. 33-69876, and incorporated herein by reference. Portions of the Exhibit have been omitted pursuant to a request by Registrant for confidential treatment, which runs through 2003.
10.7.1 Amended and Restated Private Label Revolving Credit Plan Agreement between Registrant and Bank One, NA, dated as of June 17, 1998, filed as Exhibit 10.2 to Registrant's Quarterly Report on Form 10-Q for the fiscal period ended June 30, 1998, and incorporated herein by reference.
*10.7.2 Amendment to Amended and Restated Private Label Revolving Credit Plan Agreement between Registrant and GE Capital Consumer Card Co., as successor to Bank One, NA, dated as of January 24, 2000, amending the agreement referred to in Exhibit 10.7.1, filed herewith.
10.8 Loan and Security Agreement between Registrant and BankBoston Retail Finance Inc., dated March 3, 1999, filed as Exhibit 10.8 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference.
**10.8.1 First Amendment to Loan and Security Agreement between Registrant and BankBoston Retail Finance, Inc., dated as of May 14, 1999, amending the Loan and Security Agreement referred to in 10.8 above, filed as Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the fiscal period ended June 30, 1999, and incorporated herein by reference.
**10.8.2 First Modification Agreement to Loan and Security Agreement between Registrant and BankBoston Retail Finance, Inc., dated as of November 17, 1999, amending the Loan and Security Agreement referred to in 10.8 above, filed as Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q for the fiscal period ended September 30, 1999, and incorporated herein by reference.
*10.8.3 Post-Petition Loan and Security Agreement for up to $25 million between Registrant and Jackson National Life Insurance Company, dated as of February 22, 2000, replacing the financing referred to in Exhibit 10.8.2, filed herewith.
10.10# Registrant's Executive Compensation Plan, adopted in 1994, effective for the 1995 calendar year, filed as Exhibit 10.10 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference.
10.10.1# Registrant's Amended and Restated Executive Compensation Plan, as amended for the 1996 calendar year, amending the Plan referred to in Exhibit 10.10 above, and filed as Exhibit 10.10.1 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and incorporated herein by reference.
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10.10.2# Registrant's Seconded Amended and Restated Executive Compensation Plan, as amended for the 1997 calendar year, amending the Plan referred to in Exhibit 10.10.1 above, filed as Exhibit 10.10.2 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1996, and incorporated herein by reference.
10.10.3# Registrant's Third Amended and Restated Executive Compensation Plan, as amended for the 1998 calendar year, amending the Plan referred to in Exhibit 10.10.2 above, filed as Exhibit 10.10.3 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1997, and incorporated herein by reference.
10.11.3# Employment Agreement, dated as of May 27, 1997, between Registrant and Billy D. Benton, Executive Vice President-Operations, filed as Exhibit 10.11.3 to Registrant's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated herein by reference.
**10.11.4# Amended and Restated Employment Agreement, dated as of April 30, 1999, between Registrant and Billy D. Benton, Executive Vice President-General Merchandise Manager, superseding the Agreement referred to in 10.11.3 above, filed as Exhibit 10.11 to Registrant's Report on Form 10-Q for the quarterly period ended June 30, 1999, and incorporated herein by reference.
10.11.5# Employment Agreement, dated July 6, 1998, between Registrant and Melvin H. Baskin, Chief Executive Officer, filed as Exhibit 10.1 to Registrant's Report on Form 10-Q for the quarterly period ended September 30, 1998, and incorporated herein by reference.
21 Subsidiary of Registrant, filed as Exhibit 21 to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994 and incorporated herein by reference.
*23 Independent Auditors' Consent.
*24 Powers of attorney.
*27 Financial Data Schedules
* Exhibits electronically filed herewith. ** Exhibits incorporated by reference for the first time. # Constitutes a "management contract or compensatory plan or arrangement," pursuant to Item 14(a)(3),(c).
(b) REPORTS ON FORM 8-K ----------------------------
None.
(c) EXHIBITS -----------------
The response to this portion of Item 14 is submitted as a separate section of this Report.
(d) FINANCIAL STATEMENT SCHEDULES --------------------------------------
The response to this portion of Item 14 is submitted as a separate section of this Report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ROBERDS, INC., by
/s/ Melvin H. Baskin* - ------------------------------------ Melvin H. Baskin, its Chief Executive Officer
/s/ Gearry D. Davenport* - ------------------------------------ Gearry D. Davenport, its Chief Financial Officer
/s/ Daniel L. Thobe* - ------------------------------------ Daniel L. Thobe, its Vice President and Chief Accounting Officer
/s/ Robert M. Wilson *By:________________________________ Robert M. Wilson Attorney in Fact
February 25, 2000
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities indicated on February 25, 2000.
/s/ Melvin H. Baskin* - ------------------------------------ Melvin H. Baskin Director
/s/ Jerry L. Kirby* - ------------------------------------ Jerry L. Kirby Director
/s/ James F. Robeson* - ------------------------------------ James F. Robeson Director
/s/ Howard W. Smith* - ------------------------------------ Howard W. Smith Director
/s/ Gilbert P. Williamson* - ------------------------------------ Gilbert P. Williamson Director
/s/ Robert M. Wilson - ------------------------------------ Robert M. Wilson Director
/s/ Donald C. Wright* - ------------------------------------ Donald C. Wright Director
/s/ Robert M. Wilson *By:________________________________ Robert M. Wilson Attorney in Fact
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 62 of 128
EXHIBIT INDEX -------------
10.1.3 Amendment to Roberds, Inc. 1993 Stock Incentive Plan, referred to in Exhibit 10.1, effective as of April 30, 1999.
10.7.2 Amendment to Amended and Restated Private Label Revolving Credit Plan Agreement between Registrant and GE Capital Consumer Card Co., as successor to Bank One, NA, dated as of January 24, 2000, amending the agreement referred to in Exhibit 10.7.1.
10.8.3 Post-Petition Loan and Security Agreement for up to $25 million between Registrant and Jackson National Life Insurance Company, dated as of February 22, 2000, replacing the financing referred to in Exhibit 10.8.2.
23 Independent Auditors' Consent.
24 Powers of attorney.
27 Financial Data Schedules.
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ROBERDS, INC. 1999 ANNUAL REPORT ON FORM 10-K Page 63 of 128