<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant /X/
Filed by a party other than the registrant / /
Check the appropriate box:
/X/ Revised preliminary proxy statement / / Confidential, for Use of the
Commission Only (as
permitted by
Rule 14a-6(e)(2))
/ / Definitive proxy statement
/ / Definitive additional materials
/ / Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
CROWLEY, MILNER AND COMPANY
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
CROWLEY, MILNER AND COMPANY
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
/ / $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(i)(2)
or Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
/X/ Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the form or schedule and the date of its filing.
(1) Amount previously paid:
- --------------------------------------------------------------------------------
(2) Form, schedule or registration statement no.:
- --------------------------------------------------------------------------------
(3) Filing party:
- --------------------------------------------------------------------------------
(4) Date filed:
- --------------------------------------------------------------------------------
<PAGE> 2
CROWLEYS LOGO
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD AUGUST , 1996
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Crowley,
Milner and Company, a Michigan corporation (the "Company"), will be held at the
principal offices of the Company, 2301 West Lafayette Boulevard, Detroit,
Michigan 48216 on Wednesday, August , 1996 at 2:00 p.m., Eastern Daylight
Savings Time, for the following purposes:
1. To elect four directors to hold office until the Annual Meeting of
Shareholders in 1999;
2. To approve the issuance by the Company of 514,800 shares of Common
Stock of the Company to the shareholders (the "Steinbach
Shareholders") of Steinbach Stores, Inc., an Ohio corporation
("Steinbach"), in exchange for all of the issued and outstanding
shares of Common Stock of Steinbach (the "Acquisition") pursuant to
the terms and conditions of that certain Agreement and Plan of
Reorganization, dated as of November 17, 1995, as amended, by and
among the Company and the Steinbach Shareholders (the "Acquisition
Agreement");
3. To approve an amendment to the Crowley, Milner and Company 1992
Incentive Stock Plan (the "1992 Incentive Stock Plan") to increase the
number of shares of Common Stock authorized for issuance under the
1992 Incentive Stock Plan from 200,000 shares to 300,000 shares; and
4. To appoint the firm of Ernst & Young LLP to audit the financial
records of the Company for the fiscal year ending February 1, 1997;
5. To consider and act upon any other matters which may properly come
before the meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on July 5, 1996 as
the record date for the determination of shareholders entitled to vote at the
Annual Meeting and any adjournment thereof (the "Record Date").
You are cordially invited to attend the meeting in person. If you do not
expect to be present, please sign, date and mark the enclosed proxy and return
it immediately. Your proxy may be revoked by filing with the Secretary a written
revocation or a proxy bearing a later date at any time prior to the time it is
voted or by attending the Annual Meeting and voting in person.
By order of the Board of Directors,
Mark A. Vandenberg
MARK A. VANDENBERG, Secretary
Detroit, Michigan
July , 1996
<PAGE> 3
Crowleys Logo
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
To Be Held August , 1996
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors of Crowley, Milner and Company, a Michigan corporation
(the "Company"), of proxies to be used at the Annual Meeting of Shareholders
which will be held on August , 1996 or at any adjournment of the meeting. The
mailing address of the principal executive offices of the Company is 2301 West
Lafayette Boulevard, Detroit, Michigan 48216. This Proxy Statement and the
enclosed Proxy were first sent or given to shareholders on July , 1996.
The cost of soliciting proxies, whether by mail, telephone, telegraph, in
person or otherwise, will be borne by the Company. In addition to solicitation
by mail, the Company will reimburse brokerage houses and other nominees for
their expenses incurred in sending proxies and proxy material to the beneficial
owners of shares held by them.
Holders of Common Stock of record at the close of business on July 5, 1996
will be entitled to vote at the meeting (the "Record Date"). On that Record
Date, 956,069 shares of Common Stock were issued and outstanding. Each
shareholder is entitled to one vote for each share of Common Stock held by him.
Cumulative voting for the election of directors is not available under the
Company's Articles of Incorporation. Shares cannot be voted at the meeting
unless the holder is present in person or represented by proxy. Any shareholder
giving a proxy may revoke it at any time prior to its use. Unless revoked, the
shares represented by the proxy will be voted in accordance with the
specifications made. If no specifications are made, such shares will be voted
(i) FOR the election of the Company's nominees as directors, (ii) FOR the
issuance of 514,800 shares of Common Stock in connection with the Acquisition,
(iii) FOR the approval of an amendment to the Crowley, Milner and Company 1992
Incentive Stock Plan (the "1992 Incentive Stock Plan") to increase the number of
shares of Common Stock authorized for issuance under the 1992 Incentive Stock
Plan from 200,000 shares to 300,000 shares, and (iv) FOR the appointment of
Ernst & Young LLP as auditors. The Board of Directors does not intend to present
any other matters at the Annual Meeting. However, should any other matters
properly come before the Annual Meeting, the proxy holders will have
discretionary authority to vote upon such matters and, in such event, it is the
intention of such proxy holders to vote the proxy in accordance with their best
judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of the Company, at or before the taking of the vote at the
Annual Meeting, a written notice of revocation bearing a later date than the
proxy, (ii) duly executing a later dated proxy relating to the same shares and
delivering it to the Secretary of the Company before the taking of the vote at
the Annual Meeting, or (iii) attending the Annual Meeting and voting in person
(although attendance at the Annual Meeting will not in and of itself constitute
a revocation of a proxy). Any written notice of revocation or subsequent proxy
should be sent so as to be delivered to Crowley, Milner and Company, 2301 West
Lafayette Boulevard, Detroit, Michigan 48216, Attention: Secretary, or hand
delivered to the Secretary of the Company at or before the taking of the vote at
the Annual Meeting.
For purposes of determining the number of votes cast with respect to any
voting matter, except as otherwise expressly described herein, (a) only those
cast "for" or "against" are included, (b) abstentions are counted only for
purposes of determining whether a quorum is present at the Annual Meeting, and
(c) broker non-votes are not counted for any purpose. A majority of the
outstanding shares of the Company Common Stock, represented in person or by
proxy, will constitute a quorum at the meeting.
1
<PAGE> 4
MATTERS TO COME BEFORE THE MEETING
PROPOSAL 1: ELECTION OF DIRECTORS.
General; Plurality and Voting.
The Bylaws of the Company provide that the Board of Directors shall consist
of not less than nine members nor more than twelve members as shall be fixed
from time to time by the Board and that the Board of Directors shall be divided
into three classes as nearly equal in number as possible. The term of office of
each class of directors is three years, and the terms of office of the three
classes overlap.
The Board of Directors is presently comprised of eleven directors. Four
directors will be elected at this year's Annual Meeting to hold office until the
Annual Meeting in 1999. The nominees named below have been selected by the Board
of Directors. If, due to circumstances not now foreseen, any of the nominees
named below will not be available for election, the proxies will be voted for
such other person or persons as the Board of Directors may select.
Provided that a quorum is present, the four nominees receiving the highest
number of votes cast at the Annual Meeting will be elected as directors of the
Company.
If no instructions are indicated in any properly executed proxy, such proxy
will be voted FOR the election of the three individuals nominated by the Board
of Directors.
The following table sets forth the name, age, principal occupation for the
past five years, other directorships with publicly owned companies and with
public institutions, term of service as a director of the Company, and
beneficial shareholdings with respect to the four individuals who will be
nominated for election and the seven directors who were previously elected or
appointed and who will continue for the terms indicated, as provided to the
Company by each such person.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AS OF
HAS JUNE 30, 1996(1)
SERVED ------------------------
NOMINEES FOR ELECTION AS A PERCENT
AS DIRECTOR UNTIL THE PRINCIPAL OCCUPATION DIRECTOR OF
1999 ANNUAL MEETING AND OTHER DIRECTORSHIPS AGE SINCE NUMBER CLASS(2)
- --------------------------- ---------------------------------- --- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Joseph C. Keys............. Buyer for the Company............. 55 1983 132,113(1)(3) 13.8%
Richard S. Keys............ Buyer for the Company............. 57 1981 132,353(1)(3) 13.8%
Paul R. Rentenbach......... Member in the firm of Dykema
Gossett PLLC, Detroit,
Michigan (attorneys)........... 51 1991 3,000(3) *
James L. Schaye, Jr........ Vice-President, Schottenstein
Professional Asset Management
Corporation (formerly Jubilee
Co., Inc.) since 1990; formerly
President, Eleven Group, Inc.
(apparel manufacturer) from
1988 to 1989................... 47 1993 2,500(1)(3) *
<CAPTION>
DIRECTORS WHOSE TERM
WILL CONTINUE UNTIL THE
1998 ANNUAL MEETING
- ---------------------------
<S> <C> <C> <C> <C> <C>
Dennis P. Callahan......... President and Chief Executive
Officer of the Company since
November 1992; previously
employed as Senior Vice
President -- Merchandising of
Hess's Department Stores,
Allentown, Pennsylvania, from
May 1990 to November 1992...... 52 1992 66,420(1) 6.8%
</TABLE>
2
<PAGE> 5
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AS OF
HAS JUNE 30, 1996(1)
SERVED ------------------------
DIRECTORS WHOSE TERM AS A PERCENT
WILL CONTINUE UNTIL THE PRINCIPAL OCCUPATION DIRECTOR OF
1998 ANNUAL MEETING AND OTHER DIRECTORSHIPS AGE SINCE NUMBER CLASS(2)
- --------------------------- ---------------------------------- --- -------- ------- --------
<S> <C> <C> <C> <C> <C>
JoAnn S. Cousino........... Private investor; former buyer for
the Company.................... 56 1983 133,526(1)(3) 13.9%
Alfred M. Entenman, Jr..... Executive Consultant to BEI
Associates, Inc. (architectural
and engineering services) since
January 1988................... 75 1973 3,000(3) *
<CAPTION>
DIRECTORS WHOSE TERM
WILL CONTINUE UNTIL THE
1997 ANNUAL MEETING
- ---------------------------
<S> <C> <C> <C> <C> <C>
Carroll E. Ebert........... Retired Chairman, Carson Pirie
Scott & Co..................... 72 1991 3,500(3) *
Julius L. Pallone.......... Management consultant since June
1993; President and Chief
Executive Officer of Royal
Financial Services, Inc. from
January 1989 to June 1993;
Chairman of the Board and
President of its wholly-owned
subsidiary, Royal Maccabees
Life Insurance Co. from 1968 to
June 1993. Also serves as a
trustee of the Woodward
Funds.......................... 65 1988 6,000(3) *
Jerome L. Schostak......... Chairman of the Board and Chief
Executive Officer of Schostak
Brothers & Company, Inc. (real
estate-commercial and
industrial-sales, leases,
development and industrial).
Also serves as a director of
Charter One Financial, Inc. ... 62 1995 -- --
Andrew J. Soffel........... Chairman of the Board of Directors
of the Company since March 1991
and consultant to the Company
since January 31, 1993;
President and Chief Executive
Officer of the Company from
March 1988 to November 1992.... 65 1988 14,000(3) 1.5%
</TABLE>
- -------------------------
* Less than 1%.
(1) See "Principal Shareholders".
(2) For purposes of computing the applicable percentages of the named persons,
shares which can be acquired upon the exercise of any option within the
60-day period beginning June 30, 1996 were added to the shares owned
beneficially by such persons and to the total shares outstanding on that
date, provided that such shares were not deemed to be outstanding for
purposes of computing the percentages of any other person. Does not include
shares beneficially owned by the Steinbach Shareholders. See "Principal
Shareholders".
(3) Includes options to purchase 2,000 shares of Common Stock granted under the
1995 Director Stock Option Plan which are presently exercisable.
Except as otherwise described, the individuals named above have been
principally engaged in the occupations described above for the past five years.
3
<PAGE> 6
Richard and Joseph Keys are brothers and JoAnn S. Cousino is their cousin.
None of the above individuals is a party to any contract, arrangement, or
understanding with any person with respect to any securities of the Company
except for the Shareholder Agreement (the "Shareholder Agreement"), dated August
18, 1992, as amended, among Ms. Cousino and Messrs. Joseph Keys and Richard Keys
and except for the Acquisition Agreement in which case Mr. Schaye serves as the
Vice President of an affiliate of the Steinbach Shareholders (see "Proposal 2:
Approval of Stock Issuance" and "Principal Shareholders"). Pursuant to the
Shareholder Agreement, Ms. Cousino and Messrs. Joseph Keys and Richard Keys have
agreed to restrict the disposition of, and regulate the voting of, the 390,062
shares (approximately 40.8%) of the Company's outstanding Common Stock subject
to the Shareholder Agreement. In particular, these shares may only be
transferred to certain revocable trusts, to the immediate family of one of these
shareholders, or upon the approval of all of these shareholders. Moreover, in
connection with the execution of the Shareholder Agreement, each of these
shareholders executed an irrevocable proxy whereby any two of them have the
power to vote all of such shares; provided, however, that with respect to
certain proposals involving the Company (i.e., a merger or business combination,
a sale of substantially all the assets, or a dissolution and liquidation), all
of these shareholders acting together must agree to vote such shares. The
Shareholder Agreement, and accompanying irrevocable proxy, shall continue in
force through August 18, 1996, unless sooner terminated as provided therein. No
cash was involved in the execution and delivery of the Shareholder Agreement.
See "Principal Shareholders".
The law firm of Dykema Gossett PLLC, of which Mr. Rentenbach is an equity
member, has performed legal services for the Company during its last fiscal year
and is expected to perform such services during the current year. The amounts
paid to Dykema Gossett during the fiscal year ended February 3, 1996 by the
Company for legal services did not exceed five percent of that firm's gross
revenues for its last fiscal year.
Meetings and Committees of the Board.
The Board of Directors has established an Executive Committee, a
Compensation Committee, an Audit Committee, and a Nominating Committee. During
the fiscal year ended February 3, 1996, the Board of Directors met six times,
the Executive Committee and Nominating Committee did not meet, the Compensation
Committee met once, and the Audit Committee met once.
Directors other than officers are currently paid a retainer of $9,000 per
year and $300 per meeting for attending meetings of the Board and any committees
on which they serve. In the case of Mr. Rentenbach, amounts paid to him as
director's fees are credited against fees for legal services charged by the law
firm of which he is a member.
The present members of the Executive Committee are Messrs. Rentenbach
(Chairman), Callahan, Entenman, Joseph C. Keys, and Soffel, and Ms. Cousino. The
function of the Executive Committee is to exercise the authority of the Board of
Directors in the management of the business of the Company between meetings of
the Board of Directors.
The present members of the Compensation Committee are Messrs. Pallone
(Chairman), Ebert, Entenman, Richard S. Keys, and Schaye. The Compensation
Committee establishes from time to time the salaries of the Company's executive
officers, recommends to the Board of Directors the schedule of discretionary
annual bonuses to be paid under the Company's discretionary bonus program, and
administers the 1992 Incentive Stock Plan and the Crowley, Milner and Company
1995 Director Stock Option Plan.
The present members of the Audit Committee are Messrs. Entenman (Chairman),
Ebert, Joseph C. Keys, Richard S. Keys, Pallone, and Schaye, and Ms. Cousino.
The Audit Committee nominates the independent auditors, reviews with the
independent auditors the scope and results of the auditing engagement and any
non-audit services to be performed by the independent auditors and evaluates the
independence of the independent auditors and their fees for audit and non-audit
services.
The present members of the Nominating Committee are Messrs. Richard S. Keys
(Chairman), Ebert, Entenman, Pallone and Rentenbach. The Nominating Committee is
responsible for identifying and recommending to the Board qualified candidates
for election as directors of the Company. In carrying out its
4
<PAGE> 7
responsibilities, the Nominating Committee will consider candidates suggested by
other directors, employees and shareholders. Suggestions for candidates,
accompanied by biographical material for evaluation, may be sent to the
Secretary of the Company at the Company's principal executive offices.
PROPOSAL 2: APPROVAL OF STOCK ISSUANCE
Introduction.
Pursuant to the Acquisition Agreement, the Company will acquire from the
Steinbach Shareholders and the Steinbach Shareholders will deliver to the
Company all of the issued and outstanding shares of Common Stock of Steinbach in
exchange for 514,800 shares of the Common Stock of the Company (representing
approximately 35.0% of the issued and outstanding shares of Common Stock of the
Company as of the date of this Proxy Statement (the "Consideration")). The
shareholders of the Company are not entitled to preemptive rights to acquire the
Company's unissued shares of Common Stock. The Steinbach Shareholders consist of
10 trusts established for the benefit of several members of the Schottenstein
family. Jay L. Schottenstein serves as the sole trustee of such trusts. Upon the
issuance of the 514,800 shares of Company Common Stock to the Steinbach
Shareholders, and assuming 1,470,869 shares of Company Common Stock were issued
and outstanding as a result thereof, the beneficial ownership of all directors
and officers as a group will be diluted from 51.1% to 34.0% and the beneficial
ownership of all current shareholders of the Company will be diluted from 100.0%
to 65.0% of the then issued and outstanding shares of Company Common Stock. See
"Principal Shareholders".
The issuance by the Company of the 514,800 shares of Common Stock in
connection with the Acquisition will not be registered under the Securities Act
of 1933, as amended (the "Securities Act"), but rather will be undertaken in
compliance with the registration exemption afforded by Section 4(2) of the
Securities Act. See "The Acquisition and Related Matters -- Federal Securities
Laws Consequences; Registration Rights Agreement".
Under the rules of the American Stock Exchange, the principal market on
which the Company's Common Stock is traded, the approval of the Company's
shareholders is required as a prerequisite to approval by the American Stock
Exchange to list the shares of the Company's Common Stock to be issued to the
Steinbach Shareholders. As a result, this Proposal 2 relates only to the
approval for the Company to issue the 514,800 shares of Common Stock in
connection with the Acquisition so that such shares can be listed on the
American Stock Exchange and does not relate to the approval of the overall
Acquisition Agreement itself (including, the acquisition by the Company of all
of the outstanding shares of Steinbach Common Stock).
The affirmative vote of a majority of the shares of Common Stock present at
the Annual Meeting is required to approve the issuance of 514,800 shares of
Common Stock in connection with the Acquisition. As of the Record Date,
directors and executive officers of the Company and their affiliates have the
right to vote shares, or approximately %, of the outstanding shares
of Company Common Stock. Each of the directors and executive officers has
advised the Company that he or she intends to vote or direct the vote of all
shares of Company Common Stock over which he or she has voting control for
approval of the issuance of 514,800 shares of Common Stock in connection with
the Acquisition. The Board of Directors of the Company believes that, in light
of the foregoing, the shareholders will approve this Proposal 2. However, if
such approval is not received, the Board will revisit this matter for purposes
of determining whether, and on what basis, the Company and the Steinbach
Shareholders would pursue a business combination or other strategic alliance.
See "Vote Required; Recommendation of the Company's Board of Directors" and
"Principal Shareholders".
This Proxy Statement is accompanied by a copy of the Company's Annual
Report to Shareholders for the fiscal year ended February 3, 1996 and by a copy
of the Company's Quarterly Report on Form 10-Q for the quarter ended May 4,
1996.
Reference is made to, and the discussion set forth in this "Proposal 2:
Approval of Stock Issuance" is qualified in its entirety by, the more detailed
information set forth in the Appendices hereto (including the Financial
Statements and Pro Forma Combined Condensed Financial Statements hereto) and the
documents referred to herein. Shareholders are urged to read this Proxy
Statement and the Appendices hereto (including
5
<PAGE> 8
the Financial Statements and the Pro Forma Combined Condensed Financial
Statements hereto) in their entirety.
Business of the Company and Steinbach.
The Company was organized under Michigan law as a corporation in 1914 and
is presently engaged in the operation of retail specialty department stores in
the metropolitan Detroit, Michigan and suburban Flint, Michigan areas. In
addition to its own merchandise, the Company offers certain goods and services
through licensed (or so-called leased) departments. The Company is a quality
fashion department store selling moderate priced lines in men's, women's and
children's apparel, accessories and decorative home furnishings. The Company's
principal offices are located at 2301 West Lafayette Boulevard, Detroit,
Michigan 48216 and its telephone number is (313) 962-2400.
Effective October 30, 1994, Steinbach acquired all of the outstanding stock
of Steinbach, Inc. (referred to herein as the predecessor company of Steinbach)
which was subsequently merged with and into Steinbach. As of January 1994,
Steinbach, Inc. (the predecessor company) operated 28 department stores. As of
January 1995 and December 1995, Steinbach operated 27 and 24 department stores,
respectively, in the States of Connecticut, New Hampshire, New Jersey, New York
and Vermont. Since December 1995, Steinbach has closed or sold seven of its
stores and two more are scheduled to be closed prior to completion of the
Acquisition. Fifteen of such stores will be acquired by the Company in the
Acquisition (the "15 Acquired Stores"). See "Acquisition Agreement -- Covenants;
Disposition of Excluded Assets and Excluded Liabilities; Interim Operating
Agreement". Steinbach's principal offices are located at 1800 Moler Road,
Columbus, Ohio 48201 and its telephone number is (614) 221-9200.
Selected Financial and Comparative Data.
The following tables set forth certain selected financial and comparative
data, on an historical and pro forma basis, relative to the Company and
Steinbach (including Steinbach, Inc. (the predecessor company)). The Acquisition
will be accounted for as a purchase and pro forma data is derived in accordance
with such method. The pro forma information is provided for illustrative
purposes and is not necessarily indicative of the operating results or financial
position that would have occurred if the Acquisition had been consummated at the
beginning of the periods indicated or of future operating results or financial
position. The following tables should be read in conjunction with the separate
financial statements and related notes thereto of the Company and Steinbach
contained herein. See "Financial Statements" and "Pro Forma Combined Condensed
Financial Statements".
Selected Financial Data -- the Company and Steinbach. The following tables
set forth selected financial data (i) for the Company on a historical basis for
each of the five fiscal years ended February 1, 1992, January 30, 1993, January
29, 1994, January 28, 1995, and February 3, 1996, as well as the quarters ended
May 4, 1996, and April 29, 1995, and (ii) for Steinbach, Inc. (the predecessor
company) on a historical basis for each of the three fiscal years ended January
25, 1992, January 30, 1993, January 29, 1994, and for the nine month period
ended October 29, 1994 and for Steinbach on a historical basis for the three
month period ended January 28, 1995 and for the eleven month period ended
December 30, 1995, as well as the quarters ended May 4, 1996, and April 29,
1995.
6
<PAGE> 9
CROWLEY, MILNER AND COMPANY
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
QUARTER ENDED
FISCAL YEAR ---------------------
--------------------------------------------------------- MAY 4, APRIL 29,
1995 1994 1993 1992 1991 1996 1995
-------- -------- -------- -------- -------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIO) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net sales including leased
departments.................... $105,863 $109,927 $106,935 $106,349 $103,906 $23,267 $23,593
Cost of merchandise and services
sold........................... 72,324 73,774 70,937 69,663 65,562 16,893 17,503
Operating expenses (includes
restructuring charge of
$1,900,000 for 1993)........... 33,446 33,784 34,389 39,391 40,112 7,988 7,858
Interest expense................. 1,805 1,615 1,366 1,394 1,369 437 388
Earnings (loss) before income
taxes.......................... (2,344)(1) 1,031 514 (3,947) (2,960) (1,369)(2) (2,094)
Income tax credits............... -- -- -- -- (345) -- --
Net earnings (loss).............. (2,344)(1) 1,031 514 (3,947) (2,615) (1,369)(2) (2,094)
Dividends paid................... -- -- -- -- -- -- --
Capital expenditures............. 504 527 57 626 452 96 53
Depreciation and amortization.... 1,317 1,671 2,128 2,626 2,869 315 338
Cash provided by (used in)
operations..................... (1,758) 1,654 (4,933) 3,560 (746) 680 (1,444)
PER SHARE(3)
Net earnings (loss).............. $ (2.38) $ .84 $ .45 $ (3.88) $ (2.57) $ (1.43) $ (2.00)
Dividends paid................... -- -- -- -- -- -- --
Shareholders' equity............. 7.20 10.09 9.26 8.87 13.00 5.85 8.14
Market price -- high............. 6.00 11.88 12.13 8.75 8.13 6.00 4.75
Market price -- low.............. 3.00 3.75 3.07 4.50 5.00 4.38 3.50
FINANCIAL POSITION
Working capital.................. $ 4,842 $ 8,143 $ 6,939 $ 1,485 $ 7,999 $ 3,649 $ 6,455
Ratio of current assets to
current liabilities............ 1.29x 1.61x 1.45x 1.09x 1.74x 1.21x 1.45x
Inventories...................... $ 16,637 $ 17,993 $ 16,898 $ 12,646 $ 14,674 $16,587 $17,712
Properties -- net................ 9,759 10,572 11,715 13,896 16,511 9,540 10,287
Total assets..................... 34,704 35,248 37,092 35,154 37,948 33,866 34,084
Long-term debt (including capital
lease obligations)............. 9,076 9,766 10,442 7,013 12,762 9,020 11,352
Shareholders' equity............. 6,953 10,584 9,431 9,027 13,230 5,591 8,531
Shareholders' return on equity... -- 9.7% 5.4% -- -- -- --
</TABLE>
- -------------------------
(1) Includes for the 1995 fiscal year a $957,000 operating loss and integration
charge related to Steinbach.
(2) Includes for the quarter ended May 4, 1996 operating income of $653,000
related to Steinbach.
(3) All per share calculations for prior years have been adjusted to reflect the
2 for 1 stock split which occurred May 25, 1994.
7
<PAGE> 10
STEINBACH
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
STEINBACH STEINBACH INC. (PREDECESSOR) STEINBACH
--------------------------- ---------------------------------------------------- ---------------------
ELEVEN MONTHS THREE MONTHS NINE MONTHS
FISCAL YEAR ENDED QUARTER ENDED
ENDED ENDED ENDED --------------------------------------- ---------------------
DECEMBER 30, JANUARY 28, OCTOBER 29, JANUARY 29, JANUARY 30, JANUARY 25, MAY 4, APRIL 29,
1995 1995 1994 1994 1993 1992 1996 1995
------------- ------------ ----------- ----------- ----------- ----------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIO) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net sales............. $ 183,535 $ 76,082 $ 142,844 $ 226,377 $ 225,316 $ 221,336 $ 23,844 $ 39,503
Cost of merchandise
and services sold... 122,497 52,824 87,887 142,792 138,615 135,754 15,806 26,148
Operating expenses.... 71,400 19,796 64,145 90,824 89,561 88,535 12,337 20,588
Store closing costs... 5,996 1,572 172 1,886 -- -- 1,108 --
Interest expense...... 2,076 360 1,050 1,582 1,553 1,776 245 158
Earnings (loss) before
income taxes........ (18,413) 1,497 (10,371) (10,753) 5,420 7,465 (5,579) (7,368)
Income taxes
(credits)........... -- -- -- (123) 1,253 2,099 -- --
Net earnings (loss)... (18,413) 1,497 (10,371) (10,630) 4,167 5,366 (5,579) (7,368)
Capital
expenditures........ 991 1,343 890 3,309 4,190 6,096 -- 354
Depreciation and
amortization........ 1,294 293 4,972 6,987 6,837 6,577 355 254
Cash provided by (used
in) operations...... 1,374 16,213 (4,627) (5,541) 7,764 5,335 (4,842) (17,669)
PER SHARE
Net earnings (loss)... $(184,130) $ 14,970 $ (4,779) $ (4,899) $ 2,498 $ 3,440 $(55,790) $ (73,680)
Dividends paid........ -- -- -- -- -- -- --
FINANCIAL POSITION
Working capital....... $ (2,573) $ 15,236 $ 14,535 $ 22,233 $ 19,872 $ 23,065 $ (8,211) $ 8,578
Ratio of current
assets to current
liabilities......... 0.92x 1.65x 1.37x 1.78x 1.68x 1.90x 0.68x 1.23x
Inventories........... $ 23,720 $ 32,054 $ 47,182 $ 29,378 $ 31,341 $ 27,932 $ 12,990 $ 41,508
Properties -- net..... 6,322 7,825 28,462 32,806 36,485 39,133 5,311 7,925
Total assets.......... 36,855 46,562 82,546 83,790 86,311 89,401 22,649 53,247
Long-term debt
(including capital
lease
obligations)........ 5,665 6,564 12,593 14,396 12,876 15,758 5,788 6,332
Shareholders'
equity.............. (1,916) 16,497 30,650 41,020 41,651 45,818 (8,688) 10,171
</TABLE>
- -------------------------
Note: All of the figures represent results for all of the stores operated by
Steinbach, Inc. (the predecessor company) and Steinbach. The Acquisition
Agreement contemplates that Steinbach will discontinue operations at nine
of its stores, with the result that 15 Acquired Stores will be operated by
Steinbach at the time the Acquisition is consummated. See below "The
Acquisition and Related Matters -- Business of the Company and Steinbach,"
"-- Background and Reasons for the Acquisition," and "The Acquisition
Agreement -- Covenants; Disposition of Excluded Assets and Excluded
Liabilities; Interim Operating Agreement."
8
<PAGE> 11
Pro Forma Financial Data. The following table sets forth pro forma combined
unaudited financial data for the Company on a basis assuming the Acquisition had
been effective at the beginning of the fiscal year ended February 3, 1996 and at
the beginning of the quarter ended May 4, 1996, as the case may be.
SELECTED FINANCIAL DATA -- PRO FORMA COMBINED
<TABLE>
<CAPTION>
FISCAL YEAR QUARTER
ENDED ENDED
FEBRUARY 3, 1996 MAY 4, 1996
---------------- -----------
(IN THOUSANDS EXCEPT PER SHARE
DATA AND RATIO)
<S> <C> <C>
OPERATIONS
Net sales......................................... $201,614 $39,524
Cost of merchandise and services sold............. 138,351 25,600
Operating expenses................................ 63,246 14,937
Interest expense.................................. 2,255 497
Loss before income taxes.......................... (2,640) (1,464)
Income tax credits................................ -- --
Net loss.......................................... (2,640) (1,464)
PER SHARE
Net loss.......................................... $ (1.79) $ (1.00)
Dividends paid.................................... -- --
Stockholders' equity.............................. 6.26 5.38
FINANCIAL POSITION
Working capital................................... $ 7,781 $ 6,896
Ratio of current assets to current liabilities.... 1.30x 1.24x
Inventories....................................... $ 28,589 $29,175
Properties -- net................................. 12,406 12,206
Total assets...................................... 49,401 50,638
Long-term debt (including capital lease
obligations)................................... 12,345 12,289
Shareholders' equity.............................. 9,271 7,908
</TABLE>
The pro forma financial position data for the fiscal year ended February 3,
1996 reflects the combination of the balance sheet of the Company as of February
3, 1996 and of Steinbach as of December 30, 1995. The pro forma operations data
for the fiscal year ended February 3, 1996 reflects the combination of the
income statement for the Company for the fiscal year ended February 3, 1996 and
for Steinbach for the eleven months ended December 30, 1995. The pro forma
financial position data and the pro forma operations data for the quarter ended
May 4, 1996 reflects the combination of the balance sheets and the income
statements of the Company and Steinbach as of and for the period ended May 4,
1996. Both the Steinbach balance sheet and income statement reflect only the 15
Acquired Stores. On December 30, 1995, in accordance with the terms of an
Interim Operating Agreement, the Company began operating Steinbach for its own
benefit and at its own risk. See "The Acquisition Agreement -- Covenants;
Disposition of Excluded Assets and Excluded Liabilities; Interim Operating
Agreement" and "Pro Forma Combined Condensed Financial Statements."
The Acquisition and Related Matters.
Background and Reasons for the Acquisition. The terms of the Acquisition
Agreement are the result of arms-length negotiations between representatives of
the Company and the Steinbach Shareholders. The following is a brief discussion
of the background of these negotiations.
Beginning in the late 1980s, due to the increasing amount of competition
from apparel stores operated by companies with significantly larger resources,
management of the Company began to explore ways by which shareholder value might
be preserved and enhanced. Several preliminary discussions were held with
smaller, family-owned retail stores and chain stores in an effort to find a
means of increasing the Company's revenues in order to achieve economies of
scale. These discussions did not result in any definitive proposals for
acquisition and none of them progressed beyond the stage of preliminary
discussions, largely due to the Company's financial condition and prospects at
that time and also because the families in control of these stores were hesitant
to relinquish control of their respective companies. Efforts were then made to
explore the possibility of selling the Company to a larger retail store operator
in order to enhance shareholder value.
9
<PAGE> 12
During the early 1990s, on two separate occasions the Company retained an
investment banking firm to assist in finding a merger partner. After
considerable effort in this regard, no interested parties were found. In 1992,
the Company retained a consulting firm to analyze the Company's overall
operations, with particular emphasis on its central office and distribution
center facilities and corporate overhead, and to advise the Company on ways to
reduce expenses and increase operating efficiencies. During the next two years,
vigorous cost reductions were put into place and central office overhead was
reduced.
Competition in the retail apparel market in Southeastern Michigan continues
to increase. Since 1990, a number of large retail chain stores, such as
Target's, Kohl's and Mervyn's, have entered the market, aggressively promoting
merchandise. As a result of its extensive cost reduction efforts, the Company
achieved modest profits in 1993 and 1994, but the competitive situation
continues to require the Company to aggressively discount its merchandise, which
has eroded its gross margins. During 1995, management began to explore ways by
which revenues could be increased and economies of scale achieved through store
expansion or otherwise. The operations of the Schottenstein Stores Corporation
("SSC") and its affiliates were well known to Company management, because SSC
had provided financing for the Company during the period from 1993 to 1994 (see
below "Material Relationships During Prior Three Years"), and from time to time
since 1993 the SSC management has called on Mr. Callahan to provide his advice
and counsel on operational matters relating to various retail operations being
conducted by SSC and its affiliated companies.
In October 1994, the Schottenstein family purchased Steinbach from
Specialty Department Stores, Inc., an affiliate of American Retail Group, Inc.
In May 1995, Jay Schottenstein approached Mr. Callahan and requested his
assistance in reviewing the expense structure of Steinbach, which he believed to
be in need of attention. Mr. Callahan had some familiarity with Steinbach, since
they were members of the same buying group as was the Company and several of Mr.
Callahan's prior employers in the Eastern states. After reviewing Steinbach's
expense budgets, Mr. Callahan recommended significant reductions in several
areas and provided Mr. Schottenstein with specific recommendations.
During the summer of 1995, after further consultation with Mr. Callahan,
Steinbach attempted to implement many of the recommended expense reductions
suggested by Mr. Callahan, but was successful in only reducing expenses by a
small fraction of what had been recommended. By the early fall of 1995, Mr.
Schottenstein had determined to divest Steinbach and he requested a meeting with
Mr. Callahan to discuss the possibility of the Company taking over the
operations of some or all of certain of the stores operated by Steinbach which
were, in the opinion of Mr. Schottenstein and management of Steinbach, too small
in terms of sales volume and gross profit margins to be of interest to potential
acquirors, such as Value City, Inc., an affiliate of Mr. Schottenstein, or other
national or regional operators of retail department stores. At the meeting, Mr.
Schottenstein proposed that the Company consider acquiring some or all of the 15
Acquired Stores. After this meeting, Mr. Callahan visited all of the 15 Acquired
Stores and was provided with information on the operations of each particular
store, as well as information on the overall operations of the Steinbach
organization since its acquisition by the Schottenstein family. After reviewing
in detail the operations and analyzing the information on a store-by-store
basis, Mr. Callahan proposed that the Company acquire and operate all of the 15
Acquired Stores, in exchange for an amount of Company Common Stock that would be
in proportion to the value of the assets used in the operation of these stores
and their revenues in relation to the book value and revenues of the existing
stores of the Company.
Mr. Callahan and the Company's counsel visited Mr. Schottenstein and his
advisors in Columbus in October 1995 to discuss a specific transaction that
would result in the acquisition of the 15 Acquired Stores in exchange for
Company Common Stock. Following this meeting, the parties proceeded to negotiate
the terms and conditions of the Acquisition Agreement, which was approved by the
Board of Directors of the Company at a meeting held on November 8, 1995 and
executed on November 17, 1995. At its November 8, 1995 meeting, all of the
directors were in attendance, except for Mr. Schaye, and, of those in
attendance, all of the directors approved the Acquisition Agreement, except for
Mr. Schostak who abstained due to his then recent tenure on the Board and his
corresponding lack of familiarity with the facts and circumstances surrounding
the transaction. The Acquisition Agreement was subsequently amended on December
29, 1995, to provide for an extension of time for each of the parties to
complete its investigation into the business and affairs of the other party and
for the exchange of required information.
10
<PAGE> 13
On December 30, 1995, in accordance with the terms of an Interim Operating
Agreement, the Company began operating Steinbach for its own benefit and at its
own risk. See below "The Acquisition Agreement -- Covenants; Disposition of
Excluded Assets and Excluded Liabilities; Interim Operating Agreement". During
January and February 1996, the Eastern States in which Steinbach operates
experienced prolonged severe winter weather which severely impacted sales and
profits at the stores. In March and April 1996, as a result of the business
failing to perform as expected, the parties negotiated a further amendment to
the Acquisition Agreement to provide for a reduction in the amount of the
Company Common Stock to be issued in the Acquisition from 782,200 shares to
514,800 shares, or from approximately forty-five percent (45%) to thirty-five
percent (35%) of the total amount of the Company Common Stock to be outstanding
after the Acquisition. The Acquisition Agreement provides that the 514,800
shares of Common Stock to be issued in connection with the Acquisition will not
be adjusted due to the increase or decrease of the market value of the Common
Stock on the American Stock Exchange (i.e., the national securities exchange on
which the Common Stock is listed for trading). See "Market Prices".
Management of the Company believes that Steinbach has a similar customer
base to the Company's Michigan stores. This customer is female, 40-50 years old,
with a moderate income level. The vendor structure for the 15 Acquired Stores is
also very similar to that of the Company, and the Company intends to coordinate
its marketing and advertising programs to eliminate redundant efforts and reduce
expenses. The Company believes it can operate the 15 Acquired Stores and its
existing 10 stores at reduced operating expense levels relative to sales due to
the fact it will not be absorbing the existing Steinbach corporate overhead.
Steinbach's corporate overhead allocated against the 15 Acquired Stores was over
$10.0 million dollars for 1995. The Company anticipates adding approximately
$4.5 million of additional corporate overhead to its existing overhead to
accommodate the Steinbach acquisition. Total Steinbach operating expenses as a
percent of sales for the eleven months ended December 30, 1995, was 38.9%
compared with the Company's operating expense ratio of 31.6% for the fiscal year
ended February 3, 1996. The 15 acquired stores operating expenses including the
corporate overhead allocated to the stores as a percent of sales for the eleven
months ended December 30, 1995, was 37.3%. The pro forma combined operating
expense ratio for 1995 was 31.6%. While it is possible that there may be some
additional costs that could be incurred above the $4.5 million mentioned above,
these costs are not presently determinable. The Company expects that all buying
operations, as well as accounting, finance, administrative and computer systems
will be managed from its Detroit headquarters with minimal additions to staff.
Although Steinbach operates in a different geographic region than the Company,
which entails certain risks associated with managing a geographically remote
operation, management of the Company believes that, based upon the similar
customer base, the planned reduction in overhead and corporate expenses, the
experience of management in managing remote operations in general and the
Company's experience in operating Steinbach since December 30, 1995, under the
Interim Operating Agreement in particular, such risks are manageable. (The
information in the foregoing portion of this paragraph contains forward looking
statements within the meaning of the Securities Exchange Act of 1934 and is
subject to the safe harbor created by that statute; actual results could differ
materially from those projected in the forward looking statements and there can
be no assurance that the Company will be successful in its efforts to eliminate
redundant efforts and reduce expenses in the marketing and advertising programs,
in its efforts to integrate Steinbach into the Company's operations with minimal
additional overhead or to significantly reduce Steinbach's corporate expenses
from 1995 levels or in its efforts to operate in a geographically remote area.)
Management of the Company and the Board also considered alternatives to a
stock-for-stock transaction (including the purchase of assets in exchange for
cash and/or stock and the purchase of stock in exchange for cash), but tax
considerations and the lack of sufficient financing lead the Board to conclude
that a stock-for-stock exchange was preferable and could be successfully
negotiated with the Steinbach Shareholders. The Board believes that the terms of
the Acquisition are fair to, and in the best interests of, the Company and its
shareholders. Accordingly, the Board recommends approval of the Acquisition by
the Company's shareholders.
In determining to proceed with the Acquisition, the Board considered a
number of factors, including historical information relating to the business,
financial condition and results of operations of the Company and Steinbach, the
business and financial prospects of the Company and Steinbach, the terms of the
11
<PAGE> 14
Acquisition Agreement, and the condition in the Acquisition Agreement that, on
or prior to the closing, the Company shall have received a fairness opinion from
an investment banking and/or appraisal firm to the effect that the transaction
contemplated therein is fair, from a financial point of view, to the
shareholders of the Company. See "Opinion of the Company's Financial Advisor".
The Board of Directors of the Company views the Acquisition as an opportunity to
materially increase the Company's sales without significantly increasing the
Company's operating expenses, due in large part to the Company's planned
elimination of duplicative functions. The Board of Directors of the Company did
not undertake separate analysis of each of these factors nor did the Board reach
a separate conclusion with respect to each such factor in its determination as
to the fairness of the terms of the Acquisition. The consideration of such
factors resulted from the information relating to such factors being added to
the collective business knowledge and experience of the Company's Board so as to
enable the Board to apply such information in its deliberative processes. In
view of the above and the variety of factors considered by the Board of
Directors in reaching its conclusion as to the fairness of the Acquisition, the
Board of Directors did not find it practicable to and did not quantify or
otherwise assign relative weights to the specific factors considered in reaching
its determination as to the fairness of the terms of the Acquisition.
Opinion of the Company's Financial Advisor. On July 15, 1996, First of
Michigan Corporation ("FoM") delivered its opinion to the Board of Directors of
the Company that the Consideration to be issued by the Company in exchange for
the Steinbach Common Stock in the Acquisition is fair, from a financial point of
view, to the Company and its shareholders.
In its opinion, FoM noted, among other things, that its opinion necessarily
is based upon conditions (including the current market prices for the Company
Common Stock) as they existed and could be evaluated on the date of its opinion.
THE FULL TEXT OF FOM'S OPINION, WHICH CONTAINS A DESCRIPTION OF QUALIFICATIONS,
ASSUMPTIONS MADE, PROCEDURES FOLLOWED AND MATTERS CONSIDERED, IS INCLUDED AS
APPENDIX A AND INCORPORATED HEREIN BY REFERENCE AND SHOULD BE READ IN ITS
ENTIRETY. As described in its opinion, FoM relied upon the accuracy and
completeness of all financial and other information provided or otherwise made
available to it, did not independently verify such information, and did not make
or obtain any independent evaluations or appraisals of the properties or
facilities of either the Company or Steinbach. With respect to financial
projections (including projections of synergies from a combination of the
Company and Steinbach), FoM assumed that such projections reflected the best
currently available estimates and judgments of the managements of the Company
and Steinbach as to the future financial performance of the two companies. It
should be understood that, although subsequent developments may affect the July
15, 1996 opinion, FoM does not have any obligation to update, revise or reaffirm
such opinion.
The Consideration to be paid to the Steinbach Shareholders in connection
with the Acquisition was determined through arms-length negotiations between the
parties and was not determined by FoM. No limitations were placed on FoM by the
Board of Directors of the Company with respect to the investigations made or the
procedures followed by FoM in preparing and rendering its opinion.
In connection with rendering its opinion, FoM reviewed and analyzed, among
other things, the following: (i) the Acquisition Agreement; (ii) the Interim
Operating Agreement; (iii) certain publicly available information concerning the
Company, including the Annual Reports on Form 10-K for each of the fiscal years
in the three year period ended February 3, 1996; (iv) certain publicly available
information concerning the trading of, and the trading market for, the Company
Common Stock; (v) certain other internal information, primarily financial in
nature, concerning the business and operations of the Company furnished to FoM
by the Company for purposes of FoM's analysis; (vi) certain internal
information, primarily financial in nature, concerning the business and
operations of Steinbach furnished to FoM by Steinbach for purposes of FoM's
analysis; (vii) certain publicly available information with respect to certain
other companies with businesses that FoM considered relevant to its inquiry and
the trading markets for certain of such other companies' securities; and (viii)
certain publicly available information concerning the nature and terms of
certain other transactions that FoM considered relevant to its inquiry. In
addition, FoM also met with certain officers and employees of the Company and
Steinbach to discuss the foregoing, as well as certain other matters FoM
believed relevant to its inquiry.
12
<PAGE> 15
In considering its analysis and arriving at its opinion, FoM considered
such financial and other factors as it deemed appropriate under the
circumstances, including, among others, the following which identifies all of
the material factors considered by FoM: (i) the historical and current financial
position and results of operations of the Company and Steinbach; (ii) the
business prospects for the Company and Steinbach; (iii) the historical and
current market for the Company Common Stock and for the equity securities of
certain other companies with businesses FoM considered relevant for its inquiry;
(iv) the potential pro forma financial effects of the transactions contemplated
in the Acquisition Agreement; and (v) the nature and terms of certain other
relevant merger and acquisition transactions that FoM believed to be relevant.
FoM also took into account its assessment of general economic, market and
financial conditions, as well as its experience in connection with similar
transactions and securities valuations generally.
Pursuant to its engagement of FoM, the Company has agreed to pay FoM
$30,000 in connection with the rendering of its opinion. The Company has also
agreed to reimburse FoM for all of its reasonable out-of-pocket expenses for its
own account, up to $5,000, and to indemnify and hold harmless FoM against
certain liabilities and expenses, including certain liabilities arising under
the federal securities laws.
FoM is an investment banking firm engaged, among other things, in the
valuation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes. The Company selected FoM on
the basis of such expertise, FoM's reputation and FoM's knowledge of the Company
and its business. FoM has previously rendered certain investment banking
services to the Company, other than in connection with the opinion rendered in
connection with the Acquisition, including, over the last two years, general
financial advisory and investment banking services in connection with possible
acquisitions or divestitures involving the Company. The Company has not paid FoM
any fees for investment banking services over the last two years.
In the ordinary course of its business, FoM may trade the securities of the
Company for its own account and for the accounts of its customers and,
accordingly, may at any time hold a long or short position in such securities.
Material Relationships During Prior Three Years. On May 20, 1993, the
Company and Schottenstein Stores Corporation (i.e., "SSC"; see "The Acquisition
and Related Matters -- Background and Reasons for the Acquisition") entered into
a Credit and Security Agreement pursuant to which SSC provided the Company with
an $8 million revolving credit facility. In connection with the consummation of
this credit agreement, the Company and SSC entered into an option agreement
pursuant to which the Company granted to SSC an irrevocable option to purchase
up to 198,000 shares of the Company Common Stock at a purchase price of $0.50
per share.
Separately, on May 28, 1993, Schottenstein Professional Asset Management
Corporation ("SPAMC"), an affiliate of SSC, purchased an aggregate of 255,336
shares of the Company Common Stock at a price of $1.25 per share in a private
transaction with persons and entities affiliated with FMR Corp. and Kelso
Management Company, Inc.
In connection with the foregoing, Mr. James L. Schaye, Jr., a Vice
President of SPAMC, was nominated for, and was elected by the Company's
shareholders at the 1993 Annual Meeting of Shareholders as a member of, the
Company's Board of Directors. Mr. Schaye continues to serve on the Company's
Board and he is a nominee at this year's Annual Meeting of Shareholders for
election to the Board, with a term expiring at the 1999 Annual Meeting of
Shareholders.
Effective June 15, 1995, the Company, SSC and SPAMC consummated the
following transactions:
- SSC cancelled and surrendered to the Company its option to purchase
198,000 shares of the Company Common Stock in exchange for an aggregate
purchase price of $792,000 (the market price at the time less the option
exercise price of $0.50 per share). As part of the foregoing, the SSC
option agreement was terminated.
- The Company purchased from SPAMC, and SPAMC sold to the Company, 96,936
shares of the Company Common Stock in exchange at a price of $4.50 per
share (or an aggregate purchase price of $436,212), which was the market
price per share at the time.
13
<PAGE> 16
Both SSC and SPAMC are affiliates of the Steinbach Shareholders. Except for
the element of common control among SSC, SPAMC and the Steinbach Shareholders,
arising principally from Mr. Schottenstein's role as a director and an executive
officer of SSC and SPAMC and as the trustee of the several trusts comprising the
Steinbach Shareholders, none of SSC, SPAMC or Mr. Schaye, as Vice President of
SPAMC, has a substantial interest in the Acquisition Agreement or the
transactions contemplated therein.
In addition, pursuant to the Acquisition Agreement, the Company has agreed
to take certain actions relative to the representation of the Steinbach
Shareholders on the Company's Board of Directors. See "The Acquisition Agreement
- -- Representation on Board of Directors".
Federal Income Tax Consequences. The Acquisition will constitute a tax-free
reorganization for federal income tax purposes within the meaning of Section 368
of the Internal Revenue Code of 1986, as amended (the "Code"). Consequently,
there will be no direct federal income tax consequences to the shareholders of
the Company as a result of the Acquisition.
Accounting Treatment. The Acquisition will be accounted for as a "purchase"
for financial reporting purposes. Under purchase accounting, the Company will
allocate the total cost of acquiring the Steinbach Common Stock to the assets
and liabilities of Steinbach. The pro forma results of such accounting treatment
are reflected in the unaudited financial data included elsewhere herein under
"Pro Forma Combined Financial Statements".
HSR Act. By November 22, 1995, the Company and Steinbach had filed
notifications relating to the Acquisition with the Federal Trade Commission and
with the Antitrust Division of the United States Department of Justice, as
required by the HSR Act, and on December 4, 1995, the waiting period under the
HSR Act was terminated.
Federal Securities Law Consequences; Registration Rights Agreement. The
Steinbach Shareholders will be "affiliates" of the Company and, consequently,
the shares of the Company's Common Stock to be delivered to the Steinbach
Shareholders in exchange for their shares of Steinbach Common Stock may not be
resold unless they are registered under the Securities Act, or are sold pursuant
to an applicable exemption from registration, including Rule 144 promulgated
under the Securities Act.
The Company has agreed to register such shares pursuant to the terms of a
Registration Rights Agreement to be entered into by the Company and the
Steinbach Shareholders as of the Closing Date. The Registration Rights Agreement
will provide that the Steinbach Shareholders may request the Company to effect
the registration under the Securities Act of such shares (a "demand
registration"). However, the Company is not obligated to effect more than one
demand registration and is not obligated to take action to have such
registration become effective if, in the opinion of counsel reasonably
satisfactory to the Steinbach Shareholders, no such registration is necessary
under applicable federal securities laws for the sale of such shares proposed to
be sold in order to receive substantially the same benefits as if such shares
had been so registered. In addition to the demand registration described above,
if, at any time during the four year period ending on the fourth (4th)
anniversary of the Closing Date, the Company proposes to effect a registration
not requested by the Steinbach Shareholders, the Company must give written
notice to the Steinbach Shareholders of its intention to do so and, upon written
request of the Steinbach Shareholders given after such notice, the Company shall
use reasonable efforts to cause such shares to be included in such registration,
subject to certain rights of the Company to reduce the participation of the
Steinbach Shareholders requesting registration. The expenses of any registration
of such shares will be borne by the Company, although the underwriting discounts
and fees shall be borne by the Steinbach Shareholders. The Company and the
Steinbach Shareholders have agreed to indemnify each other against certain
liabilities under the Securities Act relating to material misstatements or
omissions in any prospectus or registration statement arising as a result of the
foregoing. As of the date hereof, the Steinbach Shareholders have not advised
the Company as to whether or when they intend to seek registration of their
shares pursuant to the Registration Rights Agreement.
In general, under Rule 144 as currently in effect, if two years have
elapsed since the later of the date of acquisition of the "restricted shares"
(as defined in Rule 144) from the Company or any "affiliate" (as defined
14
<PAGE> 17
in Rule 144) of the Company, the acquiror or subsequent holder thereof, and any
affiliate, is entitled to sell within any three-month period a number of shares
that does not exceed the greater of 1% of the then outstanding shares of the
Company Common Stock or the average weekly trading volume of the shares of the
Company Common Stock during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain manner of sale provisions, notice
requirements and the availability of current public information about the
Company. If three years have elapsed since the date of the acquisition of
restricted shares from the Company or from any affiliate of the Company, and the
acquiror or subsequent holder thereof is deemed not to have been an affiliate of
the Company at any time during the ninety days preceding a sale, such person
would be entitled to sell such shares in the public market under Rule 144(k)
without regard to volume limitations, manner of sale provisions, public
information requirements or notice requirements.
The Acquisition Agreement.
The following description of the terms and conditions of the Acquisition
Agreement does not purport to be complete and is qualified in its entirety by
reference to the Acquisition Agreement, a copy of which is included as Appendix
B and incorporated herein by reference.
Acquisition of Steinbach Common Stock and Issuance of the Company's Common
Stock. On the Closing Date, the Company shall acquire from the Steinbach
Shareholders and the Steinbach Shareholders will deliver to the Company an
aggregate of 100 shares of Steinbach Common Stock, constituting all of the
issued and outstanding shares of the capital stock of Steinbach, in exchange for
514,800 shares of Common Stock of the Company, representing approximately 35.0%
of the issued and outstanding shares of Common Stock of the Company as of the
date of this Proxy Statement (i.e., the "Consideration"). The Acquisition
Agreement provides that the 514,800 shares of Common Stock to be issued in
connection with the Acquisition will not be adjusted due to the increase or
decrease of the market value of the Common Stock on the American Stock Exchange
(i.e., the national securities exchange on which the Common Stock is listed for
trading). See "Market Prices."
Closing Date. Following approval of the Acquisition by the Company's
shareholders at this year's Annual Meeting of Shareholders, and subject to the
satisfaction or waiver of the terms and conditions contained in the Acquisition
Agreement, the Acquisition will be consummated. Assuming the approval of the
Acquisition by the shareholders, the Company intends to close the Acquisition as
soon as practicable thereafter (the "Closing Date").
Conditions To Consummation of the Acquisition. The obligation of the
Steinbach Shareholders and the Company to go forward with the closing, the
consummation of the Acquisition and the other transactions contemplated by the
Acquisition Agreement is subject to the satisfaction or waiver of several
conditions, including: (i) the Steinbach Shareholders and the Company shall have
executed and delivered a Registration Rights Agreement on or before the Closing
Date in form and substance satisfactory to the parties, see above "The
Acquisition and Related Matters -- Federal Securities Law Consequences;
Registration Rights Agreement"; (ii) the Steinbach Shareholders and the Company
shall have executed and delivered a Shareholder Agreement on before the Closing
Date in form and substance satisfactory to the parties and relative to, among
other things, the agreement by the Steinbach Shareholders and their affiliates
not to acquire, at any time up to four years after the Closing Date, more than
forty-five percent (45%) of the then issued and outstanding shares of the
Company's Common Stock (the "Steinbach Shareholders Agreement"); and (iii) the
Acquisition Agreement and the consummation of the transactions contemplated by
therein shall have been approved by Congress Financial Corporation (Central),
the Company's principal lender.
The Company is currently negotiating with Congress Financial Corporation
(Central), its current lender, to expand its credit facility to $24 million from
the present $12 million for purposes of accommodating the financing needs of the
Company on a post-Acquisition basis. Management of the Company anticipates that
the expanded credit facilities will be in place on or before the closing of the
Acquisition. In the event negotiations with Congress Financial Corporation
(Central) are not successful, management of the Company intends to pursue
negotiations with three other lenders which have previously submitted proposals
to the Company for this purpose.
15
<PAGE> 18
The full text of the conditions to the consummation of the Acquisition are
set forth in Sections V and VI of the Acquisition Agreement.
Covenants; Disposition of Excluded Assets and Excluded Liabilities; Interim
Operating Agreement. The Steinbach Shareholders and the Company have covenanted
and agreed with each other in the Acquisition Agreement with respect to several
matters, including: (i) except as otherwise permitted or contemplated in the
Acquisition Agreement, from and after November 17, 1995, and until the Closing
Date, the Steinbach Shareholders shall use all reasonable efforts to conduct the
business to be acquired in the Acquisition (the "Acquired Business") in
substantially the same manner as conducted prior to November 17, 1995 and, with
respect to the Acquired Business, maintain its business organization intact,
retain its present employees and preserve the confidence of its suppliers,
distributors, dealers, representatives and customers; and (ii) except as
otherwise permitted or contemplated in the Acquisition Agreement, from and after
November 17, 1995, and until the Closing Date, the Company shall use all
reasonable efforts to conduct its business in substantially the same manner as
heretofore conducted and maintain its business organization intact, retain its
present employees and preserve the confidence of its suppliers, distributors,
dealers, representatives and customers.
In addition, the Steinbach Shareholders have agreed to use their best
efforts to take such actions as are necessary in order to transfer to a person
or persons other than Steinbach or to otherwise dispose of those assets (the
"Excluded Assets") and liabilities (the "Excluded Liabilities") of Steinbach
which are not related to the operation of the 15 Acquired Stores. The full text
of the several covenants and agreements are set forth in the Acquisition
Agreement, particularly in Section IV thereof.
Subject to the terms and conditions of the Interim Operating Agreement,
dated December 29, 1995, among the Company, Steinbach and the Steinbach
Shareholders (the "Interim Operating Agreement"), the Company, Steinbach and the
Steinbach Shareholders have agreed, among other things, (i) that, during the
period of December 30, 1995 through the closing of the Acquisition Agreement,
the 15 Acquired Stores shall be operated under the management and supervision of
the Company and all revenues, as well as all costs and expenses, relating
thereto shall be for the account of the Company, and (ii) that as soon as
reasonably practicable after December 30, 1995, the Steinbach Shareholders shall
cause Steinbach to dispose of the Excluded Assets, to pay and discharge the
Excluded Liabilities and to terminate all employees not associated with the
operation of the 15 Acquired Stores and that the operation and disposition of
the Excluded Assets and the Excluded Liabilities, all revenues, as well as all
costs and expenses, related thereto shall be for the account and at the sole
risk of the Steinbach Shareholders.
Indemnification. Under the terms of the Acquisition Agreement, the
Steinbach Shareholders have agreed to indemnify the Company with respect to
certain matters, including any inaccuracy in, or breach or violation of, the
representations and warranties made by the Steinbach Shareholders and the
covenants and agreements undertaken by them pursuant to the Acquisition
Agreement, as well as any liability arising from the actions taken by Steinbach
and/or the Steinbach Shareholders with respect to the Excluded Assets and the
Excluded Liabilities and the disposition thereof. In addition, the Company has
agreed to indemnify the Steinbach Shareholders with respect to any inaccuracy
in, or breach or violation of, the representations and warranties made by the
Company and the covenants and agreements undertaken by it pursuant to the
Acquisition Agreement. The foregoing indemnification obligations are limited to
a maximum exposure of $1,000,000.
Separately, under the terms of the Interim Operating Agreement, the
Steinbach Shareholders have agreed to indemnify the Company with respect to
certain matters, including breaches by the Steinbach Shareholders of the Interim
Operating Agreement and claims asserted with respect to the operation of any of
the Excluded Assets or arising out of an event at any non-Acquired Stores. In
addition, the Company has agreed to indemnify Steinbach with respect to certain
matters, including breaches by the Company of the Interim Operating Agreement
and claims asserted with respect to the operation of the 15 Acquired Stores
after December 30, 1995.
Amendment and Termination. The Acquisition Agreement may be terminated upon
the occurrence of certain events, including the following: (i) at any time by
mutual written agreement of the Steinbach
16
<PAGE> 19
Shareholders and the Company; (ii) by the Company if any of the conditions
required of the Steinbach Shareholders set forth in the Acquisition Agreement
shall not be fulfilled for reasons beyond the reasonable control of the Company
and are not waived by the Company; (iii) by the Steinbach Shareholders if any of
the conditions of the Company set forth in the Acquisition Agreement shall not
be fulfilled for reasons beyond the reasonable control of the Steinbach
Shareholders and are not waived by the Steinbach Shareholders; or (iv) by either
the Steinbach Shareholders or the Company if the Closing has not occurred on or
before July 31, 1996. The Company anticipates that the Acquisition Agreement
will be amended to change such July 31, 1996 termination date to a later date
which will enable the Company to schedule and hold its Annual Meeting and
thereafter accommodate a closing of the Acquisition as soon as practicable.
In the event of termination as described above, the Acquisition Agreement
shall terminate without further action by any of the parties hereto. In
addition, if the Steinbach Shareholders, on the one hand, or the Company, on the
other hand, waive in writing compliance with any such condition to their
respective obligations, the right to terminate provided herein shall no longer
exist with respect to that particular condition. If the Acquisition Agreement is
terminated as provided in the Acquisition Agreement, neither the Company, on the
one hand, nor the Steinbach Shareholders, on the other hand, shall be under any
liability to the other by reason of this Acquisition Agreement, its negotiation
or its termination, or by reason of any of the transactions contemplated under
this Acquisition Agreement, whether for costs, expenses, damages or otherwise
(except that the letter agreement, dated September 29, 1995, between the Company
and Steinbach relative to confidentiality matters shall remain in full force and
effect to the extent set forth therein); provided, however, that, if the
election to terminate is due to the default of a party hereunder, then the
non-defaulting party shall be entitled to any and all remedies available at law
or in equity.
Representation on Board of Directors. Pursuant to the Acquisition
Agreement, promptly after the closing date, the Company will take such action as
is necessary to appoint one (1) nominee of the Steinbach Shareholders as a
member of the Company's Board of Directors to serve a term which will expire at
the Company's 1998 Annual Meeting of Shareholders. As of the date hereof, the
Steinbach Shareholders have identified Benton E. Kraner, a partner in Swanson,
Kraner & Gesler, Inc. (Columbus, Ohio), an accounting firm, as their initial
nominee. Thereafter, on or prior to the fourth (4th) anniversary of the closing
date, the Company shall take such actions as are reasonably necessary to either
appoint or nominate for election in connection with Annual Meetings of
Shareholders such additional nominees of the Steinbach Shareholders so that the
Steinbach Shareholders' aggregate percentage of representation on the then Board
of Directors approximates the Steinbach Shareholders' aggregate percentage of
ownership of the then issued and outstanding shares of the Company's Common
Stock. These obligations to the Company under the Acquisition Agreement
automatically shall terminate at such time as the Steinbach Shareholders own
less than ten percent (10%) of the then issued and outstanding shares of Common
Stock. In addition, Mr. Schaye, a Vice President of SPAMC, an affiliate of the
Steinbach Shareholders (see "The Acquisition and Related Matters -- Material
Relationships During Prior Three Years"), has served on the Company's Board of
Directors since 1993. In connection with the foregoing, the Company has been
advised by the Steinbach Shareholders that Mr. Schaye will be deemed to be a
representative of the Steinbach Shareholders for purposes of determining their
applicable representation on the Board of Directors.
Based upon the approximately thirty-five percent (35%) of the issued and
outstanding shares of Common Stock that the Steinbach Shareholders would own as
a result of the Acquisition, and assuming that the Company elected to
immediately take such actions as are necessary so that the Steinbach
Shareholders' aggregate percentage of representation on the Board approximated
the Steinbach Shareholders' aggregate percentage ownership of the Company Common
Stock, then the Steinbach Shareholders' would be entitled to be represented by
four (4) of the current eleven (11) members of the Company's Board of Directors.
After giving effect to the Steinbach Shareholders Agreement (see "The
Acquisition Agreement -- Conditions to Consummation of the Acquisition"), the
Steinbach Shareholders' aggregate percentage of representation on the then Board
of Directors will not exceed forty-five percent (45%) on or prior to the fourth
(4th) anniversary of the closing date. In addition, after the termination of the
Steinbach Shareholders Agreement (which expires by its terms on the fourth (4th)
anniversary of the closing date), the Company will be under no contractual
obligation to appoint nominees to the Board on behalf of the Steinbach
Shareholders
17
<PAGE> 20
and, after the earlier to occur of the Steinbach Shareholders' ownership of less
than 10% of the then issued and outstanding Company Common Stock or the fourth
(4th) anniversary of the closing date, the Steinbach Shareholders will be under
no contractual obligation to limit their ownership of the Company Common Stock.
As a result of the foregoing, upon the cessation of such contractual obligations
relating to the appointment of nominees and the limitation of stock ownership,
normal corporate, shareholder, market and related factors then in existence will
determine the Steinbach Shareholders' aggregate percentage of representation on
the Board of Directors of the Company, including the possible control by the
Steinbach Shareholders of a majority of the directors.
Market Prices.
The Company Common Stock is traded on the American Stock Exchange under the
symbol "COM". Following the Acquisition, the Company Common Stock will continue
to be traded on the American Stock Exchange.
The information set forth in the table below represents the high and low
sale prices quoted on the American Stock Exchange for the Company Common Stock
on November 16, 1995, the last full trading day prior to the public announcement
that the Acquisition Agreement had been executed and delivered, and on July ,
1996, the last full trading day for which quotations are available at the time
of the printing of this Proxy Statement.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
November 16, 1995................................................ $ 4 1/2 $ 4 1/2
July , 1996.................................................... $ $
</TABLE>
For information relating to market prices of and dividends on the Company
Common Stock during the two fiscal years ended January 28, 1995 and February 3,
1996, see the Company's Annual Report to Shareholders for the fiscal year ended
February 3, 1996 (a copy of which accompanies this Proxy Statement). Because the
market price of the Company Common Stock is subject to fluctuation, the market
value of the Company Common Stock that the Steinbach Shareholders receive as the
Consideration for the Acquisition may increase or decrease prior to the closing
of the Acquisition Agreement. The Acquisition Agreement provides that the
514,800 shares of Common Stock to be issued in connection with the Acquisition
will not be adjusted due to the increase or decrease of the market value of the
Common Stock on the American Stock Exchange (i.e., the national securities
exchange on which the Common Stock is listed for trading).
Management's Discussion and Analysis of Results of Operations and
Financial Condition -- the Company.
Management's Discussion and Analysis of Results of Operations and Financial
Condition relative to the Company is hereby incorporated by reference from the
Company's Annual Report on Form 10-K for the fiscal year ended February 3, 1996,
as amended on June 11, 1996, and the Company's Quarterly Report on Form 10-Q for
the quarter ended May 4, 1996, copies of which accompany this Proxy Statement.
Management's Discussion and Analysis of Results of Operations and
Financial Condition -- Steinbach.
Effective October 30, 1994, Steinbach acquired all of the outstanding stock
of Steinbach, Inc. (the predecessor company) which was subsequently merged with
and into Steinbach. In connection with such acquisition, Steinbach allocated the
purchase price to fixed assets, resulting in a $8.9 million write-down of fixed
assets. This write-down decreased depreciation charges for fiscal 1994 from the
prior year's level. Also, Steinbach changed its inventory accounting principles
to a first-in, first-out (FIFO) method from a last-in, last-out (LIFO) method,
resulting in a $2.0 million increase to equity with no profit or loss impact.
The following represents management's discussion and analysis of the results of
operations and the financial condition of Steinbach, Inc. (the predecessor
company) and Steinbach for all of the stores operated by such entities during
the periods indicated. In addition, the discussion of the results of operations
for the fiscal year ended January 28, 1995, represent the combination of the
results of operations of Steinbach, Inc. (the
18
<PAGE> 21
predecessor company) for the nine month period ended October 29, 1994 and the
results of operations of Steinbach for the three month period ended January 28,
1995. Historical financial information specific to the 15 Acquired Stores (e.g.,
comparative store sales and gross profit margins) is not available for any of
the periods, including the interim quarterly periods, discussed below. In
addition, the Company considers sales and margin results to be not meaningful in
light of the Company's plans to change the operations of the 15 Acquired Stores
in the future, including an upgrading of merchandise lines and a more focused
promotional effort.
As of December 30, 1995, Steinbach operated 24 stores in five eastern
states. Pursuant to the terms of the Acquisition Agreement, the Company will
acquire all of the outstanding Common Stock of Steinbach. Between December 31,
1995 and the Closing Date, the Steinbach Shareholders have agreed to use their
best efforts to take such actions as are necessary in order to transfer to
another person or persons or to otherwise dispose of those assets (the "Excluded
Assets") and liabilities (the "Excluded Liabilities") of Steinbach which are not
related to the operations of the 15 Acquired Stores, which actions include,
among other things, the following: (i) the transfer of the nine stores which are
non-acquired stores (and the assets and liabilities related thereto) and which
are to be closed prior to the Closing Date; (ii) the termination or other
disposition of the leases pertaining to Steinbach's corporate offices in White
Plains, New York, and its central accounting offices in Bridgeport, Connecticut;
(iii) the disposition to a third party of the assets and liabilities related to
its distribution center in Eatontown, New Jersey; and (iv) the termination of
all of Steinbach's employees, except for those actively involved in the
day-to-day operations of the 15 Acquired Stores and specifically identified by
the Company as employees to be retained after the Closing Date (and, in
connection therewith, the Steinbach Shareholders have agreed to pay all
separation costs related to the terminated employees. The assets and liabilities
that are being acquired by the Company as a result of the Acquisition include
the 15 Acquired Stores, as well as all cash, prepaid expenses, inventory, fixed
assets, personnel, accounts payable and accrued liabilities associated with the
15 Acquired Stores. See "The Acquisition Agreement -- Covenants; Disposition of
Excluded Assets and Liabilities; Interim Operating Agreement". Since December
1995, Steinbach has closed or sold seven of its stores and two more are
scheduled to be closed prior to completion of the Acquisition. On December 30,
1995, in accordance with the terms of an Interim Operating Agreement, the
Company began operating the 15 Acquired Stores for its own benefit and at its
own risk.
Eleven Months Ended December 30, 1995 and Fiscal Years Ended January 28,
1995 and January 29, 1994. The following includes a discussion relative to
Steinbach's financial condition and results of operations as of and for the
eleven month period ended December 30, 1995; the underlying data relative to the
foregoing discussion is not necessarily indicative of the financial condition or
results of operations that would have occurred as of and for the fiscal year
ended February 3, 1996, inasmuch as the operating results of Steinbach in
particular, and the retail industry in general, during the month of January are
historically below those of the immediately prior months. The impact on
operating results if 1995 would have been a complete fiscal year rather than an
eleven month period would have been to increase the net loss reported. The 15
Steinbach stores operated by the Company recorded a $727,000 loss for the month
of January 1996 (which included a $700,000 reserve related to the change of
certain price points at Steinbach to conform with the Company's pricing
policies). See above "The Acquisition Agreement -- Business of the Company and
Steinbach", "-- Background and Reasons for the Acquisition", and "-- Covenants;
Disposition of Excluded Assets and Excluded Liabilities; Interim Operating
Agreement".
Results of Operations. Net sales for the eleven months ended December
30, 1995 were $183,535,000 compared with $218,926,000 for the twelve month
fiscal year ended January 28, 1995 ("fiscal 1994") and $226,377,000 for the
twelve month fiscal year ended January 29, 1994 ("fiscal 1993"). Comparable
store sales for the three fiscal periods decreased 8.6%, 2.5%, and 1.0%,
respectively. The competitive nature of the retail economic environment was the
primary factor contributing to the comparative store sales decline for each
period. The impact of inflation on Steinbach's sales has been minimal during the
past three years, although the precise impact cannot be determined. Steinbach
has experienced price increases in its purchase of merchandise and other
operating expenses, but has generally been able to offset the increases through
adjusting retail prices and controlling expenses.
19
<PAGE> 22
Steinbach has had comparative store sales declines in the eleven months
ended December 30, 1995 and in each of the prior two fiscal years. The decline
for the eleven months ended December 30, 1995 was 8.6% when compared with the
same period for the previous year. The Company's plan to address the sales
declines includes a more focused promotional effort, upgrading the merchandise
lines carried in the stores, and emphasizing more direct mail advertising than
has occurred in the past. Since December 30, 1995, new merchandise lines have
been brought in to the Acquired Stores, improving both the content and the
quality of the inventory.
Gross margin dollars were $61,038,000 for the eleven months ended December
30, 1995 compared with $78,215,000 for fiscal 1994, and $83,585,000 for fiscal
1993. Gross margins as a percent of sales were 33.3% for the eleven months ended
December 30, 1995, 35.7% for fiscal 1994, and 36.9% for fiscal 1993. The highly
promotional retail environment, which was necessary to achieve the sales levels
each year, resulted in more markdowns as a percent of sales.
Selling, general and administrative expenses were $71,400,000 for the
eleven months ended December 30, 1995, $83,941,000 for fiscal 1994, and
$90,824,000 for fiscal 1993. Expenses, as a percent of sales, amounted to 38.9%
for the eleven months ended December 30, 1995, 38.3% and 40.1% for fiscal 1994
and 1993, respectively. Store closing reserve costs accrued amounted to
$5,996,000 for the eleven month period ended December 30, 1995, $1,744,000 for
the fiscal year ended January 28, 1995, and $1,886,000 for the fiscal year ended
January 29, 1994, Steinbach had in operation at the end of each such period 28,
27, and 24 stores, respectively. Expense savings from closed stores amounted to
$3,105,000 in fiscal 1995, and $1,046,000 in 1994. Expense categories that had
significant decreases for the eleven months ended December 30, 1995, when
compared with fiscal 1994 were depreciation, and salaries and benefit related
costs. The reduction in depreciation charges was due to the purchase accounting
fixed asset write down that occurred in October 1994 when Steinbach, Inc. (the
predecessor company) was acquired by Steinbach. The salary and benefit cost
reductions primarily relate to the stores that were closed. Advertising costs
were the primary expense category that increased in the eleven months ended
December 30, 1995, as Steinbach became more promotional than in past years.
Interest expense charges were $2,076,000 for the eleven months ended
December 30, 1995, $1,410,000 for fiscal 1994, and $1,582,000 for fiscal 1993.
Increased borrowings on Steinbach's line of credit contributed to the higher
interest expense charges. The increased borrowings were used to fund the losses
incurred and debt repayments.
Income taxes were not recorded for the eleven months ended December 30,
1995, and fiscal 1994 due to the losses incurred and $123,000 of credits were
recorded for fiscal 1993. For a detailed discussion of income taxes refer to the
Notes to the Financial Statements attached hereto as Appendix C.
For the eleven months ended December 30, 1995 a net loss of $18,413,000 was
recorded compared with a net loss of $8,874,000 for fiscal 1994 and a net loss
of $10,630,000 for fiscal 1993.
The increase in the net loss reported for the eleven months ended December
30, 1995, is primarily attributable to the decrease in sales and lower gross
margins as a percent of sales. Gross margin results were also negatively
impacted by the $3.7 million markdown reserve recorded by Steinbach to reflect
the impact on inventory arising from poor retail market conditions. During 1995,
Steinbach increased its advertising expenditures, primarily through the use of
newspaper inserts, and also employed a relatively high markup and heavy discount
promotional policy. This marketing strategy did not generate sufficient sales
results to offset the costs associated therewith. Also, the occurrence of severe
winter weather and the fact that several discount stores ran liquidation sales
in Steinbach's marketplace during the fourth quarter contributed to sales
declines during the busiest sales period of the year. The Company does not
expect the trend of net losses at Steinbach to continue. (The information in the
foregoing sentence contains a forward looking statement within the meaning of
the Securities Exchange Act of 1934 and is subject to the safe harbor created by
that statute; actual results could differ materially from those projected in
such statement and there can be no assurance that the Company will be successful
in its efforts to stop the trend of net losses.) The Company will be emphasizing
more direct mail as a promotional vehicle, as well as upgrading and changing the
merchandise lines carried at Steinbach. The Company's merchandising plans,
coupled with the fact that the Company is
20
<PAGE> 23
not absorbing any of the Steinbach corporate overhead, should result in improved
profitability for the 15 Acquired Stores.
Liquidity and Capital Resources. Steinbach's primary sources of
liquidity are cash provided by operating activities and borrowings under
Steinbach's line of credit. Steinbach maintains an unsecured $23 million credit
agreement to support its borrowing needs. For more detailed discussion of the
line of credit refer to the Notes to the Financial Statements attached hereto as
Appendix C.
Cash provided by operating activities amounted to $1,374,000 for the eleven
months ended December 31, 1995 compared with $11,586,000 for fiscal 1994 and
cash used of $5,541,000 for fiscal 1993. An increased loss and lower
depreciation charges recorded for the eleven month period ended December 30,
1995 compared to the fiscal year ended January 28, 1995 was a contributing
factor to the decrease in cash provided. Additionally, an increase in the amount
due to/from affiliates generated cash provided during fiscal 1994.
Cash used in investment activities was $991,000 for the eleven months ended
December 30, 1995, $28,618,000 for fiscal 1994, and $3,309,000 for fiscal 1993.
For fiscal 1994, $26,647,000 of the total related to the acquisition of
Steinbach, Inc. (the predecessor company) by Steinbach. Refer to the Notes to
the Financial Statements attached hereto as Appendix C for more detailed
discussion of the purchase transaction. The balance for fiscal 1994, as well as,
the entire amount for the eleven months ended December 31, 1995 and fiscal 1993
represent purchases of fixed assets.
Cash provided in financing activities amounted to $530,000 in the eleven
months ended December 31, 1995 compared with $22,788,000 for fiscal 1994, and
$9,149,000 for fiscal 1993. The cash provided in the eleven months ended
December 31, 1995 represents an increase in outstanding bank borrowings compared
with the prior fiscal year end period, net of repayments of capital lease
obligations. The main components of the cash provided in fiscal 1994 were an
intercompany note payable of $8,494,000, as well as a $25,000,000 contribution
to the equity capital of Steinbach by the current owners for purposes of
acquiring Steinbach, Inc. (the predecessor company), less a $10,000,000
distribution to shareholders. Refer to the Notes to the Financial Statements
attached hereto as Appendix C for more detailed discussion of the purchase
transaction. For fiscal 1993, the cash provided consisted of repayments of
capital lease obligations and a $10,000,000 contribution to paid-in capital.
Steinbach's working capital at December 30, 1995 was a deficit of
$2,573,000 compared with $15,236,000 at January 28, 1995 and $22,223,000 at
January 29, 1994. The current ratio for each of the three periods were 0.92:1,
1.65:1, and 1.78:1, respectively. The decrease in working capital at December
30, 1995 was negatively impacted by the approximate $6.0 million store closing
reserve for the nine stores not being acquired by the Company.
Quarters Ended May 4, 1996 and April 29, 1995. During the quarter ended May
4, 1996, Steinbach closed seven stores and two of its administrative offices.
The remaining two stores and the remaining administrative office are scheduled
to be closed during the second quarter of 1996. The financial statements for the
quarter ended May 4, 1996, combine the results of the 15 Acquired Stores
currently being operated by the Company under the Interim Operating Agreement
with the nine stores and three administrative buildings which were closed during
the first quarter or are scheduled to be closed during the second quarter. The
stores which were closed during the first quarter held "going out of business"
sales during the period and closed at various times during the quarter.
Results of Operations. Net sales for the quarter ended May 4, 1996 were
$23.8 million, representing a 39% decline from the $39.5 million recorded for
the first quarter ended April 29, 1995. Net sales at the 15 Acquired Stores
being operated by the Company were down 11.6%, to $16.3 million, from $18.4
million last year for the same period. Net sales at the 15 Acquired Stores were
negatively impacted by cool spring weather and start-up problems associated with
the distribution center established by the Company during the first quarter.
These start-up problems caused delays in stocking the 15 Acquired Stores with
new spring merchandise which in turn had an adverse effect on sales. Management
believes that the distribution center problems have been solved and merchandise
is now being delivered to the Acquired Stores on a timely basis.
Gross margin dollars for the first quarter of 1996 were down due to the
decrease in sales, but as a percent of sales margins were 33.7% compared with
33.8% recorded during the same period last year. The gross margin
21
<PAGE> 24
percent at the 15 Acquired Stores being operated by the Company was 46.4% and
included the reversal of the $3.3 million markdown reserve recorded by Steinbach
in December 1995 and the $700,000 reserve recorded by the Company in January
1996. The gross margin percent for the 15 Acquired Stores for the first quarter
last year was 35.6%.
Operating expenses, as a percent of sales, for the quarter ended May 4,
1996 were 51.7% compared with 52.1% for last year's first quarter. The operating
expenses for the first quarter of 1996 did not include employees that had been
terminated by Steinbach as a result of the proposed acquisition transaction.
Store expenses for the quarter included costs incurred through the actual
closing date for each of the stores closed during the period. Last year's
expenses included all 24 stores (i.e., both the 15 Acquired Stores, as well as
the nine non-acquired stores) and all corporate costs for the entire first
quarter of 1995.
A net loss of $5.6 million, or $55,790 per share, was recorded by Steinbach
compared with a net loss of $7.4 million, or $73,680 per share, for the first
quarter of last year.
Liquidity and Capital Resources. Net cash used in operating activities
amounted to $4,842,000 for the three months ended May 4, 1996 compared with cash
used of $17,669,000 for the three months ended April 29, 1995. The difference
was primarily attributable to the decrease in inventories due to the nine
non-Acquired Stores that have closed or will be closing. The lack of capital
expenditures for the current year accounted for the decrease in cash used in
investment activities. Cash provided by financing activities amounted to
$3,684,000 for the period ended May 4, 1996, compared with cash provided of
$14,068,000 for the period ended April 29, 1995. The decrease results from lower
borrowings under Steinbach's line of credit during the first quarter of the
current year when compared with the first quarter of last year.
Financial Statements.
The financial statements and notes thereto of the Company, as audited by
Ernst & Young LLP, as of January 28, 1995, and February 3, 1996, and for each of
the three fiscal years in the period ended February 3, 1996, are incorporated
herein by reference from the Company's Annual Report on Form 10-K for the fiscal
year ended February 3, 1996, as amended on June 11, 1996. The financial
statements and notes thereto of Steinbach, Inc. (the predecessor company), as
audited by Ernst & Young LLP, for the nine month period ended October 29, 1994,
and for the fiscal year ended January 29, 1994, and of Steinbach, as audited by
Ernst & Young LLP, as of January 28, 1995, and December 30, 1995, and for the
three month period ended January 28, 1995, and the eleven month period ended
December 30, 1995, are attached hereto as Appendix C.
In addition, the unaudited financial statements and notes thereto of the
Company as of and for the three month period ended May 4, 1996, are incorporated
herein by reference from the Company's Quarterly Report on Form 10-Q; in the
opinion of the Company's management, such financial statements contain all
adjustments, consisting only of normal recurring accruals, necessary for the
fair presentation of the financial position and results of operations for such
period. The unaudited financial statements and notes thereto of Steinbach as of
and for the three month period ended May 4, 1996, are attached hereto as
Appendix E; the Company has been advised that, in the opinion of the Steinbach's
management, such financial statements contain all adjustments, consisting only
of normal recurring accruals, necessary for the fair presentation of the
financial position and results of operations for such period.
Pro Forma Combined Condensed Financial Statements.
Attached to this Proxy Statement as Appendix D are unaudited pro forma
combined condensed financial statements for the Company which have been prepared
on a consolidated basis based upon the historical financial results of the
Company and Steinbach (including Steinbach, Inc. (the predecessor company)). The
pro forma balance sheet reflects the combination of the balance sheet of the
Company as of February 3, 1996, and of Steinbach as of December 30, 1995. The
pro forma income statement reflects the combination of the income statement for
the Company for the fiscal year ended February 3, 1996 and for Steinbach for the
eleven months ended December 30, 1995. Both the Steinbach balance sheet and
income statement reflect only the 15 stores being acquired by the Company in the
Acquisition. On December 30, 1995, in accordance with the terms of an Interim
Operating Agreement, the Company began operating Steinbach for its own benefit
and at
22
<PAGE> 25
its own risk. As a result thereof, the pro forma combined condensed financial
statements give effect to Steinbach's financial condition and results of
operations as of and for the eleven month period ended December 30, 1995; the
underlying data relative thereto is not necessarily indicative of the financial
condition or results of operations that would have occurred as of and for the
fiscal year ended February 3, 1996, inasmuch as the operating results of
Steinbach in particular, and the retail industry in general, during the month of
January are historically below those of the immediately prior months. See above
"The Acquisition Agreement -- Business of the Company and Steinbach", "--
Background and Reasons for the Acquisition", and "The Acquisition Agreement --
Covenants; Disposition of Excluded Assets and Excluded Liabilities; Interim
Operating Agreement."
In addition, attached to this Proxy Statement as Appendix F are unaudited
pro forma combined condensed financial statements for the Company which have
been prepared on a consolidated basis based upon the historical results of the
Company and Steinbach as of and for the period ended May 4, 1996. The pro forma
balance sheet reflects the combination of the balance sheets of the Company and
of Steinbach as of May 4, 1996. The pro forma income statement reflects the
combination of the income statements of the Company and Steinbach for the
quarter ended May 4, 1996. Both the Steinbach balance sheet and income statement
reflect only the 15 Acquired Stores.
The pro forma combined condensed financial statements give effect to the
Acquisition accounted for under the purchase method. The pro forma combined
condensed financial statements should be read in conjunction with the notes
accompanying the attached pro forma combined condensed financial statements and
the separate financial statements and related notes thereto of the Company and
Steinbach (including Steinbach, Inc. (the predecessor company)) contained
herein. The pro forma combined results are not necessarily indicative of the
results which would actually have been attained if the Acquisition had been
consummated at the beginning of the periods indicated or which may be attained
in the future.
Accountants' Representatives
A representative of Ernst & Young LLP is expected to be present at the
meeting and will have the opportunity to make a statement, if he so desires, and
will be available to answer appropriate questions by shareholders.
Vote Required; Recommendation of the Company's Board of Directors
The affirmative vote of a majority of the shares of Common Stock present at
the Annual Meeting is required to approve the issuance by the Company of 514,800
shares of the Company Common Stock to the Steinbach Shareholders in exchange for
the shares of Steinbach Common Stock pursuant to the Acquisition Agreement.
Shareholders granting proxies to the Company are considered present for purposes
of calculating a majority of the shares present at the Annual Meeting.
If no instructions are indicated in any properly executed proxy, such proxy
will be voted FOR the approval of such issuance of Common Stock by the Company.
THE BOARD OF DIRECTORS OF THE COMPANY BELIEVES THAT THE TERMS OF THE
ACQUISITION ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY AND ITS
SHAREHOLDERS AND RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE APPROVAL OF SUCH
ISSUANCE OF COMMON STOCK BY THE COMPANY.
PROPOSAL 3: APPROVAL OF AMENDMENT TO 1992 INCENTIVE STOCK PLAN.
The Board of Directors approved the amendment to the 1992 Incentive Stock
Plan described below on March 27, 1996 and directed that the amendment be
submitted to the shareholders for approval at the Annual Meeting.
Proposed Amendment to Increase the Number of Shares Authorized for Issuance.
The Company proposes to amend the 1992 Incentive Stock Plan to increase the
number of shares of Common Stock authorized for issuance under the 1992
Incentive Stock Plan from 200,000 shares to 300,000 shares.
As of April 15, 1996, (i) incentive stock options for 191,000 shares had
been granted and were outstanding and options for 166 shares had been exercised,
and (ii) awards for 20,000 shares had been granted
23
<PAGE> 26
to Mr. Callahan (subject to certain vesting and forfeiture provisions) and were
outstanding. See "Executive Compensation -- Summary Compensation Table". As a
result, there are currently 9,000 shares of Common Stock available for issuance
under the 1992 Incentive Stock Plan and, if the amendment is approved, there
will be 119,000 shares of Common Stock available for issuance under the 1992
Incentive Stock Plan.
Since the adoption of the 1992 Incentive Stock Plan, the Company has
utilized the grant of stock options and the award of restricted stock as part of
its compensation program for executives and key employees. In this way, the
Company has linked compensation at various levels within the organization to
performance and believes that it is appropriate to continue such practice in the
future through the use of stock options and restricted stock awards. In
addition, the Company believes that the grant of stock options and the award of
restricted stock to executives and key employees helps to provide an incentive
for their continued employment and otherwise more closely aligns their interests
with those of the Company's shareholders.
As a result, the Board of Directors believes that 100,000 additional shares
of Common Stock should be made available under the 1992 Incentive Stock Plan in
order to facilitate the continued use of stock options and restricted stock
awards or part of the Company's incentive compensation program.
Summary of 1992 Incentive Stock Plan.
General. The 1992 Incentive Stock Plan was adopted by the Board of
Directors on March 25, 1992 and was approved by the shareholders at the Annual
Meeting held on May 20, 1992. In addition, the Board of Directors (on March 22,
1995) and the shareholders (at the Annual Meeting held on May 17, 1995) approved
an amendment to the 1992 Incentive Stock Plan to increase the number of shares
of Common Stock authorized for issuance thereunder from 100,000 shares to
200,000 shares. The purpose of the 1992 Incentive Stock Plan is to promote the
best interests of the Company and its shareholders by encouraging employees of
the Company to acquire a proprietary interest in the Company through the grant
of options and restricted stock awards, thus identifying their interests with
those of shareholders and encouraging employees to make greater efforts on
behalf of the Company to achieve its long-term business plans and objectives.
The following is a summary of the material features of the 1992 Incentive Stock
Plan.
Currently, the 1992 Incentive Stock Plan authorizes the granting of
incentive stock options and nonqualified stock options and the awarding of
restricted stock for up to an aggregate of 200,000 shares of Common Stock to
certain eligible officers and employees of the Company and for such share
amounts as the Compensation Committee of the Board of Directors (the
"Committee") may select from time to time. The officers and employees eligible
to participate in the 1992 Incentive Stock Plan consist of the executive
officers of the Company and the directors of the Company's principal departments
(11 in total as of the date of this Proxy Statement).
Incentive Stock Options and Nonqualified Stock Options. Options granted
under the 1992 Incentive Stock Plan may be either "incentive stock options"
(options, pursuant to Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), which afford tax benefits to recipients upon compliance
with certain conditions and which do not result in tax deductions to the
Company) or "nonqualified stock options" (options which do not afford income tax
benefits to recipients, but which may provide tax deductions to the Company).
Incentive stock options and nonqualified stock options are sometimes
collectively referred to as "options".
Incentive stock options granted under the 1992 Incentive Stock Plan may be
exercised for such prices and at such times as the Committee determines,
provided that no incentive stock options shall be granted with an exercise price
below 100% of the fair market value of the Common Stock on the date of grant or
with an exercise term that extends beyond 10 years from the date of grant; in
the case of an employee owning more than 10% of the Common Stock, the exercise
price must be at least 110% of the fair market value of the Common Stock on the
date the incentive stock option is granted. Nonqualified stock options granted
under the 1992 Incentive Stock Plan may be exercised for such prices (including
an exercise price below 100% of the fair market value of the Common Stock on the
date of grant) and at such times as the Committee determines, provided that no
nonqualified stock options shall be granted with an exercise term that extends
beyond 10 years from the date of grant. The purchase price for the Common Stock
issuable upon exercise of an
24
<PAGE> 27
incentive stock option and a nonqualified stock option must be paid in full in
cash or by check, bank draft or money order at the time of exercise; in lieu of
such form of payment, an employee may pay the purchase price by tendering shares
of Common Stock.
Options granted under the 1992 Incentive Stock Plan become exercisable on a
cumulative basis in equal installments at a rate of 33 1/3% per year, commencing
one year from the date of grant; provided, however, that the termination of an
employee's employment and/or the occurrence of a "change in control" (as
described below) may affect an employee's right to exercise an option. The
shares comprising each installment may be purchased in whole or in part at any
time after such installment becomes exercisable. In the case of incentive stock
options, the aggregate fair market value of the underlying Common Stock which
may be first exercised by an employee in any one calendar year cannot exceed
$100,000, with such value being determined at the time the options are granted
as provided by the terms of Section 422 of the Code. To the extent that an
option intended to constitute an incentive stock option shall violate the
foregoing $100,000 limitation (including change of control situations), the
portion of the option that exceeds the $100,000 limitation shall be deemed to
constitute a nonqualified stock option. The Committee, in its sole discretion,
may accelerate the time at which any option may be exercised in whole or in
part.
If an employee's employment is terminated for any reason (other than a
change in control) prior to the date an option first becomes exercisable, the
employee's right to exercise the option terminates. If an employee's employment
is terminated for any reason other than death or disability after the date an
option first becomes exercisable, the employee's right to exercise the option
terminates within the earlier of the expiration of the option or the expiration
of three months after termination of employment, and if an employee's employment
is terminated due to death or disability after the date an option first becomes
exercisable, the employee's right to exercise the option terminates within the
earlier of the expiration of the option or the expiration of one year after
termination of employment. The Committee, at the time of an employee's
termination of employment, may, in its sole discretion, accelerate the term of
an option or extend the exercise period of an option.
In the case of an incentive stock option, a grantee will not be deemed to
have received taxable income upon the grant or exercise of any incentive stock
option, provided that such shares are not disposed of by the grantee for at
least one year after the date of exercise and two years after the date of grant.
No compensation deduction will be taken by the Company as a result of the grant
or exercise of incentive stock options. In the case of a nonqualified stock
option, a grantee will be deemed to receive ordinary income upon exercise of the
nonqualified stock option in an amount equal to the amount by which the exercise
price is exceeded by the fair market value of the Common Stock purchased on the
date of exercise. The amount of any ordinary income deemed to be received by a
grantee due to a disposition of Common Stock acquired upon the exercise of an
incentive stock option prior to the expiration of two years from the date of
such option was granted and/or prior to the expiration of one year from the date
the Common Stock was acquired and the amount of any ordinary income deemed to be
received by a grantee upon exercise of a nonqualified stock option will be a
deductible expense for tax purposes for the Company.
A grantee of an option will have no rights as a shareholder with respect to
any shares covered by an option until the issuance of a stock certificate for
such shares.
Restricted Stock Awards. The Committee may award shares of restricted stock
to such employees and in such amounts as it shall determine. Shares of
restricted stock awarded under the 1992 Incentive Stock Plan may not be sold or
otherwise transferred until the termination of the applicable restriction period
established by the Committee; however, the Committee shall have the discretion
to accelerate the lapse of restrictions in the applicable restriction period
with respect to all or any number of the shares of a restricted stock award. All
rights with respect to the restricted stock awarded to an employee shall be
exercisable during an employee's lifetime only by the employee. The Committee
may impose such other restrictions on any shares of restricted stock awarded
under the 1992 Incentive Stock Plan as it may deem advisable, including, without
limitation, restrictions under applicable federal or state securities laws.
Except as otherwise provided with respect to an employee's termination of
employment and/or the "change in control" provisions (described below), and
subject to applicable federal and state securities laws, shares of restricted
stock awarded under the 1992
25
<PAGE> 28
Incentive Stock Plan shall become freely transferable by the employee after the
last day of the restriction period.
During the applicable period, an awardee holding shares of restricted stock
may exercise full voting rights with respect to the restricted stock and shall
be entitled to receive all dividends and other distributions paid with respect
to such restricted stock.
Restricted stock awarded under the 1992 Incentive Stock Plan is generally
restricted from sale or other transfer for a period of five years, except that
such restrictions shall lapse and such shares shall become freely transferable
on a cumulative basis in equal installments at a rate of 20% per year,
commencing one year from the date of the award; provided, however, that the
termination of an employee's employment and/or the occurrence of a "change in
control" (described below) may affect an employee's right to receive freely
transferable stock.
If an employee's employment is terminated by reason of death, disability,
or retirement during the restriction period, any remaining restrictions (except
those required by federal or state securities laws) applicable to a restricted
stock award automatically shall terminate, and the shares shall thereby be fully
transferable. If an employee terminates employment for reasons other than death,
disability or retirement, the employee's restricted stock still subject to the
restriction period automatically shall be forfeited to the Company; provided,
however, that the Committee, in its sole discretion, may waive the restrictions
remaining on any or all shares of restricted stock and add such new restrictions
to such shares of restricted stock as it deems appropriate.
An awardee of restricted stock will be deemed to receive ordinary income
upon the lapse of applicable restrictions on transfer in an amount equal to the
fair market value of the Common Stock on the date of lapse. The amount of any
ordinary income deemed to be received by an awardee upon lapse of applicable
restrictions on transfer will be a deductible expense for tax purposes for the
Company.
Change in Control. Upon a "change in control", any options granted under
the 1992 Incentive Stock Plan become immediately exercisable and the remaining
restriction period on any restricted stock awarded under the 1992 Incentive
Stock Plan immediately lapses; provided, however, that to the extent that the
acceleration of a grant is deemed to constitute a "parachute payment" under
Section 280G of the Code and such payment, when aggregated with other parachute
payments to the employee results in an "excess parachute payment" under Section
280G of the Code, any accelerated payment shall be reduced to the highest
permissible amount that shall not subject the employee to the excess parachute
excise tax under Section 4999 of the Code and shall entitle the Company to
retain its full compensation tax deduction for the payment.
The term "change in control" is defined in the 1992 Incentive Stock Plan
generally to mean the occurrence of any of the following events: (i) if any
"person" (as such term is used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act")), or group of persons
acting in concert, other than the Company, a subsidiary or an employee benefit
plan or employee benefit plan trust maintained by the Company or a subsidiary,
becomes the "beneficial owner" (as such term is defined in Rule 13d-3 of the
Exchange Act), directly or indirectly, of securities of the Company representing
fifty percent (50%) or more of the combined voting power of the Company's then
outstanding securities ordinarily having the right to vote in the election of
directors; or (ii) a liquidation or dissolution of the Company, sale of
substantially all of the assets of the Company, or a merger, consolidation or
combination in which the Company is not the survivor; or (iii) the addition of
new members to the Board within any consecutive twenty-four (24) month period,
which members constitute a majority of the Board, unless a majority of the Board
consists of incumbent members of the Board in office prior to the commencement
of such twenty-four (24) month period, plus new members who were recommended or
appointed by a majority of the incumbent directors in office immediately prior
to the addition of such new members to the Board.
Termination and Amendment. The Board of Directors may terminate the 1992
Incentive Stock Plan, or the granting of options or awarding of restricted stock
under the 1992 Incentive Stock Plan, at any time. No option shall be granted
under this 1992 Incentive Stock Plan after the tenth anniversary of the date of
adoption
26
<PAGE> 29
of this 1992 Incentive Stock Plan by the Board (being March 25, 1992). The Board
may amend or modify the 1992 Incentive Stock Plan at any time and from time to
time, but no amendment or modification, without the approval of the shareholders
of the Company, shall (a) materially increase the benefits accruing to
participating employees under the 1992 Incentive Stock Plan, (b) increase the
amount of Common Stock for which grants and awards may be made under the 1992
Incentive Stock Plan, except as permitted with respect to stock splits, stock
dividends, and the like, or (c) change the provisions relating to the
eligibility of individuals to whom grants and awards may be made under the 1992
Incentive Stock Plan. No amendment, modification, or termination of the 1992
Incentive Stock Plan will in any manner affect any option granted or restricted
stock awarded under the 1992 Incentive Stock Plan without the consent of the
employee holding the option or restricted stock.
Miscellaneous. Options granted and restricted stock awarded under the 1992
Incentive Stock Plan are not transferable by the grantee or awardee, as the case
may be, except by will or the laws of descent and distribution. During the
lifetime of a participating employee, an option shall be exercised only by the
employee and the rights with respect to restricted stock shall be exercised only
by the employee.
Neither the adoption of the 1992 Incentive Stock Plan nor the granting of
any option or awarding of any restricted stock pursuant to the 1992 Incentive
Stock Plan will be deemed to confer on any person any right to continue in the
employ of the Company or its affiliates or to continue to perform services for
the Company or its affiliates or interferes in any way with the right of the
Company or its affiliates to terminate such person's service as an officer or
other employee at any time.
Options Granted and Restricted Stock Awarded.
The following table provides information as to the number of options
granted and shares of restricted stock awarded under the 1992 Incentive Stock
Plan from its inception through the date of this Proxy Statement to each person
or group listed in the table.
<TABLE>
<CAPTION>
NUMBER OF SHARES NUMBER OF SHARES
OF COMMON STOCK OF COMMON STOCK
SUBJECT TO OPTIONS SUBJECT TO RESTRICTED STOCK
NAME AND POSITION PREVIOUSLY GRANTED AND OUTSTANDING(1) PREVIOUSLY GRANTED AND OUTSTANDING
- ----------------------------------- ------------------------------------- ----------------------------------
<S> <C> <C>
Dennis P. Callahan
President and Chief
Executive Officer................ 140,000 20,000(2)
All current executive officers as a
group (10 persons)............... 178,500 20,000(2)
All other employees as a group (11
persons)......................... 179,500 20,000(2)
</TABLE>
- -------------------------
(1) As of the date of this Proxy Statement, there have been no grants of
nonqualified stock options under the 1992 Incentive Stock Plan. The
exercise price of all incentive stock options granted and outstanding under
the 1992 Incentive Stock Plan, ranging from $10.375 to $4.125, were at
least equal to the fair market value of the Common Stock as of the
respective grant dates. All such options are exercisable on a cumulative
basis in equal installments at a rate of 33 1/3% per year, commencing one
year from the grant date and expire 5 years after the date of grant.
(2) See "Executive Compensation -- Summary Compensation Table".
Required Vote.
The affirmative vote of holders of a majority of the shares of Common Stock
present at the Annual Meeting is required to approve the amendment to the 1992
Incentive Stock Plan. Abstentions will have the effect of a vote against
approval of the amendment to the 1992 Incentive Stock Plan and broker non-votes
will have no effect.
27
<PAGE> 30
If no instructions are indicated in any properly executed proxy, such proxy
will be voted FOR the approval of the amendments to the 1992 Incentive Stock
Plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE AMENDMENT
TO THE 1992 INCENTIVE STOCK PLAN.
PROPOSAL 4: APPOINTMENT OF AUDITORS.
The Board of Directors, upon recommendation of its Audit Committee, will
propose at the meeting that the shareholders appoint the firm of Ernst & Young
LLP to audit the financial records of the Company for the fiscal year ending
February 1, 1997. Ernst & Young LLP audited the Company's financial records for
the prior fiscal year.
A representative of Ernst & Young LLP is expected to be present at the
meeting and will have the opportunity to make a statement, if he so desires, and
will be available to answer appropriate questions by shareholders.
The affirmative vote of a majority of the shares of Common Stock present at
the meeting is required to appoint Ernst & Young LLP as the Company's auditors.
If the necessary approval by shareholders is not received the Board of Directors
will select and appoint another independent public accounting firm for such
purpose without further shareholder action.
If no instructions are indicated in any properly executed proxy, such proxy
will be voted FOR the appointment of Ernst & Young LLP as auditors.
28
<PAGE> 31
FURTHER INFORMATION
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information concerning the ownership
of the Company's Common Stock as of July 5, 1996, and as adjusted to reflect the
issuance of 514,800 shares to the Steinbach Shareholders pursuant to the
Acquisition (i) by those persons who were believed by the Company to be
beneficial owners of more than 5% of the Company's outstanding Common Stock, as
reported to the Securities and Exchange Commission ("the SEC") and/or to the
Company by such persons, (ii) by the Named Executive Officer (as defined below
in "Executive Compensation"), and (iii) by all directors and officers (including
the Named Executive Officer) of the Company as a group.
<TABLE>
<CAPTION>
SHARES
SHARES BENEFICIALLY OWNED
BENEFICIALLY OWNED AS OF THE CLOSING
AS OF JUNE 30, 1996 OF THE ACQUISITION
----------------------- -----------------------
NAME AND ADDRESS NUMBER PERCENT NUMBER PERCENT
OF BENEFICIAL OWNER OF SHARES OF CLASS OF SHARES OF CLASS
----------------------------------------------- --------- -------- --------- --------
<S> <C> <C> <C> <C>
JoAnn S. Cousino(1)(2)......................... 133,526 13.9% 133,526 9.1%
500 St. Clair
Grosse Pointe, Michigan 48230
Joseph C. Keys(1)(2)........................... 132,113 13.8% 132,113 9.0%
701 N. Oxford Road
Grosse Pointe Woods, Michigan 48236
Richard S. Keys(1)(2).......................... 132,353 13.8% 132,353 9.0%
414 Notre Dame Ave.
Grosse Pointe, Michigan 48230
FMR Corp. ..................................... 51,690 5.4% 51,690 3.5%
82 Devonshire Street
Boston, Massachusetts 02109
Dennis P. Callahan(3).......................... 66,420 6.8% 66,420 4.5%
All directors and executive officers (including
the Named Executive Officer) of the Company
as a group (20 in number)(4)(5).............. 520,312 51.1% 520,312 34.0%
Jay L. Schottenstein(5)........................ -- -- 514,800 35.0%
c/o 1800 Moler Road
Columbus, Ohio 43207
</TABLE>
- -------------------------
(1) Pursuant to a Shareholder Agreement (the "Shareholder Agreement") dated
August 18, 1992, as amended, JoAnn Cousino, Joseph Keys and Richard Keys
have agreed to restrict the disposition of, and regulate the voting of,
390,062 shares (approximately 40.8%) of the Company's outstanding Common
Stock subject to the Shareholder Agreement. In particular, these shares may
only be transferred to certain revocable trusts, to the immediate family of
one of these shareholders, or upon the approval of all of these
shareholders. Moreover, in connection with the execution of the Shareholder
Agreement, each of these shareholders executed an irrevocable proxy whereby
any two of them have the power to vote all of such shares; provided,
however, that with respect to certain proposals involving the Company (i.e.,
a merger or business combination, a sale of substantially all the assets, or
a dissolution and liquidation), all of these shareholders acting together
must agree to vote such shares. The Shareholder Agreement, and accompanying
irrevocable proxy, shall continue in force through August 18, 1996, unless
sooner terminated as provided therein; as of the date of this Proxy
Statement, the parties have not determined whether they intend to extend the
term of the Shareholder Agreement. No cash was involved in the execution and
delivery of the Shareholder Agreement.
(2) Includes options to purchase 2,000 shares of Common Stock granted under the
1995 Director Stock Option Plan which are presently exercisable.
(3) Includes shares held indirectly by members of Mr. Callahan's immediate
family and 20,000 shares as to which Mr. Callahan has the right to acquire
pursuant to outstanding stock options within 60 days from June 30, 1996.
(4) Includes shares which can be acquired within the 60-day period beginning
June 30, 1996. Does not include shares beneficially owned by the Steinbach
Shareholders.
(5) Upon the closing of the Acquisition Agreement, the Company will issue
514,800 shares of Common Stock (representing approximately 35.0% of the then
issued and outstanding shares of Common Stock) to the Steinbach
Shareholders. Mr. Schottenstein, as the sole trustee of the several trusts
comprising the Steinbach Shareholders, is deemed to be the beneficial owner
of 514,800 shares. See above "Matters to Come Before the Meeting -- Proposal
2: Approval of Stock Issuance -- Introduction." Upon such issuance, and
assuming 1,470,869 shares of Common Stock were issued and outstanding as a
result thereof, the beneficial ownership of all directors and officers
(including the Named Executive Officer) as a group would be diluted to
approximately 34.0% and the beneficial ownership of all of the current
shareholders of the Company would be diluted to approximately 65.0% of the
then issued and outstanding shares of Common Stock. See "Matters to Come
Before the Meeting -- Proposal 2: Approval of Stock Issuance".
29
<PAGE> 32
EXECUTIVE OFFICERS
Set forth below is certain information concerning the Company's present
executive officers, including name, age, principal occupation and business
experience during the past five years and length of service as an officer of the
Company.
<TABLE>
<CAPTION>
NAME AND AGE OFFICE(S) AND LENGTH OF SERVICE
- ------------------------------ -------------------------------------------------------------
<S> <C>
Dennis P. Callahan, 52........ President and Chief Executive since November 1992; previously
employed as Senior Vice President -- Merchandising of
Hess's Department Stores, Allentown, Pennsylvania, from May
1990 to November 1992, and as President of Bon Ton Stores,
York, Pennsylvania, from July 1985 to January 1989.
Mark A. VandenBerg, 39........ Vice President -- Finance and Chief Financial Officer since
July 1991; Secretary since February 1987; and Treasurer since
February 1986.
Michael G. Toloff, 41......... Vice President -- Stores (the Company) since March 1995; Vice
President -- Stores and Operations from July 1991 to March
1995; Director of Control from February 1988 to July 1991.
Nancy L. Borchers, 49......... Vice President -- Stores (Steinbach) since March 1996,
although hired by the Company in January 1996; Store Manager,
Steinbach, from June 1995 to December 1995, previously
employed as a real estate salesperson, Johnson & Johnson,
Point Pleasant, New Jersey, from May 1994 to May 1995 and
as Merchandise Manager -- Stores, Royal Doulton, Somerset,
New Jersey, from January 1991 to May 1994.
June A. Ley, 44............... Vice President -- General Merchandise Manager since March
1995; General Merchandise Manager from April 1994 to March
1995; Divisional Merchandise Manager from June 1993 to
April 1994; previously self-employed as Retail Consultant,
Pittsburg, Pennsylvania, from February 1992 to June 1993,
and as Divisional Merchandise Manager of Streets of
Oklahoma City, Oklahoma City, Oklahoma, from February 1990
to November 1991.
Stephen J. Mechavich, 45...... Vice President -- General Merchandise Manager since March
1996; General Merchandise Manager from April 1994 to March
1996; Divisional Merchandise Manager from August 1991 to
April 1994; and Merchandise Advisor from April 1990 to July
1991.
John E. Godfrey, Jr., 58...... Vice President -- General Merchandise Manager since April
1996; previously employed as Senior Vice President -- General
Merchandise Manager, Bon Ton Stores Corporation, York,
Pennsylvania, from April 1984 to January 1996.
James A. Smith, 40............ Vice President -- Operations since March 1995; Director of
Distribution & Traffic from 1990 to March 1995.
Roger E. Werling, Jr., 39..... Vice President -- Management Information Systems since March
1996; Director of Management Information Systems from August
1990 to March 1996.
Edward J. Pestovic, 57........ Vice President -- Advertising since March 1996, although
hired by the Company in January 1996; previously employed as
Director of Advertising and Sales Promotion, Steinbach,
from September 1981 to January 1996.
</TABLE>
30
<PAGE> 33
EXECUTIVE COMPENSATION
The following information about the Company's method of compensating its
executive officers is intended to both comply with the disclosure rules of the
Securities and Exchange Commission ("SEC") and provide shareholders with a
better understanding of the Company's objectives, policies and arrangements for
executive compensation.
Summary Compensation Table
The following table sets forth, for the fiscal years ended February 3, 1996
("fiscal year 1995"), January 28, 1995 ("fiscal year 1994") and January 29, 1994
("fiscal year 1993"), information with respect to the cash and other
compensation paid to, or accrued for, the Chief Executive Officer, the only
executive officer whose total annual salary and bonuses exceeded $100,000 (the
"Named Executive Officer").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
---------------------------------
AWARDS
----------------------- PAYOUTS
ANNUAL RESTRICTED SECURITIES -------
COMPENSATION STOCK UNDERLYING LTIP
NAME AND PRINCIPAL ------------------ AWARDS OPTIONS PAYOUTS ALL OTHER
POSITION FISCAL YEAR SALARY BONUS ($) (#) ($) COMPENSATION($)
- ------------------------- ----------- -------- ------- ---------- ---------- ------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dennis P. Callahan(1).... 1995 $292,677 $50,000 -- 30,000 -- $ 4,901(2)
President and Chief 1994 286,273 75,000 (3) (4) $50,000(5) 4,901(2)
Executive Officer 1993 250,042 75,000 -- -- -- 24,349(6)
</TABLE>
- -------------------------
(1) Mr. Callahan became President and Chief Executive Officer of the Company
effective November 2, 1992. Pursuant to the terms of an employment
agreement, he is entitled to, among other things, a base salary of $250,000
per year.
(2) Includes $4,200 (or $350 per month) for a car allowance, $501 of premiums
paid by the Company on a term life insurance policy maintained for the
benefit of Mr. Callahan, and $200 contributed by the Company on Mr.
Callahan's behalf to the Company's profit-sharing plan.
(3) The award of restricted stock was made as of August 24, 1994 pursuant to the
terms of the 1992 Incentive Stock Plan and the Restrictive Stock Agreement,
dated August 24, 1994, between the Company and Mr. Callahan (the
"Restricted Stock Agreement"). Such terms contain the following general
provisions relative to vesting and transfer restrictions: (i) effective as
of the fiscal year ended January 28, 1995 and the fiscal years ending
February 3, 1996 and February 1, 1997, as the case may be, one-third of the
30,000 shares in the award shall be automatically forfeited to the Company
unless certain performance objectives are satisfied; in the event the
performance objectives are satisfied, such one-third portion not so
forfeited shall be deemed vested; and (ii) the 30,000 shares in the award
(including any vested shares) generally are restricted from transfer for a
period of five years from January 30, 1994, except that such transfer
restrictions shall lapse at such time, if any, as the Company's Board of
Directors shall, in their sole discretion, determine from time to time,
and, in certain cases, upon termination of employment. During the five-year
restriction period, Callahan retains full voting rights and is entitled to
receive all dividends and distributions with respect to the shares in the
award. With respect to the fiscal year ended January 28, 1995, the
performance objectives were satisfied. However, with respect to the fiscal
year ended February 3, 1996, the performance objectives were not satisfied
and 10,000 shares were automatically forfeited.
(4) Effective March 19, 1996, the Company and Mr. Callahan agreed to cancel
incentive stock options granted on April 13, 1994 to purchase 20,000 shares
at a per share purchase price of $10.00.
(5) As of January 28, 1995, 10,000 shares of Common Stock subject to an award of
restricted stock vested subject to certain restrictions on transfer. For a
description of such award, see note (2) above. The dollar value reflected
in the table was calculated by multiplying such 10,000 shares by the
closing price of the Common Stock reported on the American Stock Exchange
on February 2, 1996 (the last reported trade prior to February 3, 1996), or
$5.00 per share. With respect to the payout reported in the table, the
performance objective related to the vesting of such 10,000 shares was
reduced by the Company and by Mr. Callahan.
(6) Includes $19,000 for moving expenses, $4,200 (or $350 per month) for a car
allowance, $1,049 of premiums paid by the Company on a term life insurance
policy maintained for the benefit of
31
<PAGE> 34
Mr. Callahan, and $100 contributed by the Company on Mr. Callahan's behalf
to the Company's profit-sharing plan, for the fiscal year 1993.
Unexercised Options and Holdings
The following table sets forth information with respect to the Named
Executive Officer concerning the exercise of options previously granted under
the 1992 Incentive Stock Plan during the fiscal year ended February 3, 1996 and
unexercised options held as of that date.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND 1995 FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES VALUE FISCAL YEAR-END FISCAL YEAR-END
ACQUIRED ON REALIZED (#) EXERCISABLE/ ($) EXERCISABLE/
NAME EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE(1)
- ------------------------------------------- ------------ -------- ---------------- ----------------
<S> <C> <C> <C> <C>
Dennis P. Callahan......................... 0 $0 16,667/60,000 $0/$26,250
</TABLE>
- -------------------------
(1) The estimated value of the unexercised option shares (i.e., the difference
between the fair market value of the securities underlying the options and
the exercise price of the option at fiscal year-end) was based on the
closing price of the Common Stock reported on the American Stock Exchange
on February 2, 1996 (the last reported trade date prior to February 3,
1996), or $5.00 per share. The dollar values in this table (and all others
contained in this report) are calculated on a pre-tax basis.
Employment Contracts, Termination of Employment, and Change-in-Control
Arrangement
Executive officers of the Company (including the Named Executive Officer)
are appointed annually by the Board of Directors and, subject to the employment
agreement with Mr. Callahan described below, serve at the pleasure of the Board.
The Company has entered into a written employment agreement with Mr.
Callahan employing him as the President and Chief Executive Officer of the
Company. This agreement provides for a two year term of employment (initially,
from November 1, 1992 to October 31, 1994, subject to certain automatic renewal
provisions) unless he is terminated due to permanent disability (as defined in
the agreement), he is terminated without cause (as defined in the agreement), he
voluntarily terminates his employment or he is terminated for good reason or for
cause (as defined in the agreement, including the willful engagement in
dishonest or fraudulent actions or omissions). Termination for good reason
includes (a) a change in control (generally, (i) the acquisition by a person or
group of more than 50% of the fair market value or total voting power of the
Company, (ii) the acquisition within a twelve-month period by a person or group
of more than one-third in fair market value of the Company's assets, or (iii)
the replacement of a majority of the directors within a twelve-month period)
followed by a diminution or adverse change in the employee's duties and
responsibilities, in the employee's rights or benefits under certain bonus,
stock, and other employee benefit plans or by a requirement that the employee
relocate his principal place of employment beyond a 100 mile radius of Detroit,
Michigan, (b) a material breach of the employment agreement, and (c) the failure
by the Company to obtain a satisfactory agreement from any successor to perform
the employment agreement. If the employee is terminated without cause or for
good reason, the employee would be entitled to receive a single cash payment,
within ten business days following the date of termination, equal to the present
value of two years' base salary (initially, the base salary is $250,000 per
year) and, further, the employee would be entitled to exercise any previously
granted outstanding stock options. The agreement restricts employee disclosure
of material or secret information and employee competition within a fifteen-mile
radius of any of the Company's stores for a period of one year after employment.
Compensation Committee Interlocks and Insider Participation
During the fiscal year ended February 3, 1996, the Compensation Committee
consisted of Messrs. Pallone (Chairman), Ebert, Entenman, Richard S. Keys and
Schaye. Mr. Keys was employed by the Company as a Buyer during the year ended
February 3, 1996.
32
<PAGE> 35
Compensation Committee Report on Executive Compensation
General. The compensation of the Company's executive officers (including
the Named Executive Officer) is determined annually by the Compensation
Committee of the Board of Directors. The Compensation Committee consists of five
directors, four of whom are not employed by the Company and are not eligible to
participate in any of the Company's benefit plans except for the 1995 Director
Stock Plan. The Board of Directors, with the guidance and supervision of the
Compensation Committee, has developed and implemented compensation policies that
seek to provide fair and competitive compensation, encourage the retention of
qualified individuals and enhance stockholder value by encouraging executive
officers to focus their effort on achieving profitability for the Company. The
Company's compensation policies are intended to align the financial interest of
the Company's officers (including its executive officers) with those of the
shareholders as well as to create an atmosphere which recognizes the individual
contribution and/or performance of each executive officer.
In addition to merit-based promotions, the essential components of the
compensation policy for the Company's executive officers are base compensation,
short-term cash performance bonus awards and long-term stock incentive awards in
the form of stock options and/or restricted stock.
Base Compensation. The base compensation for the executive officers of the
Company, including the Chief Executive Officer, is reviewed in March of each
year by the Compensation Committee. Each year, the Compensation Committee
reviews with the Chief Executive Officer and approves, with any modifications it
deems appropriate, annual salaries for the Company's executive officers
(excluding the Chief Executive Officer) for the following year. Annual salaries
are developed after a review of several factors, including the overall salary
increase for Company personnel, comparative competitive industry data and
assessments of the executive's individual performance. The general salary
increase for Company employees as a whole is primarily dependent upon the
Company's earnings performance, the inflation rate for southeastern Michigan and
any reported trends reflecting general increases in compensation among retailers
of comparable size. The peer group of retailers used for compensation analysis
is not generally the same as the Peer Group Index discussed below in the Stock
Performance Graph. The Compensation Committee believes that the Company's most
direct competitors for executive talent are not necessarily comprised of all of
the companies included in a peer group established for comparing shareholder
returns, due primarily to the fact that most of the public companies included in
the peer index are much larger than the Company. In particular, the Compensation
Committee believes that retailers of relatively the same size as the Company and
other non-manufacturing companies doing business in Southeastern Michigan are
the Company's most direct competitors for executive talent, and therefore
information about compensation levels paid by such organizations is considered
by the Committee. The Compensation Committee, where appropriate, also considers
certain other non-financial measures, such as increases in market share,
improvements in service quality, and improvements in relations with customers,
suppliers and employees.
The base compensation of the Chief Executive Officer under his employment
agreement is determined by reference to the same factors applicable to the
executive officers, but such determination is made by the Compensation Committee
without the involvement by the Chief Executive Officer. For the current year,
consideration was given by the Compensation Committee to the efforts devoted by
Mr. Callahan in connection with the Steinbach Acquisition and the results of
these efforts, and the Company's operating performance was not given a great
deal of weight. Each year the Committee's determination on base compensation is
presented to and approved by the Company's Board of Directors, without
participation by any affected employee directors.
Performance Bonus Awards. For several years, the Company has maintained a
program to provide incentives to selected officers and employees who have
principal responsibility for profitability and growth in the form of contingent
awards payable in cash. This program consists primarily of cash awards under a
short-term performance plan and an annual cash bonus plan and is administered by
the Compensation Committee, which administration includes the establishment of
performance objectives and awards and the selection of participants. The
establishment of performance objectives and awards is accomplished by taking
into consideration general market and economic considerations and management's
financial plan in the form presented to the Board of Directors at the beginning
of each fiscal year.
33
<PAGE> 36
Under the short-term performance plan, the Compensation Committee
establishes annual performance objectives, stated in terms of net profits after
taxes, and performance awards based on the satisfaction of such objectives.
Awards to participants are made based on the pro rata base compensation of each
participant. As has been the case for the past several years, no awards were
made under the plan for the fiscal year ended February 3, 1996.
Under the annual cash bonus plan, ten percent (10%) of pre-tax earnings in
excess of an "earnings base" is paid to eligible participants on the basis of
their contributions to the Company as determined by the Compensation Committee.
For the fiscal year ended February 3, 1996, this earnings base was $529,213 and,
as has been the case for the past several years, no awards were made under the
plan.
The Company also has from time to time paid discretionary bonuses to
certain officers and key employees of the Company selected by the Compensation
Committee, based upon their performance during the prior fiscal year. For the
fiscal year ended February 3, 1996, the Compensation Committee approved a
discretionary bonus to the Chief Executive Officer of $50,000 and discretionary
bonuses to four other officers and key employees totalling $12,000, all of which
were made primarily as a result of the contributions to the Company's
acquisition of Steinbach.
Stock Incentive Awards. The Company's incentive program includes the 1992
Incentive Stock Plan, which is intended to retain qualified executive officers
and to motivate such officers to improve the operating results of the Company
and, thereby, improve the long term stock performance of the Company through the
grant of stock options and/or the award of restricted stock. Under this Plan,
which is administered by the Compensation Committee, grants of incentive stock
options and awards of restricted stock have been made to eligible participants
as follows: (i) during the fiscal year ended January 30, 1993, options were
granted to acquire 30,000 shares (pursuant to which options to acquire 166
shares have been exercised and certain options have terminated such that 3,834
shares have been returned to the Plan);(ii) no grants or awards were made during
the fiscal year ended January 29, 1994; (iii) during the fiscal year ended
January 28, 1995, options were granted to acquire 40,000 shares (of which,
options to acquire 20,000 shares were granted to the Chief Executive Officer)
and a restricted stock award was made to the Chief Executive Officer for 30,000
shares of Common Stock subject to certain performance objectives and vesting
requirements; (iv) during the fiscal year ending February 3, 1996, options were
granted to acquire 40,000 shares (of which, options to acquire 30,000 shares
were made to the Chief Executive Officer); and (v) to date, during the fiscal
year ending February 1, 1997, options have been granted to acquire 115,000
shares (of which, options to acquire 100,000 shares were made to the Chief
Executive Officer and, in connection therewith, options previously granted to
the Chief Executive Officer on April 13, 1994, to acquire 20,000 shares at a per
share exercise price of $10.00 were cancelled).
As is the case with respect to cash compensation, the amount of any grants
of stock options and/or awards of restricted stock to the Chief Executive
Officer will be established separately by the Compensation Committee without the
participation of the Chief Executive Officer. Any such award will be based,
among other things, upon factors applicable to executive officer awards as well
as information regarding option grants to chief executive officers of retailers
of similar size or performance, the Chief Executive Officer's base compensation
and his anticipated future contribution to the Company.
Conclusion. Through the compensation programs described above, a
significant portion of the executive compensation is based on individual and
corporate performance and on stock performance. In the case of the Chief
Executive Officer, approximately fifteen percent (15%) of his executive
compensation (excluding long-term compensation awards and payouts) for the
fiscal year ended February 3, 1996, consisted of a performance based element.
The Compensation Committee intends to continue the policy of linking the
executive compensation to corporate performance and shareholder returns.
Members of the Compensation Committee:
Jules L. Pallone, Chairman
Carroll E. Ebert
Alfred M. Entenman, Jr.
Richard S. Keys
James L. Schaye, Jr.
34
<PAGE> 37
Stock Performance Graph
The following graph compares the percentage change in the cumulative total
shareholder return on the Company's Common Stock during the Company's last five
fiscal years with the cumulative total return on the American Stock Exchange
(the "AMEX Index") and the Media General Retail Trade -- Department Stores Index
(the "Peer Group Index"). The comparison assumes the investment of $100 in the
Company's Common Stock and in each index on February 2, 1991, and the
reinvestment of all dividends, if any, through February 3, 1996.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURNS
CROWLEY, MILNER AND COMPANY, THE AMERICAN STOCK EXCHANGE INDEX,
AND MEDIA GENERAL RETAIL TRADE -- DEPARTMENT STORES INDEX
(PERFORMANCE RESULTS FROM FEBRUARY 2, 1991
THROUGH FEBRUARY 3, 1996)
[GRAPH]
<TABLE>
<CAPTION>
CROWLEY,
MEASUREMENT PERIOD MILNER AND PEER GROUP
(FISCAL YEAR COVERED) COMPANY INDEX AMEX INDEX
<S> <C> <C> <C>
1991 100 100 100
1992 67.80 127.68 123.29
1993 98.31 147.77 121.08
1994 125.42 189.87 144.58
1995 55.93 160.80 126.18
1996 67.80 208.30 161.74
</TABLE>
CERTAIN TRANSACTIONS
Pursuant to two long-term store leases (one of which was executed in 1964
and terminates in 2001 and the other of which was executed in 1980 and
terminates in 2000) between the Company and two partnerships in which Jerome L.
Schostak, a director of the Company since 1995, is a partner, the Company paid
an aggregate of $849,754 in rentals during the fiscal year ended February 3,
1996. Mr. Schostak has a substantial interest in such partnerships. The terms of
the two leases were negotiated by the Company with such partnerships at a time
when the partnerships were not an affiliated person or entity.
35
<PAGE> 38
CERTAIN REPORTING REQUIREMENTS
Under the federal securities laws, the Company's directors and executive
officers and any persons holding more than 10% of the Company's Common Stock
(collectively, the "Reporting Persons") are required to file reports with the
Securities and Exchange Commission and with the American Stock Exchange relative
to their ownership of the Common Stock. Specific due dates for filing these
reports have been established and the Company is required to disclose in this
Proxy Statement any failure to timely file these reports.
Based on the written representations of its Reporting Persons and on copies
of the reports filed with the Securities and Exchange Commission, the Company
believes that all of these requirements were satisfied by the Company's
Reporting Persons.
OTHER MATTERS AND SHAREHOLDER PROPOSALS
At the date of this Proxy Statement, management is not aware of any matters
to be presented for action at the meeting other than those described above,
except for routine matters. If other business does properly come before the
meeting, however, the persons named in the accompanying proxy intend to vote the
proxy in accordance with their best judgment on such matters.
The following documents are hereby incorporated by reference into this
Proxy Statement: (a) the Company's Annual Report on Form 10-K for the fiscal
year ended February 3, 1996, as amended on June 11, 1996, including (i) the
financial statements and notes thereto of the Company, as audited by Ernst &
Young LLP, as of January 28, 1995, and February 3, 1996, and for each of the
three fiscal years ended February 3, 1996, (ii) the Management's Discussion and
Analysis of Results of Operations and Financial Condition of the Company as of
the dates and for the periods described above in subparagraph (i), and (iii) the
market price for the Company's Common Stock for each quarterly period within the
two fiscal years ended February 3, 1996 and certain related shareholder
information; and (b) the Company's Quarterly Report on Form 10-Q for the quarter
ended May 4, 1996.
In addition to the several Appendices attached hereto, copies of the
Company's Annual Report to Shareholders for the fiscal year ended February 3,
1996, as well as the Company's Quarterly Report on Form 10-Q for the quarter
ended May 4, 1996, accompany this Proxy Statement.
Any proposals of shareholders to be presented at the Annual Meeting to be
held in 1997 which are eligible for inclusion in the Company's proxy statement
for that meeting under applicable rules of the Securities and Exchange
Commission must be received by the Company no later than 120 days prior to July
, 1997, and should be sent to the Secretary of the Company at its principal
executive offices by certified mail, return-receipt requested.
Detroit, Michigan
July , 1996
36
<PAGE> 39
APPENDICES:
<TABLE>
<S> <C>
Appendix A Opinion of First of Michigan Corporation
Appendix B Acquisition Agreement
Appendix C Financial Statements of Steinbach Stores, Inc. and Steinbach,
Inc. -- Eleven Months ended December 30, 1995 and Fiscal Years
ended January 28, 1995 and January 29, 1994
Appendix D 15 Store Income Statement and Pro Forma Combined Income
Statement -- Fiscal Year ended February 3, 1996
Appendix E Financial Statements of Steinbach Stores, Inc. -- Quarter ended
May 4, 1996
Appendix F Pro Forma Combined Condensed Financial Statements -- Quarter
ended May 4, 1996
</TABLE>
37
<PAGE> 40
APPENDIX A
OPINION OF FIRST OF MICHIGAN CORPORATION
July 15, 1996
Board of Directors
Crowley, Milner and Company
2301 West Lafayette
Detroit, MI 48216-1891
Dear Board of Directors:
Crowley, Milner and Company (the "Company") has entered into an Agreement
and Plan of Reorganization (the "Acquisition Agreement"), dated November 17,
1995, as amended, with the shareholders (the "Steinbach Shareholders") of
Steinbach, Inc. ("Steinbach") pursuant to which the Company will acquire from
the Steinbach Shareholders all of the issued and outstanding shares of Common
Stock of Steinbach Stores Inc. ("Steinbach") in exchange for 514,800 shares of
Common Stock of the Company (representing approximately 35% of the issued and
outstanding shares of the Company).
You have asked us whether, in our opinion, the total consideration paid for
Steinbach is fair to the holders of the Company's common stock from a financial
point of view.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed the annual financial statements of the Company for the fiscal
years ended February 1, 1992, January 30, 1993, January 29, 1994,
January 28, 1995 and February 3, 1996;
(2) Reviewed the annual financial statements of Steinbach for the three
months ended January 28, 1995 and the eleven months ended December 30,
1995;
(3) Reviewed certain information, including financial forecasts relating
to the business, earnings, cash flow, assets and prospects of
Steinbach and the Company, furnished to us by the Company;
(4) Conducted discussions with members of senior management of the Company
and Steinbach concerning their respective businesses and prospects;
(5) Reviewed the historical market prices and trading activity for the
Company's shares and compared it with those of certain publicly traded
companies which we deemed to be reasonably similar to Steinbach and
the Company, respectively;
(6) Compared the results of operations of Steinbach and the Company with
those certain companies which we deemed to be reasonably similar to
Steinbach and the Company;
(7) Compared the proposed financial terms of the transaction contemplated
by the Acquisition Agreement with the financial terms of certain other
mergers and acquisitions which we deemed to be relevant.
(8) Considered the pro forma effect of the acquisition on the Company's
capitalization ratios and earnings and cash flow per share;
(9) Reviewed the Acquisition Agreement; and
(10) Reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as we
deemed necessary, including our assessment of general economic, market
and monetary conditions.
A-1
<PAGE> 41
In preparing our opinion, we have relied on the accuracy and completeness
of all information supplied or otherwise made available to us by Steinbach and
the Company, and we have not independently verified such information or
undertaken an independent appraisal of the assets of Steinbach or the Company.
With respect to the financial forecasts furnished by Steinbach and the Company,
we have assumed that they have been reasonably prepared and reflect the best
currently available estimates and judgment of Steinbach's or the Company's
management as to the expected future financial performance of Steinbach or the
Company, as the case may be.
On the basis of, and subject to the foregoing, we are of the opinion that
the consideration paid for Steinbach is fair to the holders of the Company's
common stock from a financial point of view.
Very truly yours,
FIRST OF MICHIGAN CORPORATION
/s/ J. MICHAEL DAVIS
--------------------------------------
J. Michael Davis
Senior Vice President
Corporate Finance
A-2
<PAGE> 42
APPENDIX B
AGREEMENT AND PLAN OF REORGANIZATION AS AMENDED
This AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made on
November 17, 1995, as amended, between CROWLEY, MILNER AND COMPANY, a Michigan
corporation ("Crowley's"), and the several shareholders of STEINBACH STORES,
INC., an Ohio corporation ("Steinbach"), listed on the signature page hereof
(collectively, the "Shareholders").
The Shareholders are the owners of all of the issued and outstanding
capital stock of Steinbach. The Shareholders and the Board of Directors of
Crowley's have determined that it is in the best interests of Steinbach,
Crowley's, and the Shareholders to consummate the acquisition by Crowley's of
all of the Common Stock of Steinbach held by the Shareholders (the
"Reorganization"). The parties hereto desire that the Reorganization be made on
the terms and subject to the conditions set forth in this Agreement and qualify
as a tax-free reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code").
In consideration of the premises and subject to the representations,
warranties, covenants and other terms and conditions contained herein and for
the consideration herein provided, the parties agree as follows:
I. REORGANIZATION.
1.1 Exchange of Steinbach and Crowley's Common Stock. Subject to and upon
the representations, warranties, covenants, agreements, terms and conditions in
this Agreement, at the Closing (as defined herein) and as of the Closing Date
(as defined herein), Crowley's shall acquire from the Shareholders and the
Shareholders shall deliver to Crowley's an aggregate of 100 shares of Common
Stock, without par value (the "Steinbach Common Stock"), of Steinbach,
constituting all of the issued and outstanding shares of the capital stock of
Steinbach, in exchange for 514,800 shares of Common Stock of Crowley's (the
"Crowley's Common Stock"), or approximately thirty-five percent (35%) of the
total amount of the Crowley's Common Stock to be outstanding immediately after
the Closing (the "Consideration").
1.2 Nature of Consideration. It is expressly acknowledged and agreed that
the shares of Crowley's Common Stock delivered in payment of the Consideration
hereunder shall not be registered under the federal securities laws or under any
securities or Blue Sky laws of the several states, provided that the
Shareholders shall have the rights arising under the Registration Rights
Agreement (as defined in Section 5.5 hereof). Notwithstanding anything in this
Agreement to the contrary, in no event shall the determination of the
Consideration be adjusted due to the increase or decrease of the closing price
of the Common Stock on the American Stock Exchange (i.e., the national
securities exchange on which such Common Stock is listed for trading).
1.3 Procedure for Exchange of Shares. At the Closing and as of the Closing
Date, Crowley's will furnish the Shareholders with a certificate or certificates
representing that number of whole shares of Crowley's Common Stock which the
Shareholders are entitled to receive pursuant to Section 1.1 in exchange for
certificates representing all of the issued and outstanding Steinbach Common
Stock. The certificates representing all such shares of Crowley's Common Stock
will bear the following legend:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER ANY STATE SECURITIES LAW. THESE
SECURITIES MAY NOT BE SOLD EXCEPT IN ACCORDANCE WITH THE REGISTRATION
REQUIREMENTS OF SUCH LAWS OR AN EXEMPTION THEREFROM.
1.4 Closing of Steinbach Transfer Records. After the close of business on
the Closing Date, transfers of shares of Steinbach Common Stock outstanding
prior to the Closing Date shall not be made on the stock transfer books of
Steinbach.
1.5 Steinbach's Net Book Value. Attached hereto as Annex 1.5 is a balance
sheet (the "December 1995 Balance Sheet") relative to the net book value of
Steinbach's assets and liabilities as at the close of business
B-1
<PAGE> 43
on December 30, 1995 (i.e., "Steinbach's Net Book Value") which has been
prepared by Steinbach in accordance with generally accepted accounting
principles (except as otherwise provided below). It is acknowledged and agreed
that (x) for purposes of determining Steinbach's Net Book Value, neither the
December 1995 Balance Sheet nor Steinbach's Net Book Value contains or reflects
any of the Excluded Assets (as defined herein) or the Excluded Liabilities (as
defined herein) or any of the actions to be taken by the Shareholders with
respect to the disposition thereof as contemplated in Sections 4.9 and 4.10
hereof, and (y) for purposes of determining Steinbach's Net Book Value, the
fixed assets have been determined at Steinbach's historical cost and not in
accordance with generally accepted accounting principles.
II. REPRESENTATIONS AND WARRANTIES OF SHAREHOLDERS.
The Shareholders, jointly and severally, hereby represent, warrant, and
covenant to Crowley's, on and as of the date hereof, as follows:
2.1 Organization and Standing. Steinbach is a corporation duly organized,
validly existing and in good standing under the laws of the State of Ohio.
Steinbach is qualified and in good standing as a foreign corporation to do
business in Connecticut, New Hampshire, New Jersey, New York and Vermont and,
other than the foregoing, Steinbach is not required to be licensed or qualified
except where such failure to be so qualified or in good standing would not have
a material and adverse effect on the Acquired Assets (as defined herein), the
results of operations, the financial condition or the future prospects of the
Acquired Business (as defined herein), or relate in any material and adverse way
to the transactions contemplated in this Agreement (a "Material Adverse
Effect"). Steinbach has all requisite corporate power and authority and all
licenses, franchises, permits and authorizations to own and lease its properties
and assets and to carry on its business as presently conducted, except where the
failure to do so would not have a Material Adverse Effect.
2.2 Authority and Action. Steinbach has full corporate power and authority
to enter into this Agreement and each of the other agreements, instruments and
other documents to be delivered at the Closing (as defined herein) or thereafter
by Steinbach pursuant to this Agreement or otherwise and to perform and
consummate the transactions contemplated herein and therein. The Shareholders
have full power and authority to enter into this Agreement and each of the other
agreements to be delivered at the Closing or thereafter by the Shareholders
pursuant to this Agreement or otherwise and to perform and consummate the
transactions contemplated herein and therein. This Agreement, as well as the
other agreements to be delivered at the Closing or thereafter by Steinbach
and/or by the Shareholders, are collectively referred to as the "Steinbach
Delivered Documents". All corporate action required to be taken by or on the
part of Steinbach to authorize the execution and delivery of this Agreement and
the Steinbach Delivered Documents and to authorize Steinbach to perform and
consummate the transactions contemplated hereby and thereby have been, or prior
to the Closing will be, duly and properly taken. This Agreement and each of the
Steinbach Delivered Documents have been or will be duly executed and delivered
by Steinbach and by the Shareholders. This Agreement and each of the Steinbach
Delivered Documents constitute valid and binding obligations of Steinbach and of
the Shareholders and, except to the extent enforcement may be restricted by
bankruptcy or other laws affecting creditors rights of general applicability and
general principles of equity, are enforceable in accordance with their
respective terms.
2.3 Financial Information; Undisclosed Liabilities.
(a) Schedule 2.3 of the Disclosure Schedules (as defined herein) will
contain certain financial information relative to the financial condition
and results of operations of Steinbach and the Acquired Business,
including, without limitation, financial information relative to (i)
balance sheets and statements of income as of and for the fiscal year ended
January 28, 1995 ("Steinbach's Most Recent Fiscal Year End"), and (ii)
balance sheets and statements of income as of and for the period beginning
on January 29, 1995 and ending on the most recent practicable date
("Steinbach's Most Recent Fiscal Month End") (collectively, the "Steinbach
Financial Information"). Except as set forth in Schedule 2.3 of the
Disclosure Schedules, the Steinbach Financial Information (x) has been
prepared in accordance with the books and records of Steinbach, (y) is true
and correct and present fairly the results of
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operations for the periods then ended and the financial condition as of the
dates indicated, and (z) has been prepared in accordance with generally
accepted accounting principles applied on a basis consistent with preceding
years.
(b) Except as disclosed in Schedule 2.3 of the Disclosure Schedules,
Steinbach has no liabilities, whether known or unknown, whether asserted or
unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due,
except for (i) liabilities set forth on the face of the balance sheets
(rather than in any notes thereto) contained within the Steinbach Financial
Information, and (ii) liabilities which have arisen after the date of
Steinbach's Most Recent Fiscal Month End in the ordinary course of business
(none of which results from, arises out of, relates to, is in the nature
of, or was caused by any breach of contract, breach of warranty, tort,
infringement, or violation of law).
2.4 Capitalization and Ownership of Steinbach. The entire authorized
capital stock of Steinbach consists of 850 shares of Steinbach Common Stock,
without par value, of which 100 shares are issued and outstanding. The
Shareholders own all of the Steinbach Common Stock free and clear of any
restrictions on transfer (other than any restrictions under the Securities Act
of 1933, as amended (the "Securities Act"), and state securities laws), taxes,
security interests, options, warrants, purchase rights, contracts, commitments,
equities, claims, and demands. All of the issued and outstanding shares of
Steinbach Common Stock have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized stock
appreciation, phantom stock, profit participation, or similar rights with
respect to any shares of Steinbach Common Stock. There are no voting trusts,
proxies, or other agreements or understandings with respect to the voting of any
shares of Steinbach Common Stock. Except for this Agreement, none of Steinbach
nor the Shareholders is a party to any option, warrant, purchase right, or other
contract or commitment that could require a Shareholder or Steinbach to sell,
transfer, or otherwise dispose of any shares of Steinbach Common Stock.
Steinbach does not control, directly or indirectly, or have any direct or
indirect equity participation in any corporation, partnership, trust, or other
business association. The Shareholders constitute all of the shareholders of
Steinbach.
2.5 Acquired Assets -- General.
(a) Ownership. Except as described in Schedule 2.5 of the Disclosure
Schedules and except for the Excluded Assets (as defined below), Steinbach owns
and has good and marketable title to, or a valid leasehold interest in, all of
the properties and assets used by it, located on the Acquired Stores (as defined
below), or shown in the Steinbach Financial Information or acquired after the
date thereof, free and clear of all liens, claims, encumbrances, security
interests, and other restrictions ("Liens").
(b) Utilization of Assets. Except for the Excluded Assets, Steinbach's
assets (the "Acquired Assets") constitute all or substantially all of the assets
(tangible or intangible) being used by Steinbach in the operation of the
business related to the Acquired Stores and the Acquired Assets (the "Acquired
Business") as presently conducted.
(c) Location. Except as described in Schedule 2.5 of the Disclosure
Schedules and except for the Excluded Assets, all of the Acquired Assets are
now, and on the Closing Date will be, in Steinbach's possession and located at
the Acquired Stores.
2.6 Inventory. All of Steinbach's inventory related to the Acquired Stores
(the "Steinbach Inventory"), including the Steinbach Inventory reflected in the
Steinbach Financial Information, is accounted for on the first-in, first-out
(FIFO) basis and is in good and saleable condition, all of the Steinbach
Inventory for the Summer 1995 and Fall 1995 retail selling seasons has been
written down in accordance with Steinbach's normal standards and past practices
and with appropriate reserves therefor reflected in the Steinbach Financial
Information and all of the Steinbach Inventory which is obsolete, damaged or
below standard quality has been written down in accordance with Steinbach's
normal standards and past practices and with appropriate reserves therefor
reflected in the Steinbach Financial Information.
2.7 Condition of Assets. Except as disclosed on Schedule 2.7 of the
Disclosure Schedules, all of the machinery, equipment, fixed assets, furniture,
fixtures, leasehold improvements and other tangible personal
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property which are owned or otherwise used by Steinbach in the Acquired Business
is in good, useable condition and repair, ordinary wear and tear and routine
maintenance excepted, and in conformity with all material applicable ordinances,
regulations and other laws.
2.8 Relationship with Suppliers. Except as disclosed on Schedule 2.8 of the
Disclosure Schedules, with respect to the Acquired Business, no information has
come to the attention of Steinbach or the Shareholders which might reasonably
lead it to believe that any suppliers of Steinbach relating to the Acquired
Business would or intend to cease dealing with Steinbach or would or intend to
alter or modify the amount of such supplier's dealings with Steinbach in the
event of the consummation of the transactions contemplated hereby, except to the
extent such cessation or modification would not have a Material Adverse Effect.
2.9 Intellectual Property.
(a) Set forth on Schedule 2.9 of the Disclosure Schedules will be a
list of all of Steinbach's intellectual property rights used in and related
to the Acquired Business, including, without limitation, (i) all trademark
registrations and applications therefor and all tradenames and trademarks,
whether or not registered or registrable, and the goodwill pertaining
thereto (including, without limitation, the name "Steinbach" and variations
thereof), (ii) all copyrights, whether or not registered, (iii) all patents
and pending patent applications, (iv) all trade secrets, (v) all know-how,
computer programs and software, and other related items and other data used
in and related to the Acquired Business, (vi) all trademark licenses,
royalty agreements, patent licenses and other licenses used in the Acquired
Business, and (vii) all causes of action for infringement by third parties
of the foregoing (collectively, the "Steinbach Intellectual Property").
(b) Except for the Steinbach Intellectual Property and except for any
rights that may exist under common law, there are no patents, patent
applications, copyrights, trademarks or trade names owned by or registered
in the name of Steinbach and there are no licensing agreements with respect
to any patents, patent applications, trademarks or trade names to which
Steinbach is a party either as a licensor or licensee. Steinbach has no
knowledge of and has received no notice of any conflict with, or any
infringement of, third party-owned patents, patent applications,
copyrights, trademarks, tradenames, trade secrets, know-how, or inventions
caused by Steinbach's use of or ownership interest in the Steinbach
Intellectual Property. Steinbach has no knowledge of and has received no
notice of any conflict with, or any infringement of, the Steinbach-owned
Steinbach Intellectual Property caused by a third-party's use of or
ownership interest in the Steinbach Intellectual Property. No officer,
director, shareholder or employee of Steinbach, or any affiliate of the
foregoing or of Steinbach, has an ownership interest in or claim with
respect to any of the Steinbach Intellectual Property.
2.10 Contracts and Other Commitments.
(a) Set forth on Schedule 2.10 of the Disclosures Schedules will be a
description or a list, as of the date of the Disclosure Schedules, of the
following contracts and other agreements to which Steinbach is a party:
(i) The leases and agreements, together with all amendments and
modifications thereof, and a list of all agreements pursuant to which
such leases and agreements have been subordinated to any mortgages and
other liens, pertaining to the premises at each of the Acquired Stores,
which description shall include, for each such lease and agreement and
for each such subordination agreement, its execution date, all of the
parties thereto, store number and location (the "Lease Contracts").
(ii) The purchase orders or contracts for the purchase by Steinbach
from third parties of merchandise, products or services in the ordinary
course of business.
(iii) All other material contracts or agreements of Steinbach which
will remain in effect as of the Closing Date, including, without
limitation, the following:
(A) all of the material contracts or commitments with respect to
the so-called licensed or leased departments in the several Acquired
Stores.
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(B) all material contracts or commitments for the performance or
receipt of services or for the purchase, sale, lease, license, use or
acquisition of real or personal property of any kind or character,
except for (1) purchase orders for inventory in the ordinary course
of business, (2) other purchase orders for furniture, fixtures or
equipment which, in the aggregate, involve less than $5,000 and (3)
contracts terminable at will by Steinbach upon thirty (30) days'
notice.
(C) any agreement for the employment of any individual on a
full-time, part-time, consulting, or other basis;
(D) all written agreements with sales agents, purchasing agents,
distributors, dealers and representatives;
(E) all other leases and subleases of any property, real or
personal, with respect to which Steinbach is either lessor or lessee;
(F) all loan or credit agreements and any agreements of
guarantee, indemnity or suretyship;
(G) any agreement concerning confidentiality or noncompetition;
(H) any agreement with any of the Shareholders;
(I) any agreement under which Steinbach has advanced or loaned
any amount to any of its directors, officers, or leased employees,
other than travel advances, outside the ordinary course of business;
(J) any other contract or agreement (or group of related
contracts or agreements) the performance of which involves
consideration in excess of $10,000 or any other contract or agreement
with a term in excess of one year; and
(K) any other agreement or understanding (oral or written) under
which the consequences of a default or termination could have a
material adverse effect on Steinbach's business, financial condition,
operations, results of operations or future prospects.
The foregoing are collectively referred to as the "Contracts".
(b) Crowley's will be given true and correct and complete copies of
all written instruments evidencing the Contracts or summaries of all oral
Contracts on or before the delivery of the Disclosure Schedules and on or
prior to the Closing shall be given true and correct copies of all written
instruments evidencing the Contracts or summaries of all oral Contracts as
updated after the date thereof.
(c) All of the Contracts are in full force and effect and are valid
and binding obligations of the parties thereto in accordance with their
respective terms. There exists no condition, event or act (including,
without limitation, the consummation of the transactions contemplated by
this Agreement) which, with the giving of notice, the lapse of time or the
happening of any other event or condition, would (i) become a default or an
event of default, or would constitute a breach of any provision of any such
Contracts, or (ii) would permit the acceleration of any obligation of any
party thereto or the creation of a lien or encumbrance upon any of the
Acquired Assets. Steinbach has not received any notice of default from any
of the other parties to any of the Contracts and, to the best of
Steinbach's knowledge, Steinbach is not in material default under any of
the Contracts. As to each of the Lease Contracts, all rent and other
charges have been paid through the date set forth in Schedule 2.10 of the
Disclosure Schedules.
2.11 Licenses. Steinbach currently holds all necessary licenses, permits
and approvals of all applicable federal, state and local authorities with
respect to the operation of the Acquired Business and the ownership of the
Acquired Assets (collectively, the "Steinbach Licenses"), except where the
failure to hold such Steinbach Licenses would not have a Material Adverse
Effect. Set forth on Schedule 2.11 of the Disclosure Schedules will be a list of
such Steinbach Licenses. All such Steinbach Licenses are in good standing and
there is no investigation or proceeding pending or threatened with respect to
such Steinbach Licenses.
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2.12 Litigation and Investigations. Except as set forth on Schedule 2.12 of
the Disclosure Schedules, there are no actions, suits, claims, demands, legal or
administrative proceedings or governmental investigations existing or, to the
best knowledge of Steinbach, threatened against or affecting Steinbach, the
Acquired Business, or any of its property or assets, nor any judgments, decrees,
orders, rulings, writs or injunctions specifically referring to Steinbach which
(either by reason of adherence or default) may have a material and adverse
effect on Steinbach's business (including the Acquired Business), properties or
assets, prospects or financial condition or relate in any way to the
transactions contemplated in this Agreement.
2.13 Labor Relations and Employee Matters.
(a) Except as described on Schedule 2.13 of the Disclosure Schedules,
Steinbach is not a party to any written sales representative agreement,
consulting agreement or other independent contractor agreement with respect
to the sale of merchandise or services by Steinbach in the Acquired Stores.
Steinbach is not aware of any circumstances which would reasonably
characterize the contracts between Steinbach and its employees as anything
other than at will.
(b) Except as described on Schedule 3.14 of the Disclosure Schedules,
(i) there is no collective bargaining agreement or union contract binding
on Steinbach with respect to the operation of Acquired Business, (ii) there
is no labor strike, dispute, slowdown, organization drive, stoppage or
other material labor difficulty, pending or, to the best knowledge of
Steinbach, threatened against Steinbach with respect to the operation of
the Acquired Business, and (iii) there are no disputes, claims or
grievances involving employees of Steinbach or by others concerning
employment with Steinbach threatened, pending against or otherwise
affecting Steinbach, other than in the ordinary course of business.
Steinbach is not a party to any pending unfair labor practice charge nor do
there exist any facts which would provide a basis for the filing of such a
charge.
(c) Steinbach has previously delivered to Crowley's a list of all of
Steinbach's employees (identifying those involved in the Acquired Business)
and the location of their employment, together with a statement of the
current annual or weekly compensation thereof and any bonus or other
benefits payable thereto.
(d) With respect to all of Steinbach's employees who will potentially
suffer a loss of employment prior to the Closing Date, Steinbach shall
comply with the applicable requirements, if any, of the federal Worker
Adjustment and Retraining Notification Act (the "WARN Act"), as well as any
state laws equivalent thereto, and shall promptly notify Crowley's as to
any notices or other actions taken by Steinbach with regard to such Act or
such state laws. Steinbach shall, on behalf of Steinbach and Crowley's, as
the case may be, issue such notices as are required under the WARN Act, as
well as any state laws equivalent thereto, in connection with Steinbach's
intended closing of one or more facilities as contemplated in Section 4.9
hereof. Such notices shall be given sufficiently in advance of any time of
closing of such facilities so that neither Steinbach's nor Crowley's will
be liable under the WARN Act, or under any state laws equivalent thereto,
for any penalty or payment in lieu of such notice to any employee or
governmental entity.
2.14 Employee Benefit Matters.
(a) Schedule 2.14 of the Disclosure Schedules will contain a true and
complete list of all plans, contracts, programs and arrangements,
including, but not limited to, employment agreements, union contracts and
supplemental agreements, pensions, profit sharing arrangements, bonuses,
deferred compensation, retirement, stock option, severance, medical and
hospitalization, insurance, vacation, dependent care, salary continuation,
severance and other employee benefit plans, programs or arrangements, now
or at any time maintained by Steinbach or under which Steinbach has or had
any obligations in respect of any employee of Steinbach (the "Steinbach
Plans"). All current and prior material documents, including all amendments
thereto, with respect to each Steinbach Plan will be listed on Schedule
2.14 of the Disclosure Schedules and will be delivered to Crowley's on or
before the delivery of such Disclosure Schedules. With respect to each
"employee benefit plan", within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), as will be
listed in
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Schedule 2.14 of the Disclosure Schedules, true and complete copies of the
following will be delivered to Crowley's on or before the delivery of such
Disclosure Schedules: (i) all current and prior plan and trust documents,
if any, and summary plan descriptions relating thereto, (ii) the three most
recent annual actuarial valuation reports, if any, (iii) the five most
recently filed Form 5500s or 5500-C/Rs and Schedules A, B and P thereto, as
applicable, (iv) all IRS rulings, if any, and (v) the most recent IRS
determination letter, if any.
(b) Except as specifically set forth in Schedule 2.14 of the
Disclosure Schedules, with respect to any and all of the Steinbach Plans:
(i) all the "employee pension benefit plans", within the meaning of Section
3(2) of ERISA, to be listed in Schedule 2.14 of the Disclosure Schedules,
and the trusts, if any, forming a part thereof (each referred to herein as
a "Pension Plan and Trust") now meet, and since their inception have met,
the requirements for qualification under Section 401(a) of the Code and are
now, and since their inception have been, exempt from taxation under
Section 501(a) of the Code; (ii) the IRS has issued a favorable
determination letter with respect to the qualified status of each Pension
Plan and Trust, if any, and has not taken any action to revoke such letter;
(iii) Steinbach has performed all obligations required to be performed by
it under the Steinbach Plans (including, but not limited to, the making of
all contributions required by any collective bargaining agreement), is not
in default under or in violation of, and has no knowledge of any such
default or violation by any other party to, any and all of the Steinbach
Plans; (iv) to the best of Steinbach's knowledge, Steinbach is in
compliance with the requirements prescribed by any and all statutes, orders
or governmental rules or regulations applicable to such Steinbach Plans,
including but not limited to ERISA and the Code; (v) neither Steinbach nor,
to the best knowledge of the Shareholders, any other "disqualified person"
or "party in interest", within the meanings of Section 4975 of the Code and
Section 3(14) of ERISA, respectively, has engaged in any "prohibited
transaction", as such term is defined in Section 4975 of the Code or
Section 406 of ERISA, which could, following the Closing Date, subject any
Steinbach Plan (or its related trust), Crowley's, Steinbach, or any
officer, director or employee of Crowley's or Steinbach, to any material
tax or penalty imposed under the Code or ERISA; (vi) there are no material
actions, suits or claims pending (other than routine claims for benefits)
or, to the best knowledge of Steinbach, threatened against any Steinbach
Plan or against the assets of any Steinbach Plan; (vii) no Steinbach Plan
which is subject to Part 3 of Subtitle B of Title I of ERISA or Section 412
of the Code has incurred any "accumulated funding deficiency", as such term
is defined in Code Section 412(a), whether or not waived, nor does any such
Steinbach Plan have any unfunded "current liability" (as defined in Code
Section 412(1)(7)); (viii) each "plan official", within the meaning of
Section 412 of ERISA, of each Steinbach Plan is bonded to the extent
required by such Section 412; (ix) no proceeding has been initiated to
terminate any Steinbach Plan and no "reportable event", within the meanings
of Section 4043(b) or 4063(a) of ERISA, has occurred with respect to any
Steinbach Plan (other than those which may result from the transactions
contemplated hereby); (x) no Steinbach Plan is a "multiple employer plan",
within the meaning of the Code or ERISA, or a "multiemployer plan", within
the meaning of Section 3(37) of ERISA; (xi) Steinbach has complied with the
reporting and disclosure requirements of ERISA and with applicable federal
and state securities laws; (xii) there are no leased employees (as defined
in Code Section 414(n)) that must be taken into account under any Steinbach
Plan pursuant to Code Section 414(n)(3); (xiii) no retiree benefits are
payable pursuant to any "employee welfare benefit plan" (as defined in
ERISA Section 3(1)) and there are no agreements in effect that would
obligate Steinbach to pay any such benefits in the future; (xiv) each
Steinbach Plan which is a "group health plan" (as defined in Code Section
5000(b)) complies and in each case has complied in all respects with the
applicable requirements of ERISA Sections 601 and 602, Code Section 162(k)
(through December 31, 1988) and Code Section 4980(B) (commencing on January
1, 1989); and (xv) each employee welfare benefit plan (as defined in (xiii)
preceding, including any such plan which covers former employees of
Steinbach), may be amended or terminated by Steinbach or by Crowley's on or
at any time after the Closing Date.
(c) With respect to each Steinbach Plan which is subject to the
minimum funding requirements of Code Section 412 and, if applicable, Title
IV of ERISA: (i) as of the Closing Date, Steinbach shall have made all
required premium payments to the PBGC; (ii) the termination of or
withdrawal from any such
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Steinbach Plan, on or prior to the Closing Date, has not and will not
subject Steinbach or Crowley's to any liability (other than routine
administrative expenses) to the PBGC or to any other person or party; (iii)
no amendment of such Steinbach Plan has occurred which required or could
require Steinbach or Crowley's to provide security to such Steinbach Plan
under Code Section 401(a)(29); and (iv) the termination of, or withdrawal
from, any such Steinbach Plan during any part of the 60 calendar month
period ending on the Closing Date has not and will not subject Steinbach or
Crowley's to any liability to the PBGC or to any other person.
(d) The market value of the net assets of each Steinbach Plan which is
subject to Title IV of ERISA is at least equal to the actuarial present
value of the benefit liabilities (as defined in ERISA Section 4041) under
the Steinbach Plan, based on actuarial methods, tables and assumptions
satisfactory to Crowley's, which present value is not less than the
projected benefit obligation for such Steinbach Plan under FAS 87; all
required contributions to each such Steinbach Plan have been made and the
contribution for the period from the first day of the current plan year to
the Closing Date for each such Steinbach Plan shall have been made or
accrued by the Steinbach Plan sponsor in accordance with the current
actuarial report prepared with respect to the Steinbach Plan by the
Steinbach Plan's actuary; and no events have occurred or are expected to
occur with respect to any such Steinbach Plan that would cause a material
change in the market value of the net assets (other than market
fluctuations) or in the present value of the benefit liabilities
thereunder.
(e) Steinbach has made or will have made all required employer
contributions, including any salary deferrals and matching contributions,
to each Steinbach Plan which is a defined contribution plan (as defined in
ERISA Section 3(34)) for all prior plan years and for the current plan year
through the Closing Date.
(f) Between the date of this Agreement and the Closing Date, no
Steinbach Plan will (i) be terminated, (ii) be amended in any manner which
would directly or indirectly increase the benefits accrued or to be accrued
by any participant thereunder, or (iii) be amended in any manner which
would materially increase the cost of maintaining such Steinbach Plan.
2.15 Environmental Laws.
(a) For purposes of this Agreement, the following terms shall have the
meanings set forth below:
(i) The term "Environmental Laws" shall include, without
limitation, any and all federal, state or local laws (including,
statutes, regulations, ordinances, codes, rules, policies, guidelines
and other governmental restrictions and requirements and any common law
doctrines) relating to environmental pollution, contamination or other
impairment of any nature, any hazardous or other toxic substances of any
nature, whether liquid, solid and/or gaseous, including smoke, vapor,
fumes, soot, acids, alkalis, chemicals, wastes, by-products, products,
and recycled materials, which shall include, but not be limited to, the
Federal Solid Waste Disposal Act, the Federal Clean Air Act, the Federal
Clean Water Act, the Federal Resource Conservation and Recovery Act of
1976 ("RCRA"), the Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), the
Federal Toxic Substance Control Act, regulations, ordinances, codes,
rules, policies, guidelines and other governmental restrictions and
requirements of the Environmental Protection Agency, state governmental
authorities, and local governmental authorities.
(ii) The terms "hazardous substance," "release" and "threatened
release", "solid waste" and "disposal" (or "disposed") shall have the
meanings specified in the Environmental Laws; provided, however, in the
event multiple Environmental Laws define any such term, and any one
Environmental Law defines such term more broadly than any other, or any
amendment broadens the meaning of any term defined therein, such broader
meaning shall apply.
(iii) The term "Hazardous Materials" shall include, without
limitation, (i) any flammable substances, explosives, radioactive
materials, hazardous substances, hazardous wastes, toxic substances,
pollutants, contaminants, effluents, dredge or fill material or any
related materials or substances as defined in, identified in or
regulated by any of the Environmental Laws, as defined
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herein (including but not limited to any "hazardous substance" as
defined in CERCLA, as amended by the Superfund Amendments and
Reauthorization Act, 42 USC sec.9601 et. seq., or "hazardous waste" as
defined in RCRA), and (ii) asbestos, polychlorinated biphenyls, urea
formaldehyde, nuclear fuel or material, chemical waste, explosives,
known and suspected carcinogens, petroleum products and by-products
(including any fraction thereof) and radon.
(b) Except as described on Schedule 2.15 of the Disclosure Schedules:
(i) No Hazardous Materials are currently or have been stored
(unless stored in compliance with all applicable Environmental Laws),
released, emitted or disposed of, or otherwise deposited, at, on, in,
under or about the Acquired Stores or at any other real property owned,
operated or leased by Steinbach prior to the date hereof (collectively,
the "Steinbach Real Property").
(ii) No activity has been undertaken on the Steinbach Real Property
that would cause or is likely to have caused:
(A) The Steinbach Real Property to become a treatment, storage
or disposal facility within the meaning of the Environmental Laws;
(B) A release or threatened release of any Hazardous Materials
in any quantity that requires investigation, reporting, or clean up
under any applicable Environmental Laws; or
(C) The discharge of Hazardous Materials into the air, any
surface water, ground water, wetlands or other water source or system
thereof, or the dredging or filling of any waters or wetlands, that
would require a permit under the Environmental Laws.
(iii) There are no substances or conditions at, on, in, under or
about the Steinbach Real Property that may give rise to a claim or cause
of action under the Environmental Laws.
(iv) There are not, and never have been, any underground storage
tanks located in, on or under the Steinbach Real Property.
(v) With respect to the operation of the Acquired Business and the
use of the Acquired Stores, as well as the operation and use of any
other portions of the Steinbach Real Property which may be the subject
of the Non-Acquired Stores Operation Agreement (as defined herein),
Steinbach has obtained all permits, licenses and other authorizations
required under the Environmental Laws relating to pollution or
protection of the environment (indoor or outdoor, relating to air, land,
water (i.e., surface water, ground water, wetlands or other water source
or system thereof), waste (hazardous or non-hazardous), noise, odor or
otherwise), and all such permits, licenses and other authorizations are
in full force and effect as of the date hereof. To the best of
Steinbach's and the Shareholders' knowledge, Steinbach is and has at all
times been in full compliance with all such permits, licenses and
authorizations, and is, as of the date hereof, in full compliance with
all such Environmental Laws related thereto.
(vi) Steinbach is not aware of, and has not received any notice of,
(A) any pending or threatened claims, investigations, administrative
proceedings, litigation, regulatory hearings or requests or demands for
remedial or response actions or for compensation, with respect to the
Steinbach Real Property, alleging noncompliance with or violation of any
Environmental Law or seeking relief under any Environmental Law, or (B)
any past, present or future events, conditions, actions or plans which
may interfere with or prevent continued compliance with the
Environmental Laws with respect to the Acquired Stores or the Acquired
Business, as well as any other portions of the Steinbach Real Property
which may be the subject of the Non-Acquired Stores Operation Agreement
(as defined herein), or which may give rise to any common law or legal
liability, or otherwise form the basis of any claim, action, suit,
proceeding, hearing or investigation with respect to the Steinbach Real
Property.
(vii) The Steinbach Real Property has not and never have been
listed on the United States Environmental Protection Agency's National
Priorities List of Hazardous Waste Sites or, to the
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knowledge of Steinbach, any other list, schedule, log, inventory or
record of hazardous waste sites maintained by any federal, state or
local agency.
(viii) Steinbach has disclosed and delivered to Crowley's all
material environmental reports and investigations which Steinbach has
ever obtained or ordered or which Steinbach has in its possession or
control with respect to environmental, health and safety matters with
respect to the Steinbach Real Property.
(ix) To the best of Steinbach's and the Shareholders' knowledge,
the Steinbach Real Property in full compliance with all Environmental
Laws.
2.16 Compliance with Laws. Except for the Environmental Laws (which are the
subject of Section 2.15 hereof), Steinbach is not in violation of any applicable
laws, statutes, regulations, rules, orders or other requirements of any
governmental authority, the violation of which might have a Material Adverse
Effect. There is no pending or, to Steinbach's knowledge, threatened review or
investigation of an alleged violation by Steinbach of any such laws, statutes,
regulations, rules, orders or other requirements.
2.17 Tax Matters.
(a) For purposes of this Agreement, the following terms shall have the
meanings set forth below:
(i) The term "Affiliated Group" means any affiliated group within
the meaning of Code Section 1504.
(ii) The term "Tax" means any federal, state, local, or foreign
income, gross receipts, license, payroll, employment, excise, severance,
stamp, occupation, premium, windfall profits, environmental (including
taxes under Code Section 59A), customs duties, capital stock, franchise,
profits, withholding, social security (or similar), unemployment,
disability, real property, personal property, sales, use, transfer,
registration, value added, alternative or add-on minimum, estimated, or
other tax of any kind whatsoever, including any interest, penalty, or
addition thereto, whether disputed or not.
(iii) The term "Tax Return" means any return, declaration, report,
claim for refund, or information return or statement relating to Taxes,
including any schedule or attachment thereto, and including any
amendment thereof.
(b) Steinbach has filed all Tax Returns that it was required to file.
All such Tax Returns were correct and complete in all respects. All Taxes
owed by Steinbach (whether or not shown on any Tax Return) have been paid.
Steinbach is not currently the beneficiary of any extension of time within
which to file any Tax Return. No claim has ever been made by an authority
in a jurisdiction where Steinbach does not file Tax Returns that it is or
may be subject to taxation by that jurisdiction. There are no security
interests on any of the assets of Steinbach that arose in connection with
any failure (or alleged failure) to pay any Tax, except with respect to
Taxes not yet due and payable.
(c) Steinbach has withheld and paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to an employee,
independent contractor, creditor, stockholder, or other third party.
(d) No Shareholder, director or officer (or employee responsible for
Tax matters) of Steinbach expects any authority to assess any additional
Taxes for any period for which Tax Returns have been filed. There is no
dispute or claim concerning any Tax liability of Steinbach either (i)
claimed or raised by any authority in writing, or (ii) as to which any
Shareholder, director or officer (or employee responsible for Tax matters)
of Steinbach has knowledge based upon personal contact with any agent of
such authority. Schedule 2.17 of the Disclosure Schedules will list all
federal, state, local, and foreign income Tax Returns filed with respect to
Steinbach for taxable periods ended on or after December 31, 1993 that have
been audited or that currently are the subject of audit. Steinbach has
delivered to Crowley's correct and complete copies of all federal income
Tax Returns, examination reports and statements of deficiencies assessed
against or agreed to by Steinbach since September 1, 1994.
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(e) Steinbach has not waived any statute of limitations in respect of
Taxes or agreed to any extension of time with respect to a Tax assessment
or deficiency.
(f) Steinbach has not filed a consent under Code Section 341(f)
concerning collapsible corporations. Steinbach is not a party to any Tax
allocation or sharing agreement. Steinbach (i) has not been a member of an
Affiliated Group filing a consolidated federal income Tax Return, or (ii)
has no liability for the Taxes of any person under Treas. Reg. sec.
1.1502-6 (or any similar provision of state, local, or foreign law), as a
transferee or successor, by contract, or otherwise.
(g) Schedule 2.17 of the Disclosure Schedules will set forth, as of
the most recent practicable date, (i) the basis of Steinbach in its assets,
and (ii) the amount of any net operating loss, net capital loss, unused
investment or other credit, unused foreign tax, or excess charitable
contribution allocable to Steinbach.
(h) The unpaid Taxes of Steinbach (i) did not, as of Steinbach's Most
Recent Fiscal Month End, exceed the reserve for Tax liability (rather than
any reserve for deferred Taxes established to reflect timing differences
between book and Tax income) set forth on the face of the balance sheets as
at Steinbach's Most Recent Fiscal Month End (rather than in any notes
thereto), and (ii) do not exceed that reserve as adjusted for the passage
of time through the Closing Date in accordance with the past custom and
practice of Steinbach in filing its Tax Returns.
(i) The Shareholders will prepare and file all Tax Returns and will
pay all Taxes related thereto relative to Steinbach which are required to
be filed and paid on or before the Closing Date.
2.18 Insurance Coverage. Steinbach presently maintains and has at all times
prior to the date hereof, maintained liability, casualty, property loss and
other insurance coverages upon its properties and with respect to the conduct of
its business. Schedule 2.18 of the Disclosure Schedules will set forth a
complete and correct list of all insurance policies maintained by Steinbach with
respect to the Acquired Business and the Acquired Stores, and identifies the
insurance company, type of coverage, expiration date and annual premium for
each.
2.19 No Material Adverse Change. Except as set forth in Schedule 2.19 of
the Disclosure Schedules, since Steinbach's Most Recent Fiscal Year End, there
has been no material adverse change in the business, operations, properties,
results of operations, financial condition or future prospects of Steinbach, or
any circumstance which, by reason of passage of time or otherwise, may
reasonably be expected to result in any such material adverse change. Without
limiting the generality of the foregoing, Steinbach has not taken any action or
agreed to or otherwise committed to take any action, except in the ordinary
course of business and consistent with past practice or as set forth on Schedule
2.19 of the Disclosure Schedules.
2.20 Investment. The Shareholders (a) understand that the shares of
Crowley's Common Stock which the Shareholders will receive pursuant to Section 1
above are not registered under the Securities Act, or under any state securities
law, and are being offered and sold in reliance upon federal and state
exemptions for transactions not involving any public offering, (b) are acquiring
the Crowley's Common Stock solely for their own account for investment purposes,
and not with a view to the distribution thereof, (c) are a sophisticated
investor with knowledge and experience in business and financial matters, (d)
have received certain information concerning Crowley's and have had the
opportunity to obtain additional information as desired in order to evaluate the
merits and the risks inherent in holding the Crowley's Common Stock, (e) are
able to bear the economic risk and lack of liquidity inherent in holding the
Crowley's Common Stock and (f) are an accredited investor a defined in
Regulation D promulgated under the Securities Act.
2.21 Real Property Matters. Except as described in Schedule 2.21 of the
Disclosure Schedules, Steinbach does not own, or have the obligation to
purchase, any real property. Except for the Lease Contracts and except as
described in Schedule 2.21 of the Disclosure Schedules, Steinbach is not a party
to any lease of real property, nor is Steinbach under any obligation to become a
party to any lease of real property. Except as described in Schedule 2.21 of the
Disclosure Schedules, Steinbach has no interest in any real property nor the
obligation to acquire an interest in any real property. The Shareholders shall
deliver to Crowley's on or before the delivery of the Disclosure Schedules a
correct and complete copy of any lease of real property to which
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Steinbach is a party or any other material document relating to the ownership of
an interest in real property by Steinbach.
2.22 No Default. Steinbach is not in breach or violation of, and neither
the execution and delivery of this Agreement or the Steinbach Delivered
Documents by Steinbach or the Shareholders nor performance of or compliance with
its or their terms will result in a breach or violation of, (a) the Articles of
Incorporation or Bylaws of Steinbach, (b) any agreement, indenture, mortgage,
lease or other obligation or instrument to which Steinbach or the Shareholders
are a party or their respective assets are subject, except where such breach or
violation would not have a Material Adverse Effect, or (c) any law, statute,
rule, regulation or any judgment, order or decree to which Steinbach is a party
or by which Steinbach or any of its properties or assets may otherwise be
subject, except where such violation or breach would not have a Material Adverse
Effect.
2.23 Insider Interests. Schedule 2.23 of the Disclosure Schedules will set
forth each interest which any present officer, director, shareholder or
significant employee of Steinbach has in the Acquired Assets or pertaining to
the Acquired Business, and all loans or advances outstanding to Steinbach from
any such person or employee or from Steinbach to any such person or any
employee, and any other business relationship between Steinbach and any such
person other than in his capacity as an officer, director, shareholder or
significant employee.
2.24 Sensitive Transactions. To the best of Steinbach's knowledge, neither
Steinbach nor any employee, agent or representative thereof has directly or
indirectly used funds or other assets of Steinbach for illegal contributions,
gifts, or payments to or for the benefit of any governmental official or
employee.
2.25 Fees and Commissions. Neither Steinbach nor any Shareholder has agreed
to pay or become liable to pay any broker's, finder's or originator's fees or
commission by reason of services alleged to have been rendered for or at the
instance of Steinbach or any Shareholder in connection with this Agreement and
the transactions contemplated hereby.
2.26 Misstatement or Omission. No representation or warranty by the
Shareholders in this Agreement or in the Steinbach Delivered Documents, contains
or will contain any untrue statement of a material fact, or omits or will omit
to state a material fact required to be stated therein or necessary to make the
statements contained therein not misleading. Except as already disclosed in this
Agreement or in the Steinbach Delivered Documents, there are no events,
transactions or other facts which, either individually or in the aggregate,
might reasonably give rise to circumstances or conditions which might have a
Material Adverse Effect.
III. REPRESENTATIONS AND WARRANTIES OF CROWLEY'S.
Crowley's represents, warrants and covenants to the Shareholders, on and as
of the date hereof, as follows:
3.1 Organization and Standing. Crowley's is a corporation duly organized,
validly existing and in good standing under the laws of the State of Michigan.
3.2 Authority and Action. Crowley's has full corporate power and authority
to enter into this Agreement and each of the other agreements, instruments and
other documents to be delivered at the Closing or thereafter by Crowley's
pursuant to this Agreement or otherwise and to perform and consummate the
transactions contemplated herein and therein. This Agreement, as well as the
other agreements to be delivered at the Closing or thereafter by Crowley's, are
collectively referred to as the "Crowley's Delivered Documents". All corporate
action required to be taken by or on the part of Crowley's Board of Directors to
authorize the execution and delivery of this Agreement and the Crowley's
Delivered Documents and to authorize Crowley's to perform and consummate the
transactions contemplated hereby and thereby have been duly and properly taken.
This Agreement and each of the Crowley's Delivered Documents have been or will
be duly executed and delivered by Crowley's. This Agreement and each of the
Crowley's Delivered Documents constitute valid and binding obligations of
Crowley's and, except to the extent enforcement may be restricted by bankruptcy
or other laws affecting creditors rights of general applicability and general
principles of equity, are enforceable in accordance with their respective terms.
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3.3 Capitalization of Crowley's. The authorized capital stock of Crowley's
consists entirely of 4,000,000 shares of Common Stock. As of the date hereof,
966,069 shares of Crowley's Common Stock were validly issued and outstanding,
fully paid and nonassessable. Except as described on ANNEX A attached hereto,
there are no outstanding options or convertible securities or, to Crowley's
knowledge, other agreements or commitments relating to Crowley's Common Stock,
including, without limitation, (a) all rights to purchase shares under
outstanding options granted under the 1992 Crowley, Milner and Company Incentive
Stock Plan, as amended, and under the 1995 Crowley, Milner and Company Director
Stock Option Plan, and (b) all shares of Crowley's Common Stock subject to that
certain Restricted Stock Agreement, dated August 24, 1994 and as amended March
22, 1995, between Crowley's and Dennis P. Callahan.
3.4 Crowley's Common Stock. Upon consummation of the Reorganization and the
delivery of a certificate or certificates representing the Crowley's Common
Stock to the Shareholders in payment of the Consideration, such shares of
Crowley's Common Stock will be duly authorized, validly issued, fully paid and
nonassessable. The shares of Crowley's Common Stock to be delivered by Crowley's
to the Shareholders in the Reorganization will be "voting stock" within the
meaning of the Code.
3.5 Crowley's SEC Documents; Financial Information. Exhibit 3.5 of the
Disclosure Exhibits will set forth true and complete copies of the documents
that Crowley's was required to file with the Securities and Exchange Commission
(the "SEC") for the period of January 1, 1995 through the date of the Disclosure
Exhibits pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act") (collectively, the "Crowley's SEC Documents"). None of the
Crowley's SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The financial statements of Crowley's included in the
Crowley's SEC Documents complied in all material respects with applicable
accounting requirements, were prepared in accordance with GAAP applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto or, in the case of unaudited statements, as permitted by Form 10-Q
of the SEC) and fairly present (subject, in the case of unaudited statements, to
recurring audit adjustments normal in nature and amount) the consolidated
financial position of Crowley's as at the dates thereof and the consolidated
results of its operations and cash flows or changes in financial position for
the periods then ended.
3.6 Absence of Certain Changes or Events; Undisclosed Liabilities.
(a) Except as disclosed in Crowley's SEC Documents filed by Crowley's
with the SEC prior to the date of this Agreement, since January 28, 1995 to
the date of this Agreement, there has not been any change in the financial
condition, results of operations or business of Crowley's that either
individually or in the aggregate would have a material adverse effect on
the financial condition of Crowley's.
(b) Except as disclosed in Exhibit 3.6 of the Disclosure Exhibits or
in Crowley's SEC Documents, Crowley's has no liabilities, whether known or
unknown, whether asserted or unasserted, whether absolute or contingent,
whether accrued or unaccrued, whether liquidated or unliquidated, and
whether due or to become due, except for (i) liabilities set forth on the
face of the balance sheets (rather than in any notes thereto) contained
within Crowley's SEC Documents, and (ii) liabilities which have arisen
after January 28, 1995 in the ordinary course of business (none of which
results from, arises out of, relates to, is in the nature of, or was caused
by any breach of contract, breach of warranty, tort, infringement, or
violation of law).
3.7 Inventory. Each item of Crowley's inventory ("Crowley's Inventory") is
accounted for on the last-in, first-out (LIFO) basis and is in good and saleable
condition, all of Crowley's Inventory for the Summer 1995 and Fall 1995 retail
selling seasons has been written down in accordance with Crowley's normal
standards and past practices and with appropriate reserves therefor reflected in
the Crowley's financial statements and all of Crowley's Inventory which is
obsolete, damaged or below standard quality has been written down in accordance
with Crowley's normal standards and past practices and with appropriate reserves
therefor reflected in the Crowley's financial statements.
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3.8 Litigation and Investigations. Except as set forth on Exhibit 3.8 of
the Disclosure Exhibits, there are no actions, suits, claims, demands, legal or
administrative proceedings or governmental investigations existing or, to the
best knowledge of Crowley's, threatened against or affecting Crowley's, its
business, or any of its property or assets, nor any judgments, decrees, orders,
rulings, writs or injunctions specifically referring to Crowley's which (either
by reason of adherence or default) may have a material and adverse effect on
their business, properties or assets, prospects or financial condition or relate
in any way to the transactions contemplated in this Agreement.
3.9 Labor Relations and Employee Matters.
(a) Crowley's is not a party to any written sales representative
agreement, consulting agreement or other independent contractor agreement
with respect to the sale of merchandise or services by Crowley's in its
several stores.
(b) There is no collective bargaining agreement or union contract
binding on Crowley's with respect to the operation of its business. There
is no labor strike, dispute, slowdown, organization drive, stoppage or
other material labor difficulty, pending or, to the best knowledge of
Crowley's, threatened against Crowley's with respect to the operation of
its business. There are no disputes, claims or grievances involving
employees of Crowley's or by others concerning employment with Crowley's
threatened, pending against or otherwise affecting Crowley's, other than in
the ordinary course of business. Crowley's is not a party to any pending
unfair labor practice charge nor do there exist any facts which would
provide a basis for the filing of such a charge.
3.10 Environmental Matters. Except as described on Exhibit 3.10 of the
Disclosure Exhibits:
(a) No Hazardous Materials are currently or have been stored (unless
stored in compliance with all applicable Environmental Laws), released,
emitted or disposed of, or otherwise deposited, at, on, in, under or about
the premises at Crowley's several store or at Crowley's headquarters and
distribution center ("Crowley's Premises").
(b) No activity has been undertaken on the Crowley's Premises that
would cause or is likely to have caused:
(i) The Crowley's Premises to become a treatment, storage or
disposal facility within the meaning of the Environmental Laws;
(ii) A release or threatened release of any Hazardous Materials in
any quantity that requires investigation, reporting, or clean up under
any applicable Environmental Laws; or
(iii) The discharge of Hazardous Materials into the air, any
surface water, ground water, wetlands or other water source or system
thereof, or the dredging or filling of any waters or wetlands, that
would require a permit under the Environmental Laws.
(c) There are no substances or conditions at, on, in, under or about
the Crowley's Premises that may give rise to a claim or cause of action
under the Environmental Laws.
(d) There are not, and never have been, any underground storage tanks
located in, on or under the Crowley's Premises.
(e) With respect to the operation of Crowley's business and the use of
the Crowley's Premises, Crowley's has obtained all permits, licenses and
other authorizations required under the Environmental Laws relating to
pollution or protection of the environment (indoor or outdoor, relating to
air, land, water (i.e., surface water, ground water, wetlands or other
water source or system thereof), waste (hazardous and non-hazardous),
noise, odor or otherwise), and all such permits, licenses and other
authorizations are in full force and effect as of the date hereof. To the
best of Crowley's knowledge, Crowley's is and has at all times been in full
compliance with all such permits, licenses and authorizations, and is, as
of the date hereof, in full compliance with all such Environmental Laws
related thereto.
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(f) Crowley's is not aware of, and has not received any notice of, (i)
any pending or threatened claims, investigations, administrative
proceedings, litigation, regulatory hearings or requests or demands for
remedial or response actions or for compensation, with respect to the
Crowley's Premises, alleging noncompliance with or violation of any
Environmental Law or seeking relief under any Environmental Law, or (ii)
any past, present or future events, conditions, actions or plans which may
interfere with or prevent continued compliance with the Environmental Laws
with respect to the Crowley's Premises or its Business or which may give
rise to any common law or legal liability, or otherwise form the basis of
any claim, action, suit, proceeding, hearing or investigation with respect
to the Crowley's Premises or its business.
(g) The Crowley's Premises are not and never have been listed on the
United States Environmental Protection Agency's National Priorities List of
Hazardous Waste Sites or, to the knowledge of Crowley's, any other list,
schedule, log, inventory or record of hazardous waste sites maintained by
any federal, state or local agency.
(h) Crowley's has disclosed and delivered to Steinbach all material
environmental reports and investigations which Crowley's has ever obtained
or ordered or which the Crowley's has in its possession or control with
respect to environmental, health and safety matters with respect to
Crowley's Premises and its Business.
(i) To the best of Crowley's knowledge, the Crowley's Premises and its
business are in full compliance with all Environmental Laws.
3.11 Compliance with Laws. Except for the Environmental Laws (which are the
subject of Section 3.10 hereof), Crowley's is not in violation of any applicable
laws, statutes, regulations, rules, orders or other requirements of any
governmental authority, the violation of which might have a material and adverse
effect on the assets, the results of operations, the financial condition or the
future prospects of Crowley's business, or relate in any material and adverse
way to the transactions contemplated in this Agreement. There is no pending or,
to Crowley's knowledge, threatened review or investigation of an alleged
violation of by Steinbach of any such laws, statutes, regulations, rules, orders
or other requirements.
3.12 Insurance Coverage. Crowley's presently maintains and has at all times
prior to the date hereof, maintained liability, casualty, property loss and
other insurance coverages upon its properties and with respect to the conduct of
its business. Exhibit 3.12 of the Disclosure Exhibits will set forth a complete
and correct list of all insurance policies maintained by Crowley's with respect
to its business and its several department stores and identifies the insurance
company, type of coverage, expiration date and annual premium for each.
3.13 Tax Matters.
(a) Crowley's has filed all Tax Returns that it was required to file.
All such Tax Returns were correct and complete in all respects. All Taxes
owed by Crowley's (whether or not shown on any Tax Return) have been paid.
Crowley's is not currently the beneficiary of any extension of time within
which to file any Tax Return. No claim has ever been made by an authority
in a jurisdiction where Crowley's does not file Tax Returns that it is or
may be subject to taxation by that jurisdiction. There are no security
interests on any of the assets of Crowley's that arose in connection with
any failure (or alleged failure) to pay any Tax, except with respect to
Taxes not yet due and payable.
(b) Crowley's has withheld and paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to an employee,
independent contractor, creditor, stockholder, or other third party.
(c) No officer or employee responsible for Tax matters of Crowley's
expects any authority to assess any additional Taxes for any period for
which Tax Returns have been filed. There is no dispute or claim concerning
any Tax liability of Crowley's either (i) claimed or raised by any
authority in writing, or (ii) as to which any officer or employee
responsible for Tax matters of Crowley's has knowledge based upon personal
contact with any agent of such authority. Exhibit 3.13 of the Disclosure
Exhibits will list all
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federal, state, local, and foreign income Tax Returns filed with respect to
Crowley's for taxable periods ended on or after December 31, 1993 that have
been audited or that currently are the subject of audit.
(d) Crowley's has not waived any statute of limitations in respect of
Taxes or agreed to any extension of time with respect to a Tax assessment
or deficiency.
(e) Crowley's has not filed a consent under Code Section 341(f)
concerning collapsible corporations. Crowley's is not a party to any Tax
allocation or sharing agreement. Crowley's (i) has not been a member of an
Affiliated Group filing a consolidated federal income Tax Return, or (ii)
has no liability for the Taxes of any person under Treas. Reg. sec.
1.1502-6 (or any similar provision of state, local, or foreign law), as a
transferee or successor, by contract, or otherwise.
(f) The unpaid Taxes of Crowley's did not, as of July 29, 1995,
Crowley's most recent reported fiscal quarter end ("Crowley's Most Recent
Fiscal Quarter End"), exceed the reserve for Tax liability (rather than any
reserve for deferred Taxes established to reflect timing differences
between book and Tax income) set forth on the face of the balance sheets as
at Crowley's Most Recent Fiscal Quarter End (rather than in any notes
thereto), and (ii) do not exceed that reserve as adjusted for the passage
of time through the Closing Date in accordance with the past custom and
practice of Crowley's in filing its Tax Returns.
3.14 Ownership of Assets. Except as described in Exhibit 3.14 of the
Disclosure Exhibits, Crowley's owns and has good and marketable title to, or a
valid leasehold interest in, all of the properties and assets used by it,
located in its several department stores, or shown in the Crowley's SEC
Documents or acquired after the date thereof, free and clear of all Liens.
3.15 Condition of Assets. Except as disclosed on Exhibit 3.15 of the
Disclosure Exhibits, all of the machinery, equipment, fixed assets, furniture,
fixtures, leasehold improvements and other tangible personal property which are
owned or otherwise used by Crowley's in its business is in good, useable
condition and repair, ordinary wear and tear and routine maintenance excepted,
and in conformity with all material applicable ordinances, regulations and other
laws.
3.16 Relationship with Suppliers. Except as disclosed on Exhibit 3.16 of
the Disclosure Exhibits, no information has come to the attention of Crowley's
which might reasonably lead it to believe that any suppliers of Crowley's would
or intend to cease dealing with Crowley's or would or intend to alter or modify
the amount of such supplier's dealings with Crowley's in the event of the
consummation of the transactions contemplated hereby, except to the extent such
cessation or modification would not have a material and adverse effect on the
assets, the results of operations, the financial condition or the future
prospects of Crowley's business, or relate in any material and adverse way to
the transactions contemplated in this Agreement.
3.17 Intellectual Property.
(a) Set forth on Exhibit 3.17 of the Disclosure Exhibits will be a
list of all of Crowley's intellectual property rights used in and related
to its business, including, without limitation, (i) all trademark
registrations and applications therefor and all tradenames and trademarks,
whether or not registered or registrable, and the goodwill pertaining
thereto, (ii) all copyrights, whether or not registered, (iii) all patents
and pending patent applications, (iv) all trade secrets, (v) all know-how,
computer programs and software, and other related items and other data used
in and related to Crowley's business, (vi) all trademark licenses, royalty
agreements, patent licenses and other licenses used in Crowley's business,
and (vii) all causes of action for infringement by third parties of the
foregoing (collectively, "Crowley's Intellectual Property").
(b) Except for Crowley's Intellectual Property and except for any
rights that may exist under common law, there are no patents, patent
applications, copyrights, trademarks or trade names owned by or registered
in the name of Crowley's and there are no licensing agreements with respect
to any patents, patent applications, trademarks or trade names to which
Crowley's is a party either as a licensor or licensee. Crowley's has no
knowledge of and has received no notice of any conflict with, or any
infringement of, third party-owned patents, patent applications,
copyrights, trademarks, tradenames,
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trade secrets, know-how, or inventions caused by Crowley's use of or
ownership interest in Crowley's Intellectual Property. Crowley's has no
knowledge of and has received no notice of any conflict with, or any
infringement of, the Crowley's-owned Crowley's Intellectual Property caused
by a third-party's use of or ownership interest in Crowley's Intellectual
Property. No officer, director, shareholder or employee of Crowley's, or
any affiliate of the foregoing or of Crowley's, has an ownership interest
in or claim with respect to any of Crowley's Intellectual Property.
3.18 Employee Benefit Matters.
(a) Exhibit 3.18 of the Disclosure Exhibits will contain a true and
complete list of all plans, contracts, programs and arrangements,
including, but not limited to, employment agreements, union contracts and
supplemental agreements, pensions, profit sharing arrangements, bonuses,
deferred compensation, retirement, stock option, severance, medical and
hospitalization, insurance, vacation, dependent care, salary continuation,
severance and other employee benefit plans, programs or arrangements, now
or at any time maintained by Steinbach or under which Crowley's has or had
any obligations in respect of any employee of Crowley's (the "Crowley's
Plans"). All current and prior material documents, including all amendments
thereto, with respect to each Crowley's Plan will be listed on Exhibit 3.18
of the Disclosure Exhibits and will be delivered to the Shareholders on or
before the delivery of such Disclosure Exhibits. With respect to each
"employee benefit plan", within the meaning of Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), as will be
listed in Exhibit 3.18 of the Disclosure Exhibits, true and complete copies
of the following will be delivered to the Shareholders on or before the
delivery of such Disclosure Exhibits: (i) all current and prior plan and
trust documents, if any, and summary plan descriptions relating thereto,
(ii) the three most recent annual actuarial valuation reports, if any,
(iii) the five most recently filed Form 5500s or 5500-C/Rs and Schedules A,
B and P thereto, as applicable, (iv) all IRS rulings, if any, and (v) the
most recent IRS determination letter, if any.
(b) Except as specifically set forth in Exhibit 3.18 of the Disclosure
Exhibits, with respect to any and all of the Plans: (i) all the "employee
pension benefit plans", within the meaning of Section 3(2) of ERISA, to be
listed in Exhibit 3.18 of the Disclosure Exhibits, and the trusts, if any,
forming a part thereof (each referred to herein as a "Pension Plan and
Trust") now meet, and since their inception have met, the requirements for
qualification under Section 401(a) of the Code and are now, and since their
inception have been, exempt from taxation under Section 501(a) of the Code;
(ii) the IRS has issued a favorable determination letter with respect to
the qualified status of each Pension Plan and Trust, if any, and has not
taken any action to revoke such letter; (iii) Crowley's has performed all
obligations required to be performed by it under the Crowley's Plans
(including, but not limited to, the making of all contributions required by
any collective bargaining agreement), is not in default under or in
violation of, and has no knowledge of any such default or violation by any
other party to, any and all of the Crowley's Plans; (iv) to the best of
Crowley's knowledge, Crowley's is in compliance with the requirements
prescribed by any and all statutes, orders or governmental rules or
regulations applicable to such Plans, including but not limited to ERISA
and the Code; (v) neither Crowley's nor, to the best knowledge of
Crowley's, any other "disqualified person" or "party in interest", within
the meanings of Section 4975 of the Code and Section 3(14) of ERISA,
respectively, has engaged in any "prohibited transaction", as such term is
defined in Section 4975 of the Code or Section 406 of ERISA, which could,
following the Closing Date, subject any Crowley's Plan (or its related
trust), the Shareholder's, Crowley's or any officer, director or employee
of Crowley's or Steinbach, to any material tax or penalty imposed under the
Code or ERISA; (vi) there are no material actions, suits or claims pending
(other than routine claims for benefits) or, to the best knowledge of
Crowley's, threatened against any Crowley's Plan or against the assets of
any Crowley's Plan; (vii) no Crowley's Plan which is subject to Part 3 of
Subtitle B of Title I of ERISA or Section 412 of the Code has incurred any
"accumulated funding deficiency", as such term is defined in Code Section
412(a), whether or not waived, nor does any such Crowley's Plan have any
unfunded "current liability" (as defined in Code Section 412(1)(7)); (viii)
each "plan official", within the meaning of Section 412 of ERISA, of each
Crowley's Plan is bonded to the extent required by such Section 412; (ix)
no proceeding has been initiated to terminate any Crowley's Plan and no
"reportable
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event", within the meanings of Section 4043(b) or 4063(a) of ERISA, has
occurred with respect to any Crowley's Plan (other than those which may
result from the transactions contemplated hereby); (x) no Crowley's Plan is
a "multiple employer plan", within the meaning of the Code or ERISA, or a
"multiemployer plan", within the meaning of Section 3(37) of ERISA; (xi)
Crowley's has complied with the reporting and disclosure requirements of
ERISA and with applicable federal and state securities laws; (xii) there
are no leased employees (as defined in Code Section 414(n)) that must be
taken into account under any Crowley's Plan pursuant to Code Section
414(n)(3); (xiii) no retiree benefits are payable pursuant to any "employee
welfare benefit plan" (as defined in ERISA Section 3(1)) and there are no
agreements in effect that would obligate Crowley's to pay any such benefits
in the future; (xiv) each Crowley's Plan which is a "group health plan" (as
defined in Code Section 5000(b)) complies and in each case has complied in
all respects with the applicable requirements of ERISA Sections 601 and
602, Code Section 162(k) (through December 31, 1988) and Code Section
4980(B) (commencing on January 1, 1989); and (xv) each employee welfare
benefit plan (as defined in (xiii) preceding, including any such plan which
covers former employees of Crowley's), may be amended or terminated by
Crowley's on or at any time after the Closing Date.
(c) With respect to each Crowley's Plan which is subject to the
minimum funding requirements of Code Section 412 and, if applicable, Title
IV of ERISA: (i) as of the Closing Date, Crowley's shall have made all
required premium payments to the PBGC; (ii) the termination of or
withdrawal from any such Crowley's Plan, on or prior to the Closing Date,
has not and will not subject the Shareholders or Crowley's to any liability
(other than routine administrative expenses) to the PBGC or to any other
person or party; (iii) no amendment of such Crowley's Plan has occurred
which required or could require Crowley's to provide security to such
Crowley's Plan under Code Section 401(a)(29); and (iv) the termination of,
or withdrawal from, any such Crowley's Plan during any part of the 60
calendar month period ending on the Closing Date has not and will not
subject the Shareholders or Crowley's to any liability to the PBGC or to
any other person.
(d) The market value of the net assets of each Crowley's Plan which is
subject to Title IV of ERISA is at least equal to the actuarial present
value of the benefit liabilities (as defined in ERISA Section 4041) under
the Crowley's Plan, based on actuarial methods, tables and assumptions
satisfactory to Crowley's, which present value is not less than the
projected benefit obligation for such Crowley's Plan under FAS 87; all
required contributions to each such Crowley's Plan have been made and the
contribution for the period from the first day of the current plan year to
the Closing Date for each such Crowley's Plan shall have been made or
accrued by the Crowley's Plan sponsor in accordance with the current
actuarial report prepared with respect to the Crowley's Plan by the
Crowley's Plan's actuary; and no events have occurred or are expected to
occur with respect to any such Crowley's Plan that would cause a material
change in the market value of the net assets (other than market
fluctuations) or in the present value of the benefit liabilities
thereunder.
(e) Crowley's has made or will have made all required employer
contributions, including any salary deferrals and matching contributions,
to each Crowley's Plan which is a defined contribution plan (as defined in
ERISA Section 3(34)) for all prior plan years and for the current plan year
through the Closing Date.
(f) Between the date of this Agreement and the Closing Date, no
Crowley's Plan will (i) be terminated, (ii) be amended in any manner which
would directly or indirectly increase the benefits accrued or to be accrued
by any participant thereunder, or (iii) be amended in any manner which
would materially increase the cost of maintaining such Crowley's Plan.
3.19 Real Property Matters. Except as described in Exhibit 3.19 of the
Disclosure Exhibits, Crowley's does not own, or have the obligation to purchase,
any real property. Except as described in Exhibit 3.19 of the Disclosure
Exhibits, Crowley's is not a party to any lease of real property, nor is
Crowley's under any obligation to become a party to any lease of real property.
Except as described in Exhibit 3.19 of the Disclosure Exhibits, Crowley's has no
interest in any real property nor the obligation to acquire an interest in any
real property. Crowley's shall deliver to the Shareholders on or before the
delivery of the Disclosure
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Exhibits a correct and complete copy of any lease of real property to which
Crowley's is a party or any other material document relating to the ownership of
an interest in real property by Crowley's.
3.20 No Default. Crowley's is not in breach or violation of, and neither
the execution and delivery of this Agreement or the Crowley's Delivered
Documents by Crowley's nor performance of or compliance with its or their terms
will result in a breach or violation of, (a) the Articles of Incorporation or
Bylaws of Crowley's, (b) any agreement, indenture, mortgage, lease or other
obligation or instrument to which Crowley's is a party or its assets are
subject, except where such breach or violation would not have a material and
adverse effect on the assets, the results of operations, the financial condition
or the future prospects of Crowley's business, or relate in any material and
adverse way to the transactions contemplated in this Agreement, or (c) any law,
statute, rule, regulation or any judgment, order or decree to which Crowley's is
a party or by which Crowley's or any of its properties or assets may otherwise
be subject, except where such violation or breach would not have a material and
adverse effect on the assets, the results of operations, the financial condition
or the future prospects of Crowley's business, or relate in any material and
adverse way to the transactions contemplated in this Agreement.
3.21 Insider Interests. Exhibit 3.21 of the Disclosure Exhibits will set
forth each interest which any present officer, director, shareholder or
significant employee of Crowley's has in Crowley's assets or pertaining to its
business, and all loans or advances outstanding to Crowley's from any such
person or employee or from Crowley's to any such person or any employee, and any
other business relationship between Crowley's and any such person other than in
his capacity as an officer, director, shareholder or significant employee.
3.22 Sensitive Transactions. To the best of Crowley's knowledge, neither
Crowley's nor any employee, agent or representative thereof has directly or
indirectly used funds or other assets of Crowley's for illegal contributions,
gifts, or payments to or for the benefit of any governmental official or
employee.
3.23 Licenses. Crowley's currently holds all necessary licenses, permits
and approvals of all applicable federal, state and local authorities with
respect to the operation of its Business and the ownership of its assets
(collectively, the "Crowley's Licenses"), except where the failure to hold such
Crowley's Licenses would not have a a material and adverse effect on the assets,
the results of operations, the financial condition or the future prospects of
Crowley's business, or relate in any material and adverse way to the
transactions contemplated in this Agreement. Set forth on Schedule 3.23 of the
Disclosure Exhibits will be a list of such Crowley's Licenses. All such
Crowley's Licenses are in good standing and there is no investigation or
proceeding pending or threatened with respect to such Crowley's Licenses.
3.24 Fees and Commissions. Crowley's has not agreed to pay or become liable
to pay any broker's, finder's or originator's fees or commission by reason of
services alleged to have been rendered for or at the instance of Crowley's in
connection with this Agreement and the transactions contemplated hereby.
3.25 No Misstatement or Omission. No representation or warranty by
Crowley's in this Agreement or in the Crowley's Delivered Documents, contains or
will contain any untrue statement of a material fact, or omits or will omit to
state a material fact required to be stated therein or necessary to make the
statements contained therein not misleading.
IV. CERTAIN COVENANTS.
4.1 General. Each of the parties will use its best efforts to take all
action and to do all things necessary, proper, or advisable in order to
consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing conditions set forth in
Sections 5 and 6 below).
4.2 Covenants of Steinbach and Shareholders. The Shareholders, jointly and
severally, hereby covenant and agree with Crowley's as follows:
(a) Access and Information. Between the date hereof and the Closing
Date, Steinbach shall permit Crowley's and its counsel, accountants and
other representatives reasonable access during normal business hours to all
of the properties, books, contracts, commitments and records of Steinbach,
and
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during such period Steinbach shall furnish Crowley's with all such
statements (financial and otherwise), records and documents or copies
thereof, and other information concerning the affairs of Steinbach as
Crowley's shall, from time to time, reasonably request. Steinbach shall
request its independent public accountants, attorneys and other
representatives to cooperate with the representatives of Crowley's in
connection with the right of access granted herein.
(b) Delivery of Disclosure Schedules. The Shareholders shall deliver
the several Schedules described herein as being part of the Disclosure
Schedules (collectively, the "Disclosure Schedules") on or before February
23, 1996.
(c) Conduct of Business. Except as otherwise permitted or contemplated
in this Agreement, from and after the date hereof and until the Closing
Date, Steinbach and the Shareholders shall use all reasonable efforts to
conduct the Acquired Business in substantially the same manner as
heretofore conducted and, with respect to the Acquired Business, maintain
its business organization intact, retain its present employees and preserve
the confidence of its suppliers, distributors, dealers, representatives and
customers. Without limiting the generality of the foregoing, and with
respect to the Acquired Business and the Acquired Assets, Steinbach shall
not (and the Shareholders will not cause or permit Steinbach to), without
the prior written consent of Crowley's, except in the ordinary course of
business and consistent with past practice or as otherwise permitted or
contemplated by the terms of this Agreement:
(i) sell, mortgage, encumber or lease (as lessor or lessee) any
properties or assets, except for sales of inventory in the ordinary
course and renewals of current leases;
(ii) fail to maintain all its assets and properties which are
material to its business and included in the Acquired Assets or fail to
maintain its books of account and records in the usual and regular
manner and in accordance with principles and practices consistent with
prior years;
(iii) fail to pay and perform in its ordinary course any and all
liabilities and obligations in respect of the Acquired Assets or the
Acquired Business as the same mature and become due, or cause or permit
any default by Steinbach to exist or occur or any penalties to be
imposed as a consequence thereof under any of its material contracts or
commitments;
(iv) suffer or permit any default by Steinbach or any event which,
with the passage of time or the giving of notice, or both, may become a
default by Steinbach under any material contract, agreement or
understanding;
(v) take any action or omit to take any action which will affect in
any material respect the accuracy, on and as of the Closing Date, of the
representations and warranties set forth in Section 3 hereof; or
(vi) declare, set aside, or pay any dividend or make any
distribution with respect to its capital stock or redeem, purchase, or
otherwise acquire any of its capital stock.
(d) Advice of Adverse Change. From and after the execution of this
Agreement until the Closing Date, the Shareholders will promptly notify
Crowley's in writing of any event which is likely to result in a material
adverse change in the business, assets, prospects, results of operations or
financial condition or any adverse change in the earnings of Steinbach, and
any other event that would, with the passage of time or otherwise,
materially impair or materially otherwise affect the accuracy of any of the
representations and warranties of the Shareholders contained herein on and
as of the Closing Date.
4.3 Covenants of Crowley's. Crowley's hereby covenants and agrees with the
Shareholders as follows:
(a) Access and Information. Between the date hereof and the Closing
Date, Crowley's shall permit the Shareholders and their counsel,
accountants and other representatives reasonable access during normal
business hours to all of the properties, books, contracts, commitments and
records of Crowley's, and during such period Crowley's shall furnish the
Shareholders with all such statements (financial and otherwise), records
and documents or copies thereof, and other information concerning the
affairs of Crowley's as the Shareholders shall, from time to time,
reasonably request. Crowley's shall request its
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independent public accountants, attorneys and other representatives to
cooperate with the representatives of the Shareholders in connection with
the right of access granted herein.
(b) Delivery of Disclosure Exhibits. Crowley's shall deliver the
several Exhibits described herein as being part of the Disclosure Exhibits
(collectively, the "Disclosure Exhibits") on or before February 1, 1996.
(c) Conduct of Business. Except as otherwise permitted or contemplated
in this Agreement, from and after the date hereof and until the Closing
Date, Crowley's shall use all reasonable efforts to conduct its business in
substantially the same manner as heretofore conducted and maintain its
business organization intact, retain its present employees and preserve the
confidence of its suppliers, distributors, dealers, representatives and
customers.
(d) Advice of Adverse Change. From and after the execution of this
Agreement until the Closing Date, Crowley's will promptly notify the
Shareholders in writing of any event which is likely to result in a
material adverse change in the business, assets, prospects, results of
operations or financial condition or any adverse change in the earnings of
Crowley's, and any other event that would, with the passage of time or
otherwise, materially impair or materially otherwise affect the accuracy of
any of the representations and warranties of Crowley's contained herein on
and as of the Closing Date.
4.4 Consents; Approvals. From and after the date hereof, the parties shall
use their best efforts and cooperate in obtaining all consents, assignments,
novations, approvals, orders, qualifications, licenses, permits or other
authorizations, and waivers from any governmental entity or other third parties
necessary to permit the consummation of the transactions contemplated by this
Agreement.
4.5 Hart-Scott-Rodino Filings. Promptly after the date hereof, each of the
Shareholders and Crowley's will make the necessary filings, if any, required to
consummate this Agreement pursuant to the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 (the "HSR Act") and will use their respective best
efforts to cooperate and to complete any incomplete filings and to cause the
applicable waiting period under such law to expire. Copies of all proposed
filings pursuant to the HSR Act shall be delivered to the other parties for
their prompt review and approval prior to any such filing, which approval shall
not be unreasonably withheld or delayed. The initial filings required under the
HSR Act shall include a request for early termination and shall be made by no
later than ten (10) days after the date hereof. The filing fee with respect to
such filings required under the HSR Act shall be borne by each party which is
required to make a filing under the HSR Act.
4.6 Deliveries. Each party hereto shall provide and deliver to any other
party such information and documents relating to the transactions covered hereby
which are reasonably requested by such other party.
4.7 Crowley's Net Operating Losses. Subject to the Consideration to be
delivered to the Shareholders hereunder, the parties agree to use their best
efforts to ensure that the consummation of the transactions contemplated herein
shall maximize the use and preservation of Crowley's net operating losses for
income tax purposes under the Code.
4.8 Crowley's Proxy Materials and Current Report on Form 8-K. The
Shareholders shall use their best efforts to provide, at the Shareholders' sole
cost and expense, all of the information relative to Steinbach and the Acquired
Business and the Acquired Assets necessary for Crowley's to (a) prepare, timely
file with the SEC and distribute to its shareholders proxy materials (in
compliance with Regulation 14A promulgated under the Exchange Act) for purposes
of soliciting proxies from Crowley's shareholders to approve the Reorganization,
and (b) prepare and timely file with the SEC a Current Report on Form 8-K
arising from the transactions contemplated by this Agreement. Without limiting
the generality of the foregoing, such information shall include any necessary
audited financial information relative to Steinbach, the Acquired Business and
the Acquired Assets.
4.9 Disposition of Excluded Assets and Excluded Liabilities. Between the
date hereof and the Closing Date, Steinbach and the Shareholders shall use their
respective best efforts to take such actions as are necessary in order to
transfer to another person or persons or to otherwise dispose of those assets
(the "Excluded Assets") and liabilities (the "Excluded Liabilities") of
Steinbach's which are not related to the
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operation of the fifteen (15) retail department stores described on ANNEX B
attached hereto (the "Acquired Stores"). Schedule 4.9 of the Disclosure
Schedules will set forth a description of the Excluded Assets and the Excluded
Liabilities and a description of such actions to be taken by Steinbach and the
Shareholders in connection with the disposition thereof prior to the Closing
Date. Without limiting the generality of the foregoing, such actions shall
include the following:
(a) The termination of all of Steinbach's employees except for those
actively involved in the day-to-day operations of the Acquired Stores and
specifically identified by Crowley's as employees to be retained after the
Closing Date. The Shareholders shall pay all separation costs related to
the terminated employees, including applicable COBRA requirements arising
under ERISA or the Code.
(b) The termination and pay-off all outstanding debt under Steinbach's
loan agreement with National City Bank.
(c) The termination of any and all Liens on the Acquired Assets.
(d) The payment in full of any and all indebtedness owed by Steinbach
to the directors, officers and employees of Steinbach and to the other
affiliates of Steinbach or the Shareholders.
(e) The collection in full of any and all accounts receivable due to
Steinbach from, and the payment in full of any and all accounts payable
owed by Steinbach to, the directors, officers and employees of Steinbach
and to the other affiliates of Steinbach or the Shareholders.
(f) The termination or other disposition of the leases pertaining to
Steinbach's corporate offices in White Plains, New York (the "Corporate
Offices") and Steinbach's central accounting offices in Bridgeport,
Connecticut (the "Central Accounting Offices").
(g) The disposition to a third party of the assets and liabilities
related to Steinbach's distribution center in Eatontown, New Jersey (the
"Distribution Center").
(h) To the extent terminable prior to the Closing Date, the
termination of all contracts between Steinbach and third parties which are
specifically identified by Crowley's.
(i) The transfer of the non-Acquired Stores (and the assets and
liabilities related thereto), if any, which are the subject of the
Non-Acquired Stores Operation Agreement to a person or persons other than
Steinbach.
(j) The distribution of cash to the Shareholders in such amounts as
they may determine in their sole discretion, provided that, on the Closing
Date, the cash physically on hand at the Acquired Stores (i.e., located in
the vaults, safes, cash registers, etc.) shall not be distributed to the
Shareholders.
4.10 Transition Matters. From and after the date hereof, the parties shall
use their best efforts and cooperate in connection with the following transition
matters:
(a) Operation of the Acquired Stores. During the period of December
31, 1995 through the Closing Date, Crowley's shall operate the Acquired
Stores, and the assets and liabilities related thereto (i.e., beginning
with the assets and liabilities which, as of the close of business on
December 30, 1995, comprise Steinbach's Net Book Value), on a basis
pursuant to which all losses and profits relative to such operation shall
be borne by and to inure to the benefit of Crowley's, pursuant to the terms
and conditions of an operation agreement in form and substance satisfactory
to Crowley's and the Shareholders (the "Acquired Stores Operation
Agreement").
(b) Operation of Certain Non-Acquired Stores. During the period of
December 31, 1995 through the Closing Date or such other date mutually
agreed upon by Crowley's and the Shareholders, Crowley's shall, at
Steinbach's request, operate certain of the non-Acquired Stores for a fee
based upon a pro rata allocation of Crowley's corporate overhead, with all
losses and profits relative to such operation to be borne by and to inure
to the benefit of the Shareholders, pursuant to the terms and conditions of
an operation agreement in form and substance satisfactory to Crowley's and
the Shareholders (the "Non-Acquired Stores Operation Agreement").
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(c) Pyramid Leases. With respect to the three (3) so-called Pyramid
Lease Contracts relative to the Acquired Stores No. 15, Watertown, New York
(with the Pyramid Company of Watertown as the landlord), No. 19, Riverside
Mall, Utica, New York (with the Senpike Mall Company as the landlord), and
No. 20, Plattsburgh, New York (with Pyramid Champlain as the landlord), the
Shareholders shall promptly reimburse Crowley's in an amount equal to any
termination fees payable by Steinbach to the respective Pyramid landlords
in connection with the consummation of the transactions contemplated
herein.
(d) Use of Corporate Offices, Central Accounting Offices and
Distribution Center. During the period after December 31, 1995, Steinbach
and the Shareholders, as the case may be, shall take such action as is
necessary to make the Corporate Offices, the Central Accounting Offices
and/or the Distribution Center available for use by Crowley's upon such
terms and conditions as shall be mutually agreed upon by Crowley's, the
Shareholders and Steinbach (as the case may be).
(e) Other. During the period after December 31, 1995, Crowley's and
the Shareholders shall use their best efforts and cooperate with each other
in connection with all other transition matters, including those matters
related to the disposition of accounting services, leases for personal
property, payroll matters, employee benefit plans, workers compensation
matters, etc.
4.11 Further Assurances. The parties hereto agree that each of them will,
from time to time after the Closing Date when so requested by the other,
perform, execute, acknowledge or deliver or cause to be performed, executed,
acknowledged or delivered, all such further acts, deeds, assignments, transfers,
conveyances and assurances as may be required to consummate the Reorganization
and the transactions contemplated herein.
4.12 Representation on Crowley's Board of Directors. Promptly after the
Closing Date, Crowley's shall take such action as is necessary to appoint one
(1) nominee of the Shareholders as a member of Crowley's Board of Directors to
serve a term which will expire at Crowley's 1997 Annual Meeting of Shareholders.
Thereafter, on or prior to the fourth (4th) anniversary of the Closing Date,
Crowley's shall take such actions as are reasonably necessary to either appoint
or nominate for election in connection with Crowley's Annual Meetings of
Shareholders such additional nominees of the Shareholders so that the
Shareholders' aggregate percentage of representation on the then Board of
Directors approximates the Shareholders' aggregate percentage of ownership of
the then issued and outstanding shares of Crowley's Common Stock. Crowley's
obligations under this Section 4.12 automatically shall terminate at such time
as the Shareholders own less than ten percent (10%) of the then issued and
outstanding shares of Crowley's Common Stock.
V. CONDITION TO OBLIGATIONS OF SHAREHOLDERS.
The obligation of the Shareholders to go forward on the Closing Date with
the consummation of the Reorganization and the other transactions contemplated
herein is subject to the satisfaction, or waiver by the Shareholders, of each of
the following conditions precedent:
5.1 Representations and Warranties of Crowley's; Performance by Crowley's;
Certificate of Crowley's. On and as of the Closing Date, all of the
representations and warranties of Crowley's set forth in Section 3 hereof shall
be true and correct in all material respects, except for changes that have
occurred in the ordinary course of Crowley's business and consistent with past
practices or which are expressly permitted or contemplated by this Agreement
(for this purpose substituting the Closing Date for the date of this Agreement
wherever a representation or warranty shall have been made with reference to the
date of this Agreement), and Crowley's shall have performed in all material
respects all agreements and covenants required by this Agreement to be performed
by them prior to or at the Closing Date. Crowley's shall have delivered to the
Shareholders a written certificate of the President of Crowley's, dated the
Closing Date and in form and substance reasonably satisfactory to the
Shareholders and their respective counsel, reaffirming such representations and
warranties as of the Closing Date, certifying to the fulfillment of such
agreements and covenants, and such other matters as the Shareholders shall
reasonably request.
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5.2 Absence of Litigation. No action, suit or proceeding shall have been
instituted or threatened seeking to enjoin or restrain or which would materially
adversely affect the transactions contemplated hereby.
5.3 Opinion of Counsel. On the Closing Date, Crowley's shall have delivered
to the Shareholders the written opinion of Dykema Gossett PLLC, Detroit,
Michigan, dated the Closing Date, in form and substance satisfactory to the
Shareholders and their counsel.
5.4 Consents -- HSR Act. The applicable waiting period prescribed by
regulations adopted pursuant to the HSR Act shall have expired without the
receipt by the Shareholders and/or Crowley's of notice from the Department of
Justice or the Federal Trade Commission of any contemplated legal action to
restrain or nullify the transactions contemplated by this Agreement.
5.5 Registration Rights Agreement. The Shareholders and Crowley's shall
have executed and delivered a Registration Rights Agreement on or before the
Closing Date in form and substance satisfactory to the parties and providing for
not more than one (1) demand registration right and for piggyback rights for up
to four (4) years after the Closing Date relative to certain rights granted to
the Shareholders with respect to the registration of the Crowley's Common Stock
delivered in exchange for the Steinbach Common Stock (the "Registration Rights
Agreement").
5.6 Shareholder Agreement. The Shareholders and Crowley's shall have
executed and delivered a Shareholder Agreement on or before the Closing Date in
form and substance satisfactory to the parties and relative to, among other
things, the agreement by the Shareholders and their affiliates not to acquire,
at any time up to four (4) years after the Closing Date, more than forty-five
percent (45%) (with appropriate antidilution provisions relative thereto) of the
then issued and outstanding shares of Crowley's Common Stock (the "Shareholder
Agreement").
5.7 Acquired Stores Operation Agreement. Steinbach, the Shareholders and
Crowley's shall have executed and delivered the Acquired Stores Operation
Agreement on or before the Closing Date in form and substance satisfactory to
the Shareholders.
5.8 Non-Acquired Stores Operation Agreement. The Shareholders, Crowley's
and/or the then owner of the non-Acquired Stores shall have executed and
delivered the Non-Acquired Stores Operation Agreement on or before the Closing
Date in form and substance satisfactory to the Shareholders.
5.9 Due Diligence Review. The Shareholders shall have completed their due
diligence review of the Disclosure Exhibits, Crowley's and the transactions
contemplated herein to their sole satisfaction and the results of such review
shall have been satisfactory to the Shareholders and their advisors as
determined in their sole discretion. The condition precedent set forth in this
Section 5.9 shall expire on May 31, 1996.
5.10 Revised Exchange Ratio. If either of the events described above in
Section 1.5(b)(i)(B) occur, Crowley's and the Shareholders shall have agreed
upon a mutually acceptable exchange ratio with respect to the exchange of the
Steinbach Common Stock and the Crowley's Common Stock on or prior to the Closing
Date.
VI. CONDITIONS TO OBLIGATIONS OF CROWLEY'S.
The obligation of Crowley's to go forward on the Closing Date with the
consummation of the Reorganization and the other transactions contemplated
herein is subject to the satisfaction, or waiver by Crowley's, of each of the
following conditions precedent:
6.1 Representations and Warranties of Shareholders; Performance by
Shareholder; and Certificate of Shareholders. On and as of the Closing Date, all
of the representations and warranties of the Shareholders set forth in Section 2
hereof shall be true and correct in all material respects except for changes
that have occurred in the ordinary course of Steinbach's business and consistent
with past practices or which are expressly permitted or contemplated by, or not
inconsistent with, this Agreement (for this purpose substituting the Closing
Date for the date of this Agreement wherever a representation or warranty shall
have been made with reference to the date of this Agreement), and the
Shareholders shall have performed all of the agreements and covenants required
by this Agreement to be performed by them prior to or at the Closing
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Date. Each of the Shareholders shall have delivered to Crowley's a written
certificate, dated the Closing Date and in form and substance reasonably
satisfactory to Crowley's and its counsel, reaffirming such representations and
warranties made as of the Closing Date, certifying to the fulfillment of such
agreements and covenants, and such other matters as Crowley's shall reasonably
request.
6.2 Consents.
(a) Approval by Crowley's Shareholders. This Agreement and the
consummation of the transactions contemplated herein shall have been
approved by the shareholders of Crowley's.
(b) Approval by Congress Financial Corporation. This Agreement and the
consummation of the transactions contemplated herein shall have been
approved by Congress Financial Corporation (Central) ("Congress Financial")
pursuant to the terms and conditions of that certain Loan and Security
Agreement, dated November 4, 1994, between Congress Financial and
Crowley's.
(c) Consents. The parties shall have received all consents,
assignments, novations, approvals, orders, qualifications, licenses,
permits or other authorizations, and waivers from any governmental entity
or other third parties necessary to permit the consummation of the
transactions contemplated by this Agreement.
(d) HSR Act. The applicable waiting period prescribed by regulations
adopted pursuant to the HSR Act shall have expired without the receipt by
the Shareholders and/or Crowley's of notice from the Department of Justice
or the Federal Trade Commission of any contemplated legal action to
restrain or nullify the transactions contemplated by this Agreement.
(e) Consents of Landlords. With respect to each of the Lease Contracts
which, in the opinion of counsel for Crowley's (based upon, among other
things, the status of the documentation relative to such Lease Contract),
reasonable prudence would dictate requires the receipt of a consent from
the landlord under such Lease Contract to consummate the transactions
contemplated in this Agreement, Steinbach shall have delivered to
Crowley's, as to each of the Lease Contracts, a "Landlord Consent" (in form
and substance reasonably satisfactory to Crowley's and its counsel) validly
executed by the landlord under such Lease Contract and dated not more than
ten (10) days prior to the Closing Date.
6.3 Opinions of Counsel. On the Closing Date, the Shareholders shall have
delivered to Crowley's the written opinion of Porter, Wright, Morris & Arthur,
counsel for the Shareholders, dated the Closing Date, in form and substance
satisfactory to Crowley's and its counsel.
6.4 Absence of Litigation. No action, suit or proceeding shall have been
instituted which has resulted in temporary or preliminary injunctive relief of a
continuing nature preventing the consummation of the transactions contemplated
hereby, or which, in the bona fide opinion of Crowley's counsel, is not fully
covered by insurance maintained by Steinbach and will have material adverse
effect on the ability of Steinbach to continue to operate its Acquired Business
as presently conducted in all material respects. No labor dispute shall have
occurred, and no unfair labor practice charge shall have been filed which would
materially adversely affect the business, financial condition, properties or
prospects of Steinbach or the transactions contemplated hereby.
6.5 Casualty Loss. No casualty losses shall have occurred to the Acquired
Assets which would have a material adverse affect on the ability of Steinbach to
operate the Acquired Business as presently conducted or would otherwise deprive
Crowley's of the benefits of the transactions contemplated hereby. For purposes
of this Agreement, casualty losses causing the closing of two (2) or more of the
Acquired Stores shall constitute a material adverse affect on the ability of
Steinbach to operate the Acquired Business.
6.6 Due Diligence Review. Crowley's shall have completed its due diligence
review of the Disclosure Schedules, Steinbach, the Acquired Assets, the Acquired
Business and the transactions contemplated herein to its sole satisfaction and
the results of such review shall have been satisfactory to Crowley's and its
advisors as determined in Crowley's sole discretion. The condition precedent set
forth in this Section 6.6 shall expire on May 31, 1996.
B-25
<PAGE> 67
6.7 Registration Rights Agreement. The Shareholders and Crowley's shall
have executed and delivered the Registration Rights Agreement on or before the
Closing Date.
6.8 Shareholder Agreement. The Shareholders and Crowley's shall have
executed and delivered the Shareholder Agreement on or before the Closing Date.
6.9 Loan Agreement -- Schottenstein Stores Corporation. Schottenstein
Stores Corporation ("SSC") and Crowley's shall have executed and delivered a
Loan Agreement on or before the Closing Date in form and substance satisfactory
to Crowley's relative to the availability after the Closing Date of additional
or contingent financing of up to the principal amount of $6,000,000, provided
that the condition precedent set forth in this Section 6.9 shall only be in
effect in the event Crowley's is not successful in obtaining additional
financing relative to the operation of Steinbach after the Closing on reasonable
terms and conditions, and provided further that, any such Loan Agreement between
SSC and Crowley's shall be on terms and conditions similar to those set forth in
that certain Credit and Security Agreement, dated May 20, 1993, between SSC and
Crowley's, which terms and conditions would include a first lien on all of the
post-Closing assets of Steinbach as security for the repayment any indebtedness
under any such Loan Agreement (the "Loan Agreement").
6.10 Acquired Stores Operation Agreement. Steinbach, the Shareholders and
Crowley's shall have executed and delivered the Acquired Stores Operation
Agreement on or before the Closing Date in form and substance satisfactory to
Crowley's.
6.11 Non-Acquired Stores Operation Agreement. The Shareholders, Crowley's
and/or the then owner of the non-Acquired Stores shall have executed and
delivered the Non-Acquired Stores Operation Agreement on or before the Closing
Date in form and substance satisfactory to Crowley's.
6.12 Fairness Opinion. Crowley's shall have received a fairness opinion
from an investment banking and/or appraisal firm to the effect that the
transaction contemplated herein is fair, from a financial point of view, to the
shareholders of Crowley's (excluding the Shareholders and any of their
respective affiliates).
6.13 Crowley's Proxy Materials and Current Report on Form 8-K. Steinbach
shall have provided to Crowley's, at Steinbach's sole cost and expense, (a) all
of the information relative to Steinbach and the Acquired Business and the
Acquired Assets necessary for Crowley's to prepare, timely file with the SEC and
distribute to its shareholders proxy materials (in compliance with Regulation
14A promulgated under the Exchange Act) for purposes of soliciting proxies from
Crowley's shareholders to approve the Reorganization, and (b) or before the
Closing Date, all of the information relative to Steinbach and the Acquired
Business and the Acquired Assets necessary for Crowley's to prepare and timely
file with the Securities and Exchange Commission a Current Report on Form 8-K
arising from the transactions contemplated by this Agreement. Without limiting
the generality of the foregoing, such information shall include any necessary
audited financial information relative to Steinbach and the Acquired Business
and the Acquired Assets.
6.14 Resignations. Crowley's shall have received the resignations,
effective as of the Closing, of each director and officer of Steinbach.
6.15 Revised Exchange Ratio. If either of the events described above in
Section 1.5(b)(i)(B) occur, Crowley's and the Shareholders shall have agreed
upon a mutually acceptable exchange ratio with respect to the exchange of the
Steinbach Common Stock and the Crowley's Common Stock on or prior to the Closing
Date.
VII. CLOSING MATTERS.
7.1 Closing and Closing Date. The closing of the exchange of Steinbach
Common Stock and Crowley's Common Stock contemplated herein (the "Closing")
shall take place at 10:00 a.m., local time, at the offices of Dykema Gossett
PLLC, Detroit, Michigan, on the third business day following the later of (a)
the date on which all of the conditions set forth in Sections 5 and 6 have been
fulfilled to the satisfaction of, or are waived by, the party whose obligations
hereunder are so conditioned or (b) the expiration of the applicable waiting
period prescribed by regulations adopted pursuant to the HRS Act, without
receipt by the Shareholders
B-26
<PAGE> 68
and/or Crowley's of notice from the Department of Justice or the Federal Trade
Commission of any contemplated legal action to refrain or nullify the
transactions contemplated by this Agreement (the "Closing Date"). The parties
shall use their best efforts to consummate the Closing hereunder on or before
February 29, 1996.
7.2 Actions and Deliveries. At the Closing, the Shareholders and Crowley's
shall take the following actions and make the following deliveries:
(a) Consideration. Subject to the adjustments described in Section 1.5
of this Agreement, Crowley's shall deliver to the Shareholders the shares
of Crowley's Common Stock, and the Shareholders shall deliver to Crowley's
certificates evidencing all of the issued and outstanding shares of the
Steinbach Common Stock, all in the manner described in Section 1 of this
Agreement.
(b) Secretary's Certificate.
(i) From Crowley's. Crowley's shall deliver to the Shareholders a
certificate of its secretary (or assistant secretary) certifying (A) the
incumbency of the officers executing this Agreement and the Crowley's
Delivered Documents, (B) the due adoption of corporate resolutions
authorizing and approving the execution, delivery and performance of
this Agreement and all of the transactions contemplated herein, and (C)
correct and complete copies of Articles of Incorporation and Bylaws.
(ii) From Shareholders. The Shareholders shall deliver to Crowley's
a certificate of Steinbach's secretary (or assistant secretary)
certifying correct and complete copies of Articles of Incorporation and
Bylaws.
(c) Officer's and Shareholder's Certificates.
(i) From Crowley's. Crowley's shall deliver to the Shareholders the
certificate of their respective authorized officers as described in
Section 5.1 hereof.
(ii) From Shareholders. Each of the Shareholders shall deliver to
Crowley's the certificate as described in Section 6.1 hereof.
(d) Minute Books. The Shareholders shall deliver to Crowley's the
minute books and related stock and corporate records of Steinbach.
(e) Other. All other documents and instruments contemplated by this
Agreement to be delivered at the Closing and all other actions contemplated
by this Agreement to be taken at the Closing shall be delivered and taken.
VIII. TERMINATION.
8.1 Methods. This Agreement may be terminated as follows:
(a) At any time by mutual written agreement of the Shareholders and
Crowley's;
(b) By Crowley's if any of the conditions set forth in Section 6 shall
not be fulfilled for reasons beyond the reasonable control of Crowley's and
are not waived by Crowley's;
(c) By the Shareholders if any of the conditions set forth in Section
5 shall not be fulfilled for reasons beyond the reasonable control of the
Shareholders and are not waived by the Shareholders; or
(d) On or before May 31, 1996, by the Shareholders if the conduct or
results of the Shareholders' due diligence review described in Section 5.9
hereof shall not have been satisfactory to the Shareholders and their
advisors as determined in their sole discretion.
(e) On or before May 31, 1996, by Crowley's if the conduct or results
of Crowley's due diligence review described in Section 6.6 hereof shall not
have been satisfactory to Crowley's and its advisors as determined in their
sole discretion.
B-27
<PAGE> 69
(f) On or before December 30, 1995, by either Crowley's or the
Shareholders if Steinbach, the Shareholders and Crowley's shall not have
entered into the Acquired Stores Operation Agreement on terms and
conditions satisfactory to the Shareholders and Crowley's.
(g) On or before December 30, 1995, by either Crowley's or the
Shareholders if Steinbach, the Shareholders and Crowley's shall not have
entered into the Non-Acquired Stores Operation Agreement on terms and
conditions satisfactory to the Shareholders and Crowley's.
(h) By either the Shareholders or Crowley's if the Closing has not
occurred on or before July 31, 1996.
In the event of termination as provided above, this Agreement shall
terminate without further action by any of the parties hereto. In addition, if
the Shareholders, on the one hand, or Crowley's, on the other hand, waive in
writing compliance with any such condition to their respective obligations, the
right to terminate provided herein shall no longer exist with respect to that
particular condition.
8.2 Liability. If this Agreement is terminated as provided in Section 8.1,
neither Crowley's, on the one hand, nor the Shareholders, on the other hand,
shall be under any liability to the other by reason of this Agreement, its
negotiation or its termination, or by reason of any of the transactions
contemplated under this Agreement, whether for costs, expenses, damages or
otherwise (except that the letter agreement, dated September 29, 1995, between
Crowley's and Steinbach relative to confidentiality matters shall remain in full
force and effect to the extent set forth therein (the "Confidentiality
Agreement")); provided, however, that, if the election to terminate is due to
the default of a party hereunder, then the non-defaulting party shall be
entitled to any and all remedies available at law or in equity.
IX. INDEMNIFICATION.
9.1 Indemnification by Shareholders. The Shareholders, jointly and
severally, agree to indemnify and hold harmless Crowley's, its successors and
assigns, and its officers, directors, employees and shareholders, against and
with respect to, any and all loss, injury, liability, claim, assessment, damage
or expense (including, without limitation, reasonable attorneys' fees), court
costs and amounts paid in settlement of claims, of any kind or character arising
out of or in any manner incident, relating or attributed to, any of the
following:
(a) Any inaccuracy in, or breach or violation of, the representations
and warranties made by the Shareholders and the covenants and agreements
undertaken by them pursuant to this Agreement and the Steinbach Delivered
Documents.
(b) Any liability or obligation arising from or related to (i) the
actions taken by Steinbach and/or the Shareholders with respect to the
Excluded Assets and the Excluded Liabilities and the disposition thereof as
described above in Section 4.9, or (ii) the failure by Steinbach or the
Shareholders to timely take the actions described above in Section 4.9.
(c) With respect to facts and circumstances on or prior to the Closing
Date, any liability arising from or related to compliance with
Environmental Laws at the Steinbach Real Property, irrespective of the
source or cause of the condition, or any condition existing at any other
property caused by, arising from, or relating to, Steinbach's operation of
its business. In addition, with respect to facts and circumstances after
the Closing Date, any liability arising from or related to compliance with
Environmental Laws at any portions of the Steinbach Real Property
(excluding the Acquired Stores) which are not transferred from Steinbach,
or otherwise disposed of by Steinbach or the Shareholders, to another
person or persons, irrespective of the source or cause of the condition.
9.2 Indemnification by Crowley's. Crowley's agrees to indemnify and hold
harmless the Shareholders, and their respective successors and assigns, against
and with respect to, any and all loss, injury, liability, claim, assessment,
damage or expense (including, without limitation, reasonable attorneys' fees),
court costs and amounts paid in settlement of claims, of any kind or character
arising out of or in any manner incident, relating or attributed to, any
inaccuracy in, or breach or violation of, the representations and warranties
made by Crowley's and the covenants and agreements undertaken by it pursuant to
this Agreement and the Crowley's Delivered Documents.
B-28
<PAGE> 70
9.3 Liability Threshold; Ceiling. Notwithstanding anything to the contrary
herein, neither the Shareholders, on the one hand, nor Crowley's, on the other
hand, shall be liable hereunder to the other as a result of any claim for
indemnity permitted hereunder unless the losses, liabilities or damages incurred
by the subject party as a result of the actions giving rise to the claim shall
exceed, in the aggregate $100,000 (the "Threshold Amount") in which event the
injured party shall be entitled to full recovery without regard to the Threshold
Amount; provided, however, that the total aggregate recovery of all claims shall
not exceed $1,000,000.
9.4 Claims Procedure. If any action, claim or demand shall be brought or
asserted against any party in respect of which indemnity may be sought pursuant
to this Section, the party seeking indemnification shall promptly notify the
parties from whom indemnification is to be sought, stating the name and address
of any claimant and of counsel to any claimant (if known), the amount claimed to
be due and payable, the basis of the claim as alleged by any claimant and the
provision or provisions of this Agreement under which such claim for indemnity
is asserted. The notice shall be accompanied by copies of any documents relied
on by any claimant and furnished to the party seeking indemnification. Within 30
days after receipt of such notice, the parties from whom indemnification is
sought shall by written notice either (i) concede liability in whole as to the
amount claimed in such notice; (ii) deny liability in whole as to such amount;
(iii) concede liability in part and deny liability; or (iv) in the case of
claims by third parties, assume the defense thereof. Provided that the notice
required hereunder is properly given, failure by such parties to assume the
defense of a third party claim for which a party is entitled to indemnity under
this Agreement shall cause the indemnity obligations of the parties from whom
indemnification is sought to extend to whatever outcome results from such third
party claim. Any settlement or compromise of a claim shall be agreed upon by all
parties. If the party seeking indemnification declines to accept a bona fide
offer of settlement which is recommended by the party from whom indemnification
is sought, the maximum liability of the parties from whom indemnification is
sought shall not exceed that amount which it would have been liable for had such
settlement been accepted. If the party from whom indemnification is sought
declines to accept a bona fide offer of settlement recommended by the party
seeking indemnification, the party from whom indemnification is sought shall be
liable for whatever outcome results from such third party claim. The obligation
of any party to another in respect of a claim for indemnity hereunder shall be
reduced by any tax or other financial benefits realized by the party seeking
indemnification.
X. MISCELLANEOUS.
10.1 Entire Agreement; Amendment. This Agreement (including the Exhibits
and Schedules hereto and the Steinbach Delivered Documents and the Crowley's
Delivered Documents) constitutes the entire agreement and understanding of the
parties hereto with respect to the subject matter hereof and supersedes all
prior agreements and understandings of the parties with respect to the subject
matter hereof. No representation, inducement, agreement, promise or
understanding altering, modifying, amending, taking from or adding to the terms
and conditions hereof shall have any force and effect unless the same is in
writing and validly executed by the parties hereto.
10.2 Notices. All notices or other communications required or permitted
hereunder shall be in writing and shall be deemed to have been duly given (i) if
physically delivered, (ii) if telephonically transmitted by telecopier or other
similar means, with subsequent oral confirmation, (iii) five (5) days after
having been deposited in the United States Mail, as certified mail with return
receipt requested and with postage prepaid, or (iv) one (1) business day after
having been transmitted to a third party providing delivery services in the
ordinary course of business which guarantees delivery on the next business day
after such transmittal (e.g., via Federal Express), all of which notices or
other communications shall be addressed to the recipient as follows:
(a) If to Crowley's, to:
Crowley, Milner and Company
2301 West Lafayette Boulevard
Detroit, Michigan 48216
(313-962-2400; fax 313-962-2513)
Attention: President
B-29
<PAGE> 71
with a courtesy copies to:
Dykema Gossett PLLC
400 Renaissance Center
Detroit, Michigan 48243
(313-568-5374; fax 313-568-6915)
Attention: J. Michael Bernard
(b) If to the Shareholders, to:
Steinbach Stores, Inc.
c/o Schottenstein Stores Corporation
1800 Moler Road
Columbus, Ohio 43201
(614-221-9200; fax 614-443-0972)
Attention: President
with a courtesy copy to:
Porter, Wright, Morris & Arthur
41 South High Street
Columbus, Ohio 43215-6194
(614-227-2034; fax 614-227-2100)
Attention: William G. Martin
The addresses so indicated for any party may be changed by similar written
notice.
10.3 Parties in Interest. This Agreement shall be binding upon and inure to
the benefit of, and be enforceable by, the parties hereto and their respective
permitted successors and assigns, heirs and personal representatives.
10.4 Assignment. The rights and obligations provided by this Agreement
shall not be assignable by any party without the prior written consent of the
other parties, except that Crowley's shall be entitled to assign any of their
respective rights and obligations hereunder to any of their respective
affiliates (as defined in Rule 12b-2 of the Rules and Regulations promulgated by
the SEC under the Exchange Act), provided that Crowley's retains liability for
all of its respective obligations hereunder.
10.5 Severability. In the event that any one or more of the provisions of
this Agreement should be invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby.
10.6 Captions. The captions and headings of the sections and the
subsections have been inserted as a matter of convenience and reference only and
shall not control or affect the meaning or construction of this Agreement.
10.7 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be treated as an original but all of which,
collectively, shall constitute a single instrument.
10.8 Press Releases and Public Announcements. No party will issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of the other
parties, provided that, notwithstanding anything to the contrary in the
foregoing or in the Confidentiality Agreement, the parties agree that,
immediately after the execution and delivery of this Agreement by the parties,
Crowley's shall be authorized to notify the American Stock Exchange and to issue
a general press release (in form and substance reasonably satisfactory to the
Shareholders) relative to the transactions contemplated by this Agreement and
Steinbach shall be authorized to notify its employees relative to the
transactions contemplated by this Agreement, and provided further that,
notwithstanding anything to the contrary in the foregoing or in the
Confidentiality Agreement, any party may make any public disclosure required by
applicable law or any listing or trading agreement concerning its
publicly-traded
B-30
<PAGE> 72
securities (in which case the disclosing party will use its best efforts to
advise the other parties prior to making the disclosure and give the other
parties an opportunity to comment).
10.9 Survival. The representations, warranties, covenants and agreements of
the parties (or any of them) contained in this Agreement and in the Steinbach
Delivered Documents and in the Crowley's Delivered Documents shall be continuing
representations, warranties, covenants and agreements that shall survive the
Closing Date, provided that the representations and warranties contained in this
Agreement shall expire on the third (3rd) anniversary of the Closing Date.
10.10 Fees and Expenses. Except as otherwise expressly set forth herein,
each of the parties hereto shall bear any and all fees and expenses (including,
without limitation, legal, accounting, consulting and other professional fees
and expenses) incurred by it in connection with the negotiation and the
consummation of this Agreement and the transactions contemplated herein.
10.11 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Michigan (without regard to its rules
regarding choice of law).
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.
CROWLEY, MILNER AND COMPANY,
Crowley's
By: /s/ DENNY CALLAHAN
------------------------------------
Its: PRESIDENT/CEO
JEROME SCHOTTENSTEIN SUB CHAPTER S
TRUST NO. 1, a Shareholder
By: /s/ JAY SCHOTTENSTEIN
------------------------------------
Its: TRUSTEE
JEROME SCHOTTENSTEIN SUB CHAPTER S
TRUST NO. 2, a Shareholder
By: /s/ JAY SCHOTTENSTEIN
------------------------------------
Its: TRUSTEE
JEROME SCHOTTENSTEIN SUB CHAPTER S
TRUST NO. 3, a Shareholder
By: /s/ JAY SCHOTTENSTEIN
------------------------------------
Its: TRUSTEE
JEROME SCHOTTENSTEIN SUB CHAPTER S
TRUST NO. 4, a Shareholder
By: /s/ JAY SCHOTTENSTEIN
------------------------------------
Its: TRUSTEE
JEROME SCHOTTENSTEIN SUB CHAPTER S
TRUST NO. 5, a Shareholder
By: /s/ JAY SCHOTTENSTEIN
------------------------------------
Its: TRUSTEE
B-31
<PAGE> 73
JEROME SCHOTTENSTEIN SUB CHAPTER S
TRUST NO. 6, a Shareholder
By: /s/ JAY SCHOTTENSTEIN
------------------------------------
Its: TRUSTEE
JEROME SCHOTTENSTEIN SUB CHAPTER S
TRUST NO. 7, a Shareholder
By: /s/ JAY SCHOTTENSTEIN
------------------------------------
Its: TRUSTEE
JEROME SCHOTTENSTEIN SUB CHAPTER S
TRUST NO. 8, a Shareholder
By: /s/ JAY SCHOTTENSTEIN
------------------------------------
Its: TRUSTEE
JEROME SCHOTTENSTEIN SUB CHAPTER S
TRUST NO. 9, a Shareholder
By: /s/ JAY SCHOTTENSTEIN
------------------------------------
Its: TRUSTEE
JEROME SCHOTTENSTEIN SUB CHAPTER S
TRUST NO. 10, a Shareholder
By: /s/ JAY SCHOTTENSTEIN
------------------------------------
Its: TRUSTEE
B-32
<PAGE> 74
ANNEX A
TO
AGREEMENT AND PLAN OF REORGANIZATION
CAPITALIZATION OF CROWLEY'S COMMON STOCK
<TABLE>
<S> <C>
Outstanding shares held by public.................................................. 531,302
Shares subject to Crowley Family Shareholder Agreement............................. 390,062
Restricted Stock Awarded to Mr. Callahan(1)........................................ 30,000
Shares issued in September, 1995 through 401(k) Plan(2)............................ 14,705
-------
966,069
=======
</TABLE>
- -------------------------
(1) 30,000 shares have been issued, with the 20,000 of such shares subject to
possible forfeiture if performance objectives are not achieved.
(2) Shares are issued to 401(k) participants during the last month of each
calendar quarter (March, June, September, December) based upon their
elections. Based on the current market price of the company's stock the
estimated shares to be issued in December, 1995 will be 1,000 shares.
STOCK OPTIONS GRANTED
<TABLE>
<CAPTION>
GRANT DATE SHARES EXERCISE PRICE
--------------------------------------- ------- --------------
<S> <C> <C>
03/25/92............................... 6,000 $ 5.875
04/23/92............................... 10,000 5.5625
10/14/92............................... 10,000 5.8125
03/23/94............................... 10,000 10.375
04/13/94............................... 20,000 10.00
03/22/95............................... 40,000 4.125
05/16/95............................... 20,000 4.75
-------
Total............................. 116,000
=======
</TABLE>
B-33
<PAGE> 75
ANNEX B
TO
AGREEMENT AND PLAN OF REORGANIZATION
ACQUIRED STORES
<TABLE>
<C> <S>
NEW ENGLAND
1 University Mall, Burlington, Vermont (store #22)
2 Champlain Center North, Plattsburg, New York (store #20)
3 Steeplegate Mall, Concord, New Hampshire (store #39)
ALBANY
4 Clifton Country Mall, Clifton Park, New York (store #4)
5 Northway Plaza, Glens Falls, New York (store #11)
SYRACUSE
6 Riverside, North Utica, New York (store #19)
7 Salmon Run Mall, Watertown, New York (store #15)
8 New Hartford Shopping Center, New Hartford, New York (store #18)
MID NEW YORK
9 Newburg Mall, Newburg, New York (store #6)
10 Downtown Tarrytown, Tarrytown, New York (store #9)
CONNECTICUT
11 Blackrock Shopping Center, Fairfield, Connecticut (store #23)
12 Hamden Mart, Hamden, Connecticut (store #25)
13 Waterford Shopping Center, Waterford, Connecticut (store #24)
SOUTH NEW JERSEY
14 Brick Plaza, Bricktown, New Jersey (store #55)
15 Downtown Red Bank, Red Bank, New Jersey (store #64)
</TABLE>
B-34
<PAGE> 76
ANNEX 1.5
TO
AGREEMENT AND PLAN OF REORGANIZATION
December 1995 Balance Sheet; Steinbach's Net Book Value
<TABLE>
<CAPTION>
STEINBACH
DECEMBER
-----------
<S> <C>
ASSETS
Cash and equivalents........................................................... $ 265,500
Merchandise inventories........................................................ 15,236,509
Markdown reserve............................................................... (3,284,000)
-----------
Net inventory.................................................................. 11,952,509
Prepaid expenses............................................................... 286,766
-----------
Total Current Assets...................................................... 12,504,775
Properties..................................................................... 6,144,828
-----------
Total Assets.............................................................. $18,649,603
===========
LIABILITIES
Accounts payable............................................................... $ 6,357,330
Accruals....................................................................... 2,824,190
Current maturities
Capital lease obligations.................................................... 199,447
-----------
Total Current Liabilities................................................. $ 9,380,967
LONG TERM DEBT
Capital lease obligations...................................................... 3,268,636
-----------
Total Long Term Debt...................................................... $ 3,268,636
STOCKHOLDERS' EQUITY
Common Stock................................................................... --
Other capital.................................................................. 6,000,000
Retained Earnings.............................................................. --
-----------
Total Equity.............................................................. $ 6,000,000
Total Liabilities & Equity................................................ $18,649,603
===========
</TABLE>
B-35
<PAGE> 77
APPENDIX C
FINANCIAL STATEMENTS -- STEINBACH STORES, INC.
AND STEINBACH INC. (THE PREDECESSOR COMPANY)
C-1
<PAGE> 78
STEINBACH STORES, INC.
FINANCIAL STATEMENTS
Eleven months ended December 30, 1995 and three months ended January 28, 1995
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors........................................................ C-3
Balance Sheets........................................................................ C-4
Statements of Operations.............................................................. C-5
Statements of Shareholders' Equity.................................................... C-6
Statements of Cash Flows.............................................................. C-7
Notes to Financial Statements......................................................... C-8
</TABLE>
C-2
<PAGE> 79
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Steinbach Stores, Inc.
We have audited the accompanying balance sheets of Steinbach Stores, Inc.
as of December 30, 1995 and January 28, 1995, and the related statements of
operations, shareholders' equity and cash flows for the eleven month period
ended December 30, 1995 and the three month period ended January 28, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Steinbach Stores, Inc. at
December 30, 1995 and January 28, 1995, and the results of its operations and
its cash flows for the eleven month period ended December 30, 1995 and the three
month period ended January 28, 1995 in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
New York, New York
February 8, 1996
C-3
<PAGE> 80
STEINBACH STORES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 30, JANUARY 28,
1995 1995
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................................ $ 4,116 $ 3,203
Merchandise inventories............................................. 23,720 32,054
Prepaid expenses.................................................... 805 1,969
Other current assets................................................ 1,892 1,511
-------- -------
Total current assets.................................................. 30,533 38,737
Fixed assets, net of accumulated depreciation and amortization........ 6,322 7,825
-------- -------
Total assets.......................................................... $ 36,855 $46,562
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit...................................................... $ 1,313 --
Accounts payable and accrued liabilities............................ 30,817 $22,641
Capital lease obligations due within one year....................... 976 860
-------- -------
Total current liabilities............................................. 33,106 23,501
Capital lease obligations............................................. 5,627 6,526
Other liabilities..................................................... 38 38
Shareholders' equity:
Common stock, $10 stated value: 850 shares authorized, 100 issued
and outstanding.................................................. 1 1
Paid-in capital..................................................... 14,999 14,999
Accumulated deficit/retained earnings............................... (16,916) 1,497
-------- -------
Total shareholders' equity............................................ (1,916) 16,497
-------- -------
Total liabilities and shareholders' equity............................ $ 36,855 $46,562
======== =======
</TABLE>
See accompanying notes to financial statements.
C-4
<PAGE> 81
STEINBACH STORES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
ELEVEN MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 30, JANUARY 28,
1995 1995
------------- ------------
(IN THOUSANDS)
<S> <C> <C>
Net sales.......................................................... $ 183,535 $ 76,082
Operating expenses:
Cost of sales.................................................... 122,497 52,824
Selling, general and administrative.............................. 71,400 21,368
Store closing costs.............................................. 5,996 --
--------- --------
Operating income................................................... (16,358) 1,890
Interest expense................................................... (2,076) (360)
Interest and other income.......................................... 33 46
Other expenses..................................................... (12) (79)
--------- --------
Net (loss) income.................................................. $ (18,413) $ 1,497
========= ========
</TABLE>
See accompanying notes to financial statements.
C-5
<PAGE> 82
STEINBACH STORES, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
COMMON PAID-IN EARNINGS
STOCK CAPITAL (DEFICIT) TOTAL
------ -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at October 30, 1994.......................... $ -- $ -- $ -- $ --
Acquisition of Steinbach, Inc........................ 1 24,999 25,000
Distribution to shareholders......................... (10,000) (10,000)
Net income........................................... 1,497 1,497
---- -------- -------- --------
Balance at January 28, 1995.......................... 1 14,999 1,497 16,497
Net loss............................................. (18,413) (18,413)
---- -------- -------- --------
Balance at December 30, 1995......................... $ 1 $ 14,999 $(16,916) $ (1,916)
==== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
C-6
<PAGE> 83
STEINBACH STORES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE
ELEVEN MONTHS
MONTHS ENDED ENDED
DECEMBER 30, JANUARY 28,
1995 1995
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net (loss) income..................................................... $(18,413) $ 1,497
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization....................................... 1,294 293
Store closing costs................................................. 5,996
Change in operating assets and liabilities other than cash:
Decrease in merchandise inventories................................. 8,005 21,342
Decrease (increase) in prepaid expenses and other current assets.... 782 (912)
Increase (decrease) in accounts payable, accrued
expenses and other current liabilities........................... 3,710 (6,007)
-------- ---------
Net cash provided by operating activities............................. 1,374 16,213
INVESTING ACTIVITIES
Purchase of fixed assets.............................................. (991) (1,343)
Acquisition of Steinbach, Inc., net of cash acquired of $3,911........ (26,647)
-------- ---------
Net cash used in investing activities................................. (991) (27,990)
FINANCING ACTIVITIES
Proceeds from bank borrowings......................................... 1,313 5,558
Repayments of capital lease obligations............................... (783) (207)
Repayment of bank borrowings.......................................... (5,371)
Distribution to shareholders.......................................... (10,000)
Purchase of shares of the Company..................................... 25,000
-------- ---------
Net cash provided by financing activities............................. 530 14,980
-------- ---------
Increase in cash...................................................... 913 3,203
Cash at beginning of period........................................... 3,203
-------- ---------
Cash at end of period................................................. $ 4,116 $ 3,203
======== =========
Interest paid......................................................... $ 2,076 $ 360
======== =========
</TABLE>
See accompanying notes to financial statements.
C-7
<PAGE> 84
STEINBACH STORES, INC.
NOTES TO FINANCIAL STATEMENTS
ELEVEN MONTHS ENDED DECEMBER 30, 1995 AND THREE MONTHS ENDED JANUARY 28, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
On November 1, 1994, Steinbach Stores, Inc. ("Steinbach"), an S
corporation, acquired all of the outstanding capital stock of Steinbach, Inc.
for a purchase price of approximately $30.6 million and simultaneously
liquidated Steinbach, Inc. into Steinbach. The acquisition was accounted for as
a purchase and, accordingly, the purchase price was allocated based upon the
fair market value of the assets acquired and liabilities assumed. The results of
operations from the date of acquisition have been included in these financial
statements.
Steinbach operates a chain of approximately 24 retail department stores
concentrated in the Northeast United States. The stores carry men's, women's and
children's apparel and related merchandise.
FISCAL YEAR
Steinbach's fiscal year ends on the last Saturday in January, which results
in a 52- or 53-week year. The fiscal year ended December 30, 1995 reflects
eleven months of operations.
MERCHANDISE INVENTORIES
Inventories of Steinbach are stated at the lower of cost or market based on
the retail method of inventory valuation using the first-in, first-out method
("FIFO").
CREDIT CARD SALES
Steinbach maintains a proprietary credit card. Amounts due from customers
charged on Steinbach card are sold, on a without recourse basis, to National
City Bank. Substantially all receivables are from customers who reside in the
Northeast United States.
ADVERTISING AND SALES PROMOTION
Advertising and sales promotion costs (approximately $13 million for the
eleven months ended December 30, 1995 and $3.3 million for the three months
ended January 28, 1995) are expensed as incurred.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
FIXED ASSETS
Fixed assets are stated at cost. Depreciation and amortization of fixed
assets and buildings under capital leases are provided principally on the
straight-line method. The rates used are based on the lesser of the estimated
useful lives of the respective classes of assets or the terms of the related
leases.
C-8
<PAGE> 85
STEINBACH STORES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
2. FIXED ASSETS
Fixed assets consists of:
<TABLE>
<CAPTION>
DECEMBER 30, JANUARY 28,
1995 1995
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
Furniture and fixtures................................................ $4,322 $ 4,799
Buildings under capital leases........................................ 1,987 1,987
Leasehold improvements................................................ 1,558 1,332
------ ------
7,867 8,118
Less accumulated depreciation and amortization........................ 1,545 293
------ ------
$6,322 $ 7,825
====== ======
</TABLE>
Buildings under capital leases have been adjusted by $4.9 million as a
result of the purchase price allocation on November 1, 1994 relating from the
acquisition of Steinbach Inc.
Accumulated depreciation and amortization includes $355,000 at December 30,
1995 and $77,000 at January 28, 1995, relating to amortization of buildings
under capital leases.
3. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consists of:
<TABLE>
<CAPTION>
DECEMBER 30, JANUARY 28,
1995 1995
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
Merchandise payable................................................... $ 11,809 $ 9,309
Accrued expenses...................................................... 6,510 2,866
Accrued store closing................................................. 4,467 1,551
Payroll and benefit-related costs..................................... 2,494 1,180
Occupancy costs....................................................... 2,078 2,873
Other current liabilities............................................. 3,459 4,862
------- -------
$ 30,817 $22,641
======= =======
</TABLE>
4. STORE CLOSURES
During the fourth quarter, Steinbach recorded a charge of approximately $6
million related to the announced closing of six stores and three administrative
locations. All employees at these locations (approximately 600) have been
terminated; however, some employees have been offered positions with affiliated
companies. The charge consists of the write-downs of inventory to reflect the
impact of the "going out of business" sales (approximately $329,000) and the
write-off of primarily leasehold improvements (approximately $1.1 million), net
of anticipated proceeds, and severance for employees and officers (approximately
$4.6 million). In connection with the planned store closures, four of the
locations will be converted to stores operated by an affiliated company. Two
store leases will revert to the landlord, an affiliate. Steinbach anticipates
store closures to be completed by the first quarter of 1996. In addition,
Steinbach has previously identified an additional store for closing for which no
reserves are required since it is anticipated that no loss will result from
closing the store. Steinbach anticipates that the store closure will be
completed by the first quarter of 1996.
C-9
<PAGE> 86
STEINBACH STORES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
5. CAPITAL LEASE OBLIGATIONS
Future minimum payments for capital leases at December 30, 1995 are:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
Year ending December:
1996......................................................................... $ 1,536
1997......................................................................... 1,536
1998......................................................................... 1,536
1999......................................................................... 808
2000......................................................................... 424
Thereafter..................................................................... 4,768
--------
Total minimum payments......................................................... 10,608
Less amount representing interest.............................................. 4,005
--------
Present value of minimum payments.............................................. 6,603
Less current portion........................................................... 976
--------
Long-term capital lease obligation............................................. $ 5,627
========
</TABLE>
Three locations under capital leases will be converted to stores operated
by an affiliate, as discussed in Note 4. The present value of future minimum
lease payments related to these three locations is approximately $2.7 million at
December 30, 1995.
6. OPERATING LEASES
Steinbach conducts a portion of its retail operations from leased premises.
The operating leases generally include renewal options and certain leases
require consent of the landlord to transfer or assign the lease, provide for
step rentals and payment by Steinbach of percentage rentals based upon sales,
common area maintenance, real estate taxes and certain other operating expenses.
Rent expense under operating leases consists of:
<TABLE>
<CAPTION>
DECEMBER 30, JANUARY 28,
1995 1995
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
Minimum rent -- 3rd party............................................. $2,913 $ 1,274
Minimum rent -- affiliate............................................. 1,928 526
Contingency rent...................................................... 740 315
------ -------
Total rent expense.................................................... $5,581 $ 2,115
====== =======
</TABLE>
C-10
<PAGE> 87
STEINBACH STORES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
6. OPERATING LEASES -- CONTINUED
Future minimum rental payments required under noncancellable leases at
December 30, 1995 are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES WITH
OPERATING AN
LEASES AFFILIATE TOTAL
--------- ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Year ended December:
1996......................................................... $ 3,310 $ 2,019 $ 5,329
1997......................................................... 3,369 1,981 5,350
1998......................................................... 3,192 1,984 5,176
1999......................................................... 2,811 1,984 4,795
2000......................................................... 2,656 1,250 3,906
Thereafter..................................................... 16,869 1,282 18,151
------- ------- -------
Total minimum lease payments................................... $32,207 $10,500 $42,707
======= ======= =======
</TABLE>
As a result of step-rental clauses contained in certain lease agreements,
Steinbach records in accordance with generally accepted accounting principles
rent expense on a straight-line basis over the term of the related leases.
Included in current liabilities is rent equalization of $979,000 relating to
such leases.
Included in operating leases with an affiliate are three locations which
will be closed, as discussed in Note 4. For these locations, minimum rent
expense at December 30, 1995 was $1.6 million. Future minimum lease payments are
approximately $8.4 million.
7. LINE OF CREDIT
Steinbach maintained a $23 million unsecured line of credit agreement with
National City Bank. Interest on borrowings is charged at prime (8.5% at December
30, 1995 and January 28, 1995). During the year, Steinbach entered into an
arrangement with National City Bank to obtain short-term, fixed rate borrowings
in $1 million increments, on an as needed basis. The interest rate on these
short-term borrowings is charged at the bank's "fixed rate borrowings on line of
credit" rate, which fluctuated during the year, but was less than prime. The
weighted average interest rate on all borrowings during the period was 7.9% for
December 30, 1995 and 8.5% for January 28, 1995.
8. INCOME TAXES
Income taxes are not provided on the results of operations of Steinbach as
its income is included in the tax returns of its shareholders.
9. RELATED PARTY TRANSACTIONS
Steinbach purchased merchandise from affiliates of Steinbach's shareholders
amounting to approximately $1,401,000 during the eleven month period ended
December 30, 1995 and $518,000 during the three month period ended January 28,
1995.
Steinbach paid affiliates of Steinbach's shareholders $72,000 and $118,000
at December 30, 1995 and January 28, 1995, respectively, for professional
services.
C-11
<PAGE> 88
STEINBACH STORES, INC.
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
10. 401(K) PLAN
Steinbach sponsors a defined contribution plan (the "Plan") that provides
retirement benefits for all eligible employees of Steinbach. The Plan permits an
employee to reduce his or her salary under Section 401(k) of the Internal
Revenue Code. The maximum salary reduction with a company match of 100% is 3% of
eligible compensation. During the year, Steinbach modified the "Plan" such that
the maximum amount of eligible compensation with a Company match was capped at
$50,000 per year. The Company's contribution amounted to $447,000 for the eleven
month period ended December 30, 1995 and $229,000 for the three month period
ended January 28, 1995.
11. HEALTH BENEFIT PLAN TRUST
Steinbach maintains a reserve fund to provide for the payment of incurred
but unreported claims for benefits covered by the plan.
Steinbach's contribution amounted to approximately $2.7 million and $1.2
million for the eleven and three month periods ended December 30, 1995 and
January 28, 1995, respectively.
12. COMMITMENTS AND CONTINGENCIES
At December 30, 1995 and January 28, 1995, Steinbach had $1.1 million and
$1.6 million, respectively, of letters of credit outstanding for the purchase of
imported merchandise.
In the course of Steinbach's business, claims are alleged from time to
time, some of which seek punitive or unspecified damages. Steinbach believes
that these pending claims will be resolved without material adverse effects on
its financial position, results of operations and cash flows.
13. PENDING BUSINESS COMBINATION
On November 17, 1995, Steinbach entered into an Agreement and Plan of
Reorganization (the "Acquisition Agreement") with Crowley, Milner and Company
(the "Company"). Under the terms of the Acquisition Agreement, subject to
approval by the shareholders of the Company, the Steinbach Shareholders will
exchange all of their issued and outstanding common stock for approximately 35%
of the common stock of the Company. Pursuant to the Acquisition Agreement, the
Company will acquire 15 of the 24 stores of Steinbach. See Note 4 relative to
the closing of seven stores. At this time, Steinbach has not determined the
future plans for the two remaining stores not being acquired by the Company.
The pending acquisition is expected to be completed by the second quarter
of 1996. In accordance with EITF Issue No. 95-14, Recognition of Liabilities in
Anticipation of a Business Combination, the Company has not recorded any
liabilities in anticipation of this pending business combination.
C-12
<PAGE> 89
STEINBACH INC.
STATEMENTS OF OPERATIONS AND CASH FLOWS
Nine month period ended October 29, 1994 and year ended January 29, 1994
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors....................................................... C-14
Statements of Operations............................................................. C-15
Statements of Cash Flows............................................................. C-16
Notes to Statements of Operations and Cash Flows..................................... C-17
</TABLE>
C-13
<PAGE> 90
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Steinbach Stores, Inc.
We have audited the statements of operations and cash flows of Steinbach
Inc. for the nine month period ended October 29, 1994 and the year ended January
29, 1994. These statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the statements referred to above present fairly, in all
material respects, the results of operations and cash flows of Steinbach Inc.
for the nine month period ended October 29, 1994 and year ended January 29, 1994
in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
February 8, 1996
C-14
<PAGE> 91
STEINBACH INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTH
PERIOD ENDED YEAR ENDED
OCTOBER 29, JANUARY 29,
1994 1994
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
Net sales............................................................. $142,844 $ 226,377
Operating expenses:
Cost of sales....................................................... 87,887 142,792
Selling, general and administrative................................. 64,317 92,710
-------- ---------
Operating loss........................................................ (9,360) (9,125)
Interest expense...................................................... (1,050) (1,582)
Interest and other income............................................. 189 474
Other expenses........................................................ (150) (520)
-------- ---------
Net loss before taxes................................................. (10,371) (10,753)
Benefit from income taxes............................................. -- 123
-------- ---------
$(10,371) $ (10,630)
======== =========
</TABLE>
See accompanying notes to financial statements.
C-15
<PAGE> 92
STEINBACH INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTH
PERIOD ENDED YEAR ENDED
OCTOBER 29, JANUARY 29,
1994 1994
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.............................................................. $(10,371) $(10,630)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization....................................... 4,972 6,987
Allowance for doubtful accounts..................................... (217) (106)
(Increase) decrease in prepaid expenses and other current assets.... (352) 706
(Increase) decrease in merchandise inventories...................... (17,805) 1,964
Decrease in other assets............................................ 131 184
Increase (decrease) in accounts payable and liabilities............. 9,626 (148)
Increase (decrease) in due to/from affiliate........................ 10,529 (4,522)
(Decrease) increase in other liabilities............................ (1,140) 24
-------- --------
Net cash used in operating activities................................. (4,627) (5,541)
INVESTING ACTIVITIES
Proceeds from sale of fixed assets.................................... 262 --
Purchase of fixed assets.............................................. (890) (3,309)
-------- --------
Net cash used in investing activities................................. (628) (3,309)
FINANCING ACTIVITIES
Intercompany note payable............................................. 8,494 --
Repayments of capital lease obligations............................... (686) (851)
Contributions to paid-in capital...................................... -- 10,000
-------- --------
Net cash provided by financing activities............................. 7,808 9,149
-------- --------
Increase in cash...................................................... 2,553 299
Cash at beginning of period........................................... 1,358 1,059
-------- --------
Cash at end of period................................................. $ 3,911 $ 1,358
======== ========
Interest paid......................................................... $ 1,050 $ 1,582
======== ========
Income taxes paid..................................................... $ -- $ --
======== ========
</TABLE>
See accompanying notes to financial statements.
C-16
<PAGE> 93
STEINBACH INC.
NOTES TO STATEMENTS OF OPERATIONS AND CASH FLOWS
NINE MONTH PERIOD ENDED OCTOBER 29, 1994 AND YEAR ENDED JANUARY 29, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Steinbach Inc. ("Steinbach Inc.") is an indirectly wholly-owned subsidiary
of American Retail Group ("ARG"). The financial statements do not reflect the
sale referred to in Note 7, which will materially affect the financial position
of Steinbach Inc.
Steinbach Inc. operates a chain of approximately 28 retail department
stores concentrated in the Northeast United States. The stores carry men's,
women's and children's apparel and related merchandise.
FISCAL YEAR
Steinbach Inc.'s fiscal year ends on the last Saturday in January, which
results in a 52- or 53-week year.
MERCHANDISE INVENTORIES
Inventories of Steinbach Inc. are stated at the lower of cost or market
based on the retail method of inventory valuation using the last-in, first-out
method ("LIFO"). Had LIFO not been used, the carrying value of inventories would
have been greater by approximately $1,994,000 and $1,471,000 at October 29, 1994
and January 29, 1994, respectively.
CREDIT CARD SALES
Steinbach Inc. maintains a proprietary credit card. Amounts due from
customers charged on Steinbach Inc. card are sold, on a full recourse basis, to
an affiliated company pursuant to a factoring agreement. Substantially all
receivables are from customers who reside in the Northeast United States.
ADVERTISING AND SALES PROMOTION
Advertising and sales promotion costs (approximately $8.8 million for the
nine month period ended October 29, 1994 and $12.2 million for the year ended
January 29, 1994) are expensed as incurred.
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 amounts reported in the financial statement and
accompanying notes. Actual results could differ from those estimates.
FIXED ASSETS
Fixed assets are stated at cost. Depreciation and amortization of fixed
assets and buildings under capital leases is calculated principally on the
straight-line method. The rates used are based on the lesser of the estimated
useful lives of the respective classes of assets or the terms of the related
leases.
Accumulated depreciation and amortization includes $3,602,000 at October
29, 1994 and $3,137,000 at January 29, 1994 related to amortization of buildings
under capital leases.
2. OPERATING LEASES
Steinbach Inc. conducts a portion of its retail operations from leased
premises. The operating leases generally include renewal options and certain
leases require consent of the landlord to transfer or assign the
C-17
<PAGE> 94
STEINBACH INC.
NOTES TO STATEMENTS OF OPERATIONS AND CASH FLOWS -- CONTINUED
2. OPERATING LEASES -- CONTINUED
lease, provide for step rentals and payment by Steinbach Inc. of percentage
rentals based upon sales, common area maintenance, real estate taxes and certain
other operating expenses.
Rent expense under operating leasing consists of:
<TABLE>
<CAPTION>
OCTOBER 29, JANUARY 29,
1994 1994
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Minimum rent -- 3rd party.............................................. $ 3,509 $ 4,898
Minimum rent -- affiliate.............................................. 2,572 3,437
Contingency rent....................................................... 582 928
------- -------
Total rent expense..................................................... $ 6,663 $ 9,263
======= =======
</TABLE>
Future minimum rental payments required under noncancellable leases at
October 29, 1994 are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES WITH
OPERATING AN
LEASES AFFILIATE TOTAL
--------- ----------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Year ended October 29:
1995......................................................... $ 4,465 $ 3,300 $ 7,765
1996......................................................... 4,298 3,325 7,623
1997......................................................... 4,265 3,332 7,597
1998......................................................... 4,129 2,583 6,712
1999......................................................... 3,826 2,332 6,158
Thereafter..................................................... 44,903 2,814 47,717
------- ------- -------
Total minimum lease payments................................... $65,886 $17,686 $83,572
======= ======= =======
</TABLE>
As a result of step-rental clauses contained in certain lease agreements,
Steinbach Inc. records in accordance with generally accepted accounting
principles rent expense on a straight-line basis over the term of the related
leases.
3. INCOME TAXES
Steinbach Inc. is a member of an affiliated group filing consolidated
federal income tax returns. Losses incurred by Steinbach Inc. are available in
the consolidated return to offset income generated by other members of the
group. Therefore, although Steinbach Inc. has experienced tax losses, the amount
of net operating carryforwards available to Steinbach Inc., if any, will be
different than the net operating loss carryforwards computed on a stand alone
basis. Further, any losses that may be available would be subject to
restrictions under Internal Revenue Code Section 392 should there be a change in
the control in ownership of Steinbach Inc.'s stock.
Effective February 1, 1993, Steinbach Inc. changed its method of accounting
for income taxes from the deferred method to the liability method required by
FASB Statement No. 109, "Accounting for Income Taxes." The adoption of FASB
Statement No. 109 had no impact on the financial position of Steinbach Inc. As
permitted under the new rules, prior years' financial statements have not been
restated.
Deferred income taxes of Steinbach Inc. reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes as
well as net operating losses of Steinbach Inc. At October 29, 1994, net
operating losses of
C-18
<PAGE> 95
STEINBACH INC.
NOTES TO STATEMENTS OF OPERATIONS AND CASH FLOWS -- CONTINUED
3. INCOME TAXES -- CONTINUED
Steinbach Inc., expiring in 2010, have been accounted for on a stand-alone
basis. These differences relate to items such as inventory, allowance for
doubtful accounts, accruals, depreciation and leasehold amortization, and give
rise to a net deferred tax asset. Steinbach Inc. has established a valuation
allowance of approximately $7.9 million and $4.3 million at October 29, 1994 and
January 29, 1994, respectively, to completely offset the net deferred tax asset.
The (benefit) for income taxes consists of (all current):
<TABLE>
<CAPTION>
OCTOBER 29, JANUARY 29,
1994 1994
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Federal................................................................ $ -- $(123)
State and local........................................................ -- --
----- -----
Total.................................................................. $ -- $(123)
===== =====
</TABLE>
4. RELATED PARTY TRANSACTIONS
Net interest income on the net receivable/payable with ARG amounted to
$147,000 at October 29, 1994 and $63,000 at January 29, 1994, respectively.
Steinbach Inc. pays a monthly management fee to ARG and an affiliate equal
to a percentage of net sales. The expense was $570,000 at October 29, 1994 and
$1,017,000 at January 29, 1994, respectively.
Steinbach Inc. has allocated expenses for certain services provided by the
Parent and/or affiliated companies for centralized credit, information
processing and product development. The amount allocated to Steinbach Inc. at
October 29, 1994 was $1,126,000 and $1,804,000 at January 29, 1994.
5. RETIREMENT AND DEFERRED COMPENSATION PLANS
ARG sponsors a defined contribution plan (the "Plan") that provides
retirement benefits for all eligible employees of ARG and its affiliates. The
Plan permits an employee to reduce his or her salary under Section 401(k) of the
Internal Revenue Code. The maximum salary reduction with a current company match
of 100% is 5% of eligible compensation. Certain employees may make additional
contributions of up to an additional 10% of eligible compensation on an
unmatched basis. In addition, Steinbach Inc. may make additional discretionary
contributions to the Plan. The Plan expense related to Steinbach Inc. was
$613,000 and $806,000 at October 29, 1994 and January 29, 1994, respectively.
ARG also maintains a noncontributory unfunded defined benefit retirement
plan, a Long-Term Incentive Plan and other deferred compensation arrangements
which cover certain key employees of ARG and its affiliates. Steinbach Inc.'s
portion of the expense related to these plans, as allocated by ARG, was
approximately $112,000 and $343,000 at October 29, 1994 and January 29, 1994,
respectively.
6. COMMITMENTS AND CONTINGENCIES
In the course of Steinbach Inc.'s business, claims are alleged from time to
time, some of which seek punitive or unspecified damages. Steinbach Inc.
believes that these pending claims will be resolved without material adverse
effects on its financial position.
C-19
<PAGE> 96
STEINBACH INC.
NOTES TO STATEMENTS OF OPERATIONS AND CASH FLOWS -- CONTINUED
7. SUBSEQUENT EVENTS
On November 1, 1994, Steinbach Stores, Inc., an S corporation, acquired all
of the outstanding capital stock of Steinbach Inc. for a purchase price of
approximately $30.6 million and simultaneously liquidated Steinbach Inc. into
Steinbach Stores, Inc. The acquisition was accounted for as a purchase and,
accordingly, the purchase price was allocated based upon the fair market value
of the assets acquired and liabilities assumed.
C-20
<PAGE> 97
APPENDIX D
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
ELEVEN MONTHS ENDED DECEMBER 30, 1995
AND
FISCAL YEARS ENDED JANUARY 28, 1995 AND JANUARY 29, 1994
<TABLE>
CONTENTS
<S> <C>
Steinbach Stores, Inc. -- 15 Store Income Statement................................... D-2
Pro Forma Income Statements........................................................... D-3
</TABLE>
D-1
<PAGE> 98
STEINBACH STORES INC.
15 STORE INCOME STATEMENT
<TABLE>
<CAPTION>
TOTAL 15 STORE
STEINBACH PRO FORMA STEINBACH
DECEMBER 30, 1995 ADJUSTMENTS DECEMBER 30, 1995
----------------- ----------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues
Net sales.................................. $ 183,535 $ (87,784)(1) $95,751
Investment and other income................ 33 (33)(1) --
--------- --------- -------
183,568 (87,817) 95,751
Costs and Expenses
Cost of Merchandise and services sold...... 122,497 (56,470)(1) 66,027
Operating expenses......................... 71,400 (41,074)(1)(2) 30,326
Store closing costs........................ 5,996 (5,996)(1) --
Interest expense........................... 2,076 (1,626)(1) 450
Other...................................... 12 (12)(1) --
--------- --------- -------
201,981 (105,178) 96,803
--------- --------- -------
Loss before income taxes..................... (18,413) 17,361 (1,052)
Federal income taxes......................... -- -- --
--------- --------- -------
Net loss..................................... $ (18,413) $ 17,361 $(1,052)
========= ========= =======
</TABLE>
- -------------------------
(1) Pursuant to the Acquisition Agreement, between December 31, 1995 and the
Closing Date, the Steinbach Shareholders have agreed to use their best
efforts to take such actions as are necessary in order to transfer to
another person or persons or to otherwise dispose of those assets (the
"Excluded Assets") and liabilities (the "Excluded Liabilities") of Steinbach
which are not related to the operations of the 15 retail department stores
being acquired (the "Acquired Stores"), which actions include, among other
things, the following; (i) the transfer of the nine stores which are
non-Acquired Stores (and the assets and liabilities related thereto) and
which are to be closed prior to the Closing Date; (ii) the termination or
other disposition of the leases pertaining to Steinbach's corporate offices
in White Plains, New York, and its central accounting offices in Bridgeport,
Connecticut; (iii) the disposition to a third party of the assets and
liabilities related to its distribution center in Eatontown, New Jersey; and
(iv) the termination of all of Steinbach's employees, except for those
actively involved in the day-to-day operations of the Acquired Stores and
specifically identified by the Company as employees to be retained after the
Closing Date (and, in connection therewith, the Steinbach Shareholders have
agreed to pay all separation costs related to the terminated employees. The
assets and liabilities that are being acquired by the Company as a result of
the Acquisition include the Acquired Stores, as well as all cash, prepaid
expenses, inventory, fixed assets, personnel, accounts payable and accrued
liabilities associated with the Acquired Stores. The pro forma adjustments
represent sales revenues and other income related to the nine stores not
being acquired in the Acquisition, as well as the related cost of sales. In
addition, all payroll and benefit costs, advertising, depreciation, real
estate, insurance, utilities, supplies and all other direct expenses
attributable to the nine non-Acquired Stores have been eliminated as a pro
forma adjustment. Additionally, since the Company is not acquiring
Steinbach's two administrative offices or distribution center, nor any of
the employees in these three facilities, all payroll and benefit costs,
utilities, real estate, insurance, supplies, professional fees and all other
direct costs of these facilities have also been eliminated as a pro forma
adjustment. The elimination of the revenues and costs associated with the
nine non-Acquired Stores and the three non-acquired administrative
facilities was calculated and based on Steinbach management's internal
operating statements.
(2) The Company believes it can operate the 15 Acquired Stores and its existing
10 stores at reduced operating expense levels relative to sales due to the
fact it will not be absorbing the existing Steinbach corporate overhead.
Steinbach's corporate overhead allocated against the 15 Acquired Stores was
over $10.0 million dollars for 1995. The Company anticipates adding
approximately $4.5 million of additional corporate overhead to its existing
overhead to accommodate the Steinbach acquisition. Total Steinbach operating
expenses as a percent of sales for the eleven months ended December 30,
1995, were 38.9%, compared with the Company's operating expense ratio of
31.6% for the fiscal year ended February 3, 1996. The 15 Acquired Stores
operating expenses including the corporate overhead allocated to the stores
as a percent of sales for the eleven months ended December 30, 1995 were
37.3%. The pro forma combined operating expenses for 1995 were 31.6% of
sales. These amounts have been reflected in the operating expenses of the 15
store Steinbach income statement. The functions related to the receiving,
ticketing, and distribution of the Steinbach inventory were leased out to a
third party and the costs related thereto represent approximately $2.6
million of the total anticipated additional costs. This cost was determined
based on the product of (i) the estimated pieces of inventory that would be
processed through the distribution center in a year, multiplied by (ii) the
cost per piece being charged by the third party processor. The other $1.9
million of the estimated additional costs represents fees associated with
the Company's New York buying office for the additional purchases related to
Steinbach and personnel and related costs for establishing an east coast
office, as well as additional management and clerical personnel at the
Company's corporate headquarters in Detroit and other administrative costs.
The personnel costs were estimated based on the number of positions
management believes will be added and the salary and related benefits that
will be required for each position. While it is possible that there may be
some additional costs that could be incurred above the $4.5 million these
costs are not presently determinable.
D-2
<PAGE> 99
CROWLEY, MILNER AND COMPANY/STEINBACH STORES, INC.
PRO FORMA INCOME STATEMENTS
<TABLE>
<CAPTION>
15 STORE
THE COMPANY STEINBACH PRO FORMA
FEBRUARY 3, 1996 DECEMBER 30, 1995 ADJUSTMENTS COMBINED
---------------- ----------------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues
Net sales............................ $105,863 $ 95,751 $201,614
Investment and other income.......... 325 -- 325
--------- ------------ --------
106,188 95,751 201,939
Costs and Expenses
Cost of Merchandise and services
sold.............................. 72,324 66,027 138,351
Operating expenses................... 33,446 30,326 $ (526)(3) 63,246
Interest expense..................... 1,805 450 2,255
Operating loss and costs related to
integration of Steinbach(1)....... 957 -- (230)(2) 727
--------- ------------ ------- --------
108,532 96,803 (230) 204,579
--------- ------------ ------- --------
Earnings (loss) before income taxes.... (2,344) (1,052) 230 (2,640)
Federal income taxes................... -- -- -- --
--------- ------------ ------- --------
Net earnings (loss).................... $ (2,344) $ (1,052) $ 230 $ (2,640)
========= ============ ======= ========
Net earnings (loss) per share.......... $ (2.38) $(10,520.00) -- $ (1.79)
========= ============ ======= ========
</TABLE>
- -------------------------
(1) Operating and other costs related to January 1996, the first month under the
Interim Operating Agreement. Future results could vary.
(2) Pro forma adjustment represents non-recurring costs of integrating Steinbach
within the Company and includes travel, moving, and other personnel costs
related to establishing an east coast office and additional staffing at the
Company's corporate headquarters in Detroit.
(3) Pro forma adjustment represents reduction of depreciation expense based on
purchase accounting write down of the fixed assets acquired.
(4) At December 30, 1995, Steinbach management recorded a markdown reserve
totalling $3.3 million to reflect the impact on the inventory of poor retail
market conditons and as such cost of merchandise and services sold reflects
this cost. The Company does not believe this reserve will recur in the
future but was primarily the result of the Company's extensive change in
merchandise content at the stores.
(5) As described in footnote 1 on page D-2, the pro forma income statement
reflects significant operating expense reductions due to the fact that the
Company will not acquire Steinbach's two administrative facilities or its
distribution center and therefor costs associated with such activities are
not reflected in the pro forma financial statements. Steinbach corporate
overhead allocated against the 15 Acquired Stores was over $10.0 million for
1995. The Company anticipates adding approximately $4.5 million of
additional corporate overhead to its existing overhead to accommodate the
Steinbach acquisition. This reduction of overhead is reflected in the pro
forma income statement above. The Company also anticipates it will be able
to reduce operating expenses in the 15 Acquired Stores from the present
levels. Although the savings can not be quantified at this time, the Company
believes that certain costs, such as supplies and property and liability
insurance, can be reduced by combining the programs of both companies. Also
the Company believes that certain benefit insurance costs can be reduced by
instituting managed care health plans in lieu of the plans currently in
place. A bidding out of service contracts should yield cost savings in
maintenance and services purchased expenses. Also, the Company believes it
can improve sales and margins from their recent levels. (The information in
this note contains forward looking statements within the meaning of the
Securities Exchange Act of 1934 and is subject to the safe harbor created by
that statute; actual results could differ materially from those projected in
such statements and there can be no assurance that the Company will be
successful in reducing such expenses and costs.)
D-3
<PAGE> 100
APPENDIX E
STEINBACH STORES, INC.
FINANCIAL STATEMENTS
THREE MONTHS ENDED MAY 4, 1996
<TABLE>
CONTENTS
<S> <C>
Balance Sheets....................................................................... E-2
Statements of Operations............................................................. E-3
Statements of Cash Flows............................................................. E-4
Notes................................................................................ E-5
</TABLE>
E-1
<PAGE> 101
STEINBACH STORES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 4, APRIL 29,
1996 1995
-------- ---------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Assets
Current assets:
Cash................................................................... $ 362 $ (752)
Merchandise inventories................................................ 12,990 41,508
Prepaid expenses and other current assets.............................. 3,986 4,566
--------- --------
Total current assets..................................................... 17,338 45,322
Fixed assets, net of accumulated depreciation and amortization........... 5,311 7,925
--------- --------
Total assets............................................................. $ 22,649 $ 53,247
========= ========
Liabilities and shareholders' equity
Current liabilities:
Line of credit......................................................... $ 12,417 $ 14,267
Accounts payable and accrued liabilities............................... 12,135 21,584
Capital lease obligations due within one year.......................... 997 893
--------- --------
Total current liabilities................................................ 25,549 36,744
Capital lease obligations................................................ 5,422 6,294
Other liabilities........................................................ 366 38
Shareholders' equity
Common stock, $10 stated value: 850 shares authorized,
100 issued and outstanding.......................................... 1 1
Paid in capital........................................................ 14,999 14,999
Accumulated deficit/retained earnings.................................. (23,688) (4,829)
--------- --------
Total shareholders' equity............................................... (8,688) 10,171
--------- --------
Total liabilities and shareholders' equity............................... $ 22,649 $ 53,247
========= ========
</TABLE>
See accompanying notes to financial statements.
E-2
<PAGE> 102
STEINBACH STORES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
MAY 4, APRIL 29,
1996 1995
---------- ----------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
Net sales............................................................ $ 23,844 $ 39,503
Operating expenses:
Cost of sales...................................................... 15,806 26,148
Selling, general and administrative................................ 12,337 20,588
Store closing costs................................................ 1,108 --
----------- -----------
Operating income..................................................... (5,407) (7,233)
Interest expense..................................................... (245) (158)
Interest and other income............................................ 73 23
Other expenses....................................................... -- --
----------- -----------
Net loss............................................................. $ (5,579) $ (7,368)
=========== ===========
Net loss per share................................................... $55,790.00 $73,680.00
=========== ===========
</TABLE>
See accompanying notes to financial statements.
E-3
<PAGE> 103
STEINBACH STORES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
MAY 4, 1996 APRIL 29, 1995
----------- --------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
Operating activities
Net loss.......................................................... $(5,579) $ (6,326)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.................................. 355 254
Changes in operating assets and liabilities:
(Increase) Decrease in merchandise inventories............... 2,207 (9,454)
Increase in prepaid expenses and other current assets........ (1,521) (1,086)
Decrease in accounts payable and accrued liabilities......... (633) (1,057)
Increase in other liabilities................................ 329 --
------- --------
Net cash used in operating activities............................... (4,842) (17,669)
Investment activities
Purchase of fixed assets.......................................... -- (354)
------- --------
Net cash used in investment activities....................... (354)
Financing activities
Net proceeds from revolving line of credit........................ 3,877 14,267
Principal payments on capital lease obligations................... (193) (199)
------- --------
Net cash provided by financing activities........................... 3,684 14,068
------- --------
Decrease in cash............................................... (1,158) (3,955)
Cash at beginning of year........................................... 1,520 3,203
------- --------
Cash at end of period........................................ $ 362 $ (752)
======= ========
</TABLE>
See accompanying notes to financial statements.
E-4
<PAGE> 104
NOTES TO STEINBACH FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the thirteen week period ended May 4, 1996
are not necessarily indicative of the results that may be expected for the year
ending February 1, 1997, due to the seasonal nature of the retail department
store business. For further information, refer to the Steinbach Financial
Statements and notes thereto for the eleven months ended December 30, 1995.
NOTE B -- STORE CLOSURES
During the first quarter, Steinbach recorded a charge of approximately $1.1
million related to the announced closing of two additional stores. All employees
at these locations (approximately 80) have been terminated. The charge consists
of the write-downs of fixed assets (approximately $862,000), net of anticipated
proceeds, severance for employees (approximately $59,000) and lease termination
costs (approximately $188,000). The Company anticipates the store closures to be
completed during the second quarter of 1996.
E-5
<PAGE> 105
APPENDIX F
PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
QUARTER ENDED MAY 4, 1996
<TABLE>
<S> <C>
CONTENTS
Steinbach Stores, Inc. -- 15 Store Balance Sheet..................................... F-2
Pro Forma Balance Sheets............................................................. F-4
Steinbach Stores, Inc. -- 15 Store Income Statement.................................. F-6
Pro Forma Income Statements.......................................................... F-7
</TABLE>
F-1
<PAGE> 106
STEINBACH STORES, INC.
15 STORE BALANCE SHEETS
FIRST QUARTER 1996
<TABLE>
<CAPTION>
TOTAL 15 STORE
STEINBACH PRO FORMA STEINBACH
MAY 4, 1996 ADJUSTMENTS MAY 4, 1996
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Assets
Current assets
Cash.................................................. $ 362 $ (37)(2) $ 325
Inventories........................................... 12,990 (402)(2) 12,588
Prepaid expenses and other current assets............. 3,986 (2,653)(2) 1,333
------- --------- -------
Total current assets.................................... 17,338 (3,092) 14,246
Other assets............................................ -- -- --
(39,751)(2)
Property, plant and equipment........................... 7,211 53,133 (1) 20,593
Accumulated depreciation................................ (28,511)(2)
and amortization...................................... 1,900 40,854 (1) 14,243
------- --------- -------
5,311 1,039 6,350
------- --------- -------
Total assets............................................ $22,649 $ (2,053) $20,596
======= ========= =======
Liabilities and shareholders equity
Current liabilities
Accounts payable...................................... $ 7,572 $ (2,373)(2) $ 5,199
Notes payable short term.............................. 12,417 (7,906)(2) 4,511
Other current liabilities............................. 3,455 (2,365)(2) 1,090
Store closing reserve................................. 1,108 (1,108)(2) --
Current maturities of long term debt.................. -- -- --
Current maturities of capital lease obligations....... 997 (798)(2) 199
------- --------- -------
25,549 (14,550) 10,999
Long term liabilities
Long term debt........................................ -- -- --
Capital lease obligations............................. 5,422 (2,153)(2) 3,269
Other................................................. 366 (38)(2) 328
------- --------- -------
5,788 (2,191) 3,597
Shareholders equity
Common stock.......................................... 1 (1)(2) --
Other capital......................................... 14,999 (8,999)(2) 6,000
Retained earnings..................................... (23,688) 23,688 (2) --
------- --------- -------
(8,688) 14,688 6,000
------- --------- -------
Total liabilities and shareholders equity............... $22,649 $ (2,053) $20,596
======= ========= =======
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE> 107
NOTES TO 15 STORE BALANCE SHEETS
(1) Effective October 30, 1994, Steinbach acquired all of the outstanding stock
of Steinbach, Inc. (the predecessor company) which was subsequently merged
with and into Steinbach. In connection with such acquisition, Steinbach
allocated the purchase price to fixed assets, resulting in a $8.9 million
write down of fixed assets. The Acquisition Agreement between the Company
and Steinbach provides for fixed assets to be valued on a historical basis,
instead of current accounting basis, for determining the 15 store balance
sheet of Steinbach as of December 30, 1995. The pro forma adjustment
represents the write up of the fixed assets to the historical basis. Refer
to section 1.5 of the Acquisition Agreement for the basis of the fixed asset
accounting.
(2) Pursuant to the Acquisition Agreement, between December 31, 1995 and the
Closing Date, the Steinbach Shareholders have agreed to use their best
efforts to take such actions as are necessary in order to transfer to
another person or persons or to otherwise dispose of those assets (the
"Excluded Assets") and liabilities (the "Excluded Liabilities") of Steinbach
which are not related to the operations of the 15 retail department stores
being acquired (the "Acquired Stores"), which actions include, among other
things, the following: (i) the transfer of the nine stores which are
non-Acquired Stores (and the assets and liabilities related thereto) and
which are to be closed prior to the Closing Date; (ii) the termination or
other disposition of the leases pertaining to Steinbach's corporate offices
in White Plains, New York, and its central accounting offices in Bridgeport,
Connecticut; (iii) the disposition to a third party of the assets and
liabilities related to its distribution center in Eatontown, New Jersey; and
(iv) the termination of all of Steinbach's employees, except for those
actively involved in the day-to-day operations of the Acquired Stores and
specifically identified by the Company as employees to be retained after the
Closing Date (and, in connection therewith, the Steinbach Shareholders have
agreed to pay all separation costs related to the terminated employees. The
assets and liabilities that are being acquired by the Company as a result of
the Acquisition include the Acquired Stores, as well as all cash, prepaid
expenses, inventory, fixed assets, personnel, accounts payable and accrued
liabilities associated with the Acquired Stores. The pro forma adjustments
represent elimination of all assets and liabilities related to the nine
stores, two administrative offices and distribution center not being
acquired by the Company pursuant to the Acquisition Agreement.
F-3
<PAGE> 108
CROWLEY, MILNER AND COMPANY/STEINBACH STORES, INC.
PRO FORMA BALANCE SHEETS
FIRST QUARTER 1996
<TABLE>
<CAPTION>
15 STORE
THE COMPANY STEINBACH PRO FORMA
MAY 4, 1996 MAY 4, 1996 ADJUSTMENTS COMBINED
----------- ----------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets
Current assets
Cash........................................ $ 295 325 $ 620
Accounts receivable......................... 1,652 524 $ (141)(1) 2,035
Inventories................................. 16,587 12,588 29,175
Prepaid expenses and other current assets... 2,609 809 3,418
-------- -------- -------- -------
Total current assets.......................... 21,143 14,246 (141) 35,248
Other assets.................................. 3,184 -- 3,184
Property, plant and equipment................. 23,690 20,593 (3683)(2) 40,600
Accumulated depreciation and amortization..... 14,151 14,243 28,394
-------- -------- -------- -------
9,539 6,350 (3,683) 12,206
-------- -------- -------- -------
Total assets.................................. $33,866 $20,596 $(3,824) $50,638
======== ======== ======== =======
Liabilities and shareholders equity
Current liabilities
Accounts payable............................ $ 6,569 5,199 $ (141)(1) $11,627
Notes payable short term.................... 7,726 4,511 12,237
Other current liabilities................... 2,489 1,090 3,579
Current maturities of long term debt........ 525 -- 525
Current maturities of capital lease
obligations.............................. 185 199 384
-------- -------- -------- -------
17,494 10,999 (141) 28,352
Long term liabilities
Long term debt.............................. 5,325 -- 5,325
Capital lease obligations................... 3,695 3,269 6,964
Other....................................... 1,761 328 2,089
-------- -------- -------
10,781 3,597 14,378
Shareholders equity
Common stock................................ 956 -- 515 (2) 1,471
Other capital............................... 1,196 6,000 (4,198)(2) 2,998
Retained earnings........................... 3,439 -- 3,439
-------- -------- -------- -------
Total liabilities and shareholders equity..... 5,591 6,000 (3,683) 7,908
-------- -------- -------- -------
$33,866 $20,596 $(3,824) $50,638
======== ======== ======== =======
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 109
CROWLEY, MILNER AND COMPANY/STEINBACH STORES, INC.
NOTES TO THE PRO FORMA BALANCE SHEETS
FIRST QUARTER 1996
(1) Pro forma adjustment represents elimination of intercompany receivable and
payable.
(2) The Acquisition will be accounted for using the purchase method of
accounting and, as such, the following schedule reflects the cost of the
acquisition and the Company's plan for allocating the purchase price to
fixed assets. The difference between the $6,000,000 equity on the 15 store
balance sheet and the calculated purchase price of $2,316,600 resulted in a
purchase accounting write down of fixed assets of $3,683,400.
<TABLE>
<CAPTION>
PRICE OF COMPANYS
SHARES OF STOCK ON PURCHASE
STOCK ISSUED NOVEMBER 17, 1995 PRICE
------------------------------ ------------------ ----------
<S> <C> <C>
514,800 $ 4.50* $2,316,600
</TABLE>
------------------------------
* November 17, 1995 was the date the Company made its first public
announcement regarding the acquisition. The closing price of the
Company's stock, as traded on the American Stock Exchange on November 17,
1995 was $4.50 per share.
F-5
<PAGE> 110
STEINBACH STORES INC.
15 STORE INCOME STATEMENT
FIRST QUARTER 1996
<TABLE>
<CAPTION>
TOTAL 15 STORE
STEINBACH PRO FORMA STEINBACH
MAY 4, 1996 ADJUSTMENTS MAY 4, 1996
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues
Net sales............................................. $23,844 $ (7,587)(1) $16,257
Investment and other income........................... 73 (56)(1) 17
-------- --------- --------
23,917 (7,643) 16,274
Costs and Expenses
Cost of Merchandise and services sold................. 15,806 (7,099)(1) 8,707
Operating expenses.................................... 12,337 (5,483)(1) 6,854
Store closing costs................................... 1,108 (1,108)(1) --
Interest expense...................................... 245 (185)(1) 60
Other................................................. -- --(1) --
-------- --------- --------
29,496 (13,875) 15,621
-------- --------- --------
Earnings (loss) before income taxes..................... (5,579) 6,232 653
Federal income taxes.................................... -- -- --
-------- --------- --------
Net earnings (loss)..................................... $(5,579) $ 6,232 $ 653
======== ========= ========
</TABLE>
- -------------------------
(1) Pursuant to the Acquisition Agreement, between December 31, 1995 and the
Closing Date, the Steinbach Shareholders have agreed to use their best
efforts to take such actions as are necessary in order to transfer to
another person or persons or to otherwise dispose of those assets (the
"Excluded Assets") and liabilities (the "Excluded Liabilities") of Steinbach
which are not related to the operations of the 15 retail department stores
being acquired (the "Acquired Stores"), which actions include, among other
things, the following: (i) the transfer of the nine stores which are
non-Acquired Stores (and the assets and liabilities related thereto) and
which are to be closed prior to the Closing Date; (ii) the termination or
other disposition of the leases pertaining to Steinbach's corporate offices
in White Plains, New York, and its central accounting offices in Bridgeport,
Connecticut; (iii) the disposition to a third party of the assets and
liabilities related to its distribution center in Eatontown, New Jersey; and
(iv) the termination of all of Steinbach's employees, except for those
actively involved in the day-to-day operations of the Acquired Stores and
specifically identified by the Company as employees to be retained after the
Closing Date (and, in connection therewith, the Steinbach Shareholders have
agreed to pay all separation costs related to the terminated employees. The
assets and liabilities that are being acquired by the Company as a result of
the Acquisition include the Acquired Stores, as well as all cash, prepaid
expenses, inventory, fixed assets, personnel, accounts payable and accrued
liabilities associated with the Acquired Stores. The pro forma adjustments
represent sales revenues and other income related to the nine stores not
being acquired in the Acquisition, as well as the related cost of sales. In
addition, all payroll and benefits costs, advertising, depreciation, real
estate, insurance, utilities, supplies and all other direct expenses
attributable to the nine non-Acquired Stores have been eliminated as a pro
forma adjustment. Additionally, since the Company is not acquiring
Steinbach's two administrative offices or distribution center, nor any of
the employees in these three facilities, all payroll and benefit costs,
utilities, real estate, insurance, supplies, professional fees and all other
direct costs of these facilities have also been eliminated as a pro forma
adjustment. The elimination of the revenues and costs associated with the
nine non-Acquired Stores and the three non-acquired administrative
facilities was calculated and based on Steinbach managements internal
operating statements.
(2) The Company believes it can operate the 15 Acquired Stores and its existing
10 stores at reduced operating expense levels relative to sales due to the
fact it will not be absorbing the existing Steinbach corporate overhead.
Steinbach's corporate overhead allocated against the 15 Acquired Stores was
over $10.0 million dollars for 1995. The Company anticipates adding
approximately $4.5 million of additional corporate overhead to its existing
overhead to accommodate the Steinbach acquisition. Total Steinbach operating
expenses as a percent of sales for the eleven months ended December 30,
1995, were 38.9%, compared with the Company's operating expense ratio of
31.6% for the fiscal year ended February 3, 1996. The 15 Acquired Stores
operating expenses including the corporate overhead allocated to the stores
as a percent of sales for the eleven months ended December 30, 1995 were
37.3%. The pro forma combined operating expenses for 1995 were 31.6% of
sales.
F-6
<PAGE> 111
CROWLEY, MILNER AND COMPANY/STEINBACH STORES, INC.
PRO FORMA INCOME STATEMENTS
FIRST QUARTER 1996
<TABLE>
<CAPTION>
15 STORE
THE COMPANY STEINBACH PRO FORMA
MAY 4, 1996 MAY 4, 1996 ADJUSTMENTS COMBINED
----------- ----------- ----------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues
Net sales................................... $23,267 $ 16,257 $39,524
Investment and other income................. 29 17 46
-------- ----------- -------
23,296 16,274 39,570
Costs and Expenses
Cost of Merchandise and services sold....... 16,893 8,707 25,600
Operating expenses.......................... 7,988 6,854 $ 95(3) 14,937
Interest expense............................ 437 60 497
Operating profit related to Steinbach(1).... 653 -- (653)(2) --
-------- ----------- ------- -------
24,665 15,621 (558) 41,034
-------- ----------- ------- -------
Earnings (loss) before income taxes........... (1,369) 653 (558) (1,464 )
Federal income taxes.......................... -- -- -- --
-------- ----------- ------- -------
Net earnings (loss)........................... $(1,369) $ 653 $ (558) $(1,464 )
======== =========== ======= =======
Net earnings (loss) per share................. $ (1.43) $ 6,530 -- $ (1.00 )
======== =========== ======= =======
</TABLE>
- -------------------------
(1) Operating profit related to the first quarter under the Interim Operating
Agreement. Future results could vary.
(2) Pro forma adjustment represents the elimination of the profit from operating
Steinbach that was recorded on the Company's operating statements.
(3) Pro forma adjustment represents additional depreciation expense related to
the Steinbach fixed assets due to the fact the Company did not record any
depreciation on the assets in the first quarter since it will not own the
assets until the closing date.
(4) At December 30, 1995, Steinbach management recorded a markdown reserve,
related to the 15 Acquired Stores, totalling $3.3 million to reflect the
impact on the inventory of poor retail market conditions. In addition, the
Company recorded a $700,000 reserve related to changes in certain price
points at Steinbach to conform with the Company's pricing policies. These
reserves were reversed in the first quarter as the inventory was sold and,
as such, are reflected as reductions of cost of merchandise and services
sold. The Company does not believe these services will recur in the future
as they were established primarily as a result of the Company's extensive
change in merchandise content at the stores.
(5) As described in footnote 1 on page D-2, the pro forma income statement
reflects significant operating expense reductions due to the fact that the
Company will not acquire Steinbach's two administrative facilities or its
distribution center and therefor costs associated with such activities are
not reflected in the pro forma financial statements. Steinbach corporate
overhead allocated against the 15 Acquired Stores was over $10.0 million for
1995. The Company anticipates adding approximately $4.5 million of
additional corporate overhead to its existing overhead to accommodate the
Steinbach acquisition. This reduction of overhead is reflected in the pro
forma income statement above. The Company also anticipates it will be able
to reduce operating expenses in the 15 Acquired Stores from the present
levels. Although the savings can not be quantified at this time, the Company
believes that certain costs, such as supplies and property and liability
insurance, can be reduced by combining the programs of both companies. Also
the Company believes that certain benefit insurance costs can be reduced by
instituting managed care health plans in lieu of the plans currently in
place. A bidding out of service contracts should yield cost savings in
maintenance and services purchased expenses. Also, the Company believes it
can improve sales and margins from their recent levels. (The information in
this note contains forward looking statements within the meaning of the
Securities Exchange Act of 1934 and is subject to the safe harbor created by
that statute; actual results could differ materially from those projected in
such statements and there can be no assurance that the Company will be
successful in reducing such expenses and costs.)
F-7
<PAGE> 112
PROXY PROXY
CROWLEY, MILNER AND COMPANY
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF CROWLEY, MILNER AND COMPANY
The undersigned shareholder hereby appoints DENNIS P. CALLAHAN and MARK
A. VANDENBERG, or either one of them, the attorney and proxies of the
undersigned, with power of substitution, to vote all the shares of Common Stock
of Crowley, Milner and Company standing in the name of the undersigned at the
close of business on July 5, 1996 (the "Record Date") at the Annual Meeting of
Shareholders of the Company to be held on Wednesday, August __, 1996 at 2:00
p.m. Eastern Daylight Savings Time, and at any and all adjournments thereof,
with all the powers the undersigned would possess if then and there present.
The shareholder instructs the proxies to vote as specified on this
proxy on the matters described in the Proxy Statement dated June 5, 1996.
Proxies will be voted as instructed.
IF NO CHOICE IS SPECIFIED, THIS PROXY WILL BE VOTED FOR THE ELECTION OF
THE COMPANY'S NOMINEES AS DIRECTORS, FOR THE ISSUANCE OF 514,800 SHARES OF
COMMON STOCK IN CONNECTION WITH THE ACQUISITION, FOR THE APPROVAL OF AN
AMENDMENT TO THE 1992 INCENTIVE STOCK PLAN TO INCREASE THE NUMBER OF SHARES OF
COMMON STOCK AUTHORIZED FOR ISSUANCE THEREUNDER FROM 200,000 SHARES TO 300,000
SHARES AND FOR THE APPOINTMENT OF ERNST & YOUNG LLP AS AUDITORS.
BY EXECUTION OF THIS PROXY, THE UNDERSIGNED SHAREHOLDER CONFERS UPON
THE ABOVE-APPOINTED PROXIES THE DISCRETIONARY AUTHORITY TO VOTE UPON ANY OTHER
MATTERS WHICH MAY PROPERLY COME BEFORE THE MEETING.
The undersigned acknowledges receipt of the Proxy Statement and Notice
of said meeting, both dated July __, 1996.
Brokers executing proxies should indicate in the space below the number
of shares with respect to which authority is conferred by this Proxy if less
than all shares held as nominees are to be voted.
Please sign exactly as your name appears. If acting as attorney,
executor, trustee or in other representative capacity, sign name and title.
PLEASE EXECUTE AND RETURN THIS PROXY IN THE ENCLOSED ENVELOPE PROMPTLY.
Comments/Address Change:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
/X/ PLEASE MARK VOTES
AS IN THIS EXAMPLE
With- For All
For hold Except
1. Election of Directors to hold office / / / / / /
until the Annual Meeting of
Shareholders in 1999.
Nominee:
JOSEPH C. KEYS RICHARD S. KEYS
PAUL R. RENTENBACH JAMES L. SCHAYE, JR.
If you do not wish your shares voted "FOR" a particular nominee, mark the
"For All Except" box and strike a line through the nominee(s) name. Your
shares will be voted for the remaining nominee(s).
For Against Abstain
2. To approve the issuance by the / / / / / /
Company of 514,800 shares of Common
Stock of the Company to the
shareholders (the "Steinbach
Shareholders") of Steinbach Stores, Inc.
("Steinbach") in exchange for all of the
issued and outstanding shares of
Common Stock of Steinbach (the
"Acquisition") pursuant to the terms and
conditions of that certain Agreement and
Plan of Reorganization.
For Against Abstain
3. To approve an amendment to the / / / / / /
Crowley, Milner and Company 1992
Incentive Stock Plan to increase the
number of shares of Common Stock
authorized for issuance thereunder from
200,000 shares to 300,000 shares.
For Against Abstain
4. Appointment of Ernst & Young LLP as / / / / / /
independent auditors for the fiscal year
ending February 1, 1997.
Please be sure to sign and date this Proxy Date
______________________________________________________________________________
______________________________________________________________________________
Shareholder sign here Co-owner sign here
Mark box at right if comments or address change / /
have been noted on the reverse side of this card.
______________________________________________________________________________
DETACH CARD
