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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 12, 1998
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10/A-2
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
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The Elder-Beerman Stores Corp.
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(Exact Name of Registrant as Specified in Its Charter)
Ohio 31-0271980
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
3155 El-Bee Road, Dayton, Ohio 45439
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (937) 296-2700
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Securities to be registered pursuant to Section 12(b) of the Act:
None
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(Title of Class)
Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
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(Title of Class)
Share Purchase Rights
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(Title of Class)
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TABLE OF CONTENTS
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PAGE
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BUSINESS........................................................................................1
General.....................................................................................1
Background..................................................................................1
Bankruptcy..................................................................................1
Business....................................................................................2
Business Plan and Strategy for the Company..............................................2
Seasonality.............................................................................3
Competition.............................................................................4
Employees...............................................................................4
FINANCIAL INFORMATION...........................................................................5
Selected Historical Financial Information...................................................5
Management's Discussion and Analysis of Financial Condition and Results of Operations.......7
Results of Operations...................................................................7
Liquidity and Capital Resources.........................................................9
PROPERTIES......................................................................................10
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..................................11
Pro Forma Ownership of Equity Securities.......................................................11
DIRECTORS AND EXECUTIVE OFFICERS................................................................12
Directors and Executive Officers...........................................................12
Certain Corporate Governance Matters............................................................13
Board Committees............................................................................14
EXECUTIVE COMPENSATION..........................................................................15
Cash Compensation Table.....................................................................16
Existing Compensatory Plans and Agreements..................................................16
Key Employee Retention Program..........................................................16
Reorganization Bonus....................................................................17
Calculation of Certain Severance and Bonus Benefits Paid to Senior Executives...........17
New Compensatory Programs and Agreements....................................................17
General.................................................................................17
Equity and Performance Incentive Plan...................................................18
Employment Agreements and the Severance Pay Plan........................................20
Compensation Committee Interlocks and Insider Participation.................................21
Director Compensation.......................................................................21
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................................................21
LEGAL PROCEEDINGS...............................................................................22
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.........................................................................22
Absence of Public Market....................................................................22
Holders.....................................................................................23
Dividends...................................................................................24
RECENT SALES OF UNREGISTERED SECURITIES.........................................................24
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<TABLE>
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DESCRIPTION OF REGISTRANT'S SECURITIES..........................................................24
Common Stock................................................................................24
Transfer Agent and Registrar................................................................27
Preferred Stock.............................................................................27
General.................................................................................27
New Class A Preferred Stock.............................................................28
New Class B Preferred Stock.............................................................28
New Class C Preferred Stock.............................................................28
New Warrants................................................................................28
Future Issuances of Stock...................................................................28
Share Purchase Rights Agreement.............................................................28
INDEMNIFICATION OF DIRECTORS AND OFFICERS.......................................................30
Existing Indemnification Obligations........................................................30
Treatment of Indemnification Obligations Under the Plan.....................................30
New Indemnification Agreements..............................................................31
FINANCIAL STATEMENTS............................................................................31
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL ......................31
FINANCIAL STATEMENTS AND EXHIBITS...............................................................32
Financial Statements........................................................................32
Exhibits....................................................................................33
SIGNATURES......................................................................................34
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BUSINESS
This Registration Statement contains certain forward-looking statements
that are based on the beliefs of the Company's management, as well as
assumptions made by, and information currently available to, the Company's
management. The Company's future results, performance, or achievements could
differ materially from those expressed in, or implied by, any such
forward-looking statements for various reasons, including, among other factors,
competition, consumer demand and confidence, the availability and mix of
store-level inventory, weather that affects consumer traffic and general
economic conditions.
GENERAL
The Elder-Beerman Stores Corp. ("Elder-Beerman" or the "Company";
except where the context otherwise requires, references to the "Company" refer
to Elder-Beerman and its subsidiaries, as described below) operates department
stores that sell a wide range of moderate to better brand merchandise, including
women's, men's, and children's apparel and accessories, cosmetics, home
furnishings, and other consumer goods. In addition, the Company owns a specialty
shoe store chain and a private label credit card program through its
wholly-owned subsidiaries, The Bee-Gee Shoe Corp. ("Bee-Gee") and The El-Bee
Chargit Corp. ("Chargit"), respectively. Elder-Beerman operates approximately 50
stores, principally in smaller Midwestern markets in Ohio, Indiana, Illinois,
Michigan, Wisconsin, Kentucky, and West Virginia, and Bee-Gee operates 61 stores
(51 shoe outlets and 10 Shoebilee! stores), principally in smaller Midwestern
markets in Ohio, Indiana, Illinois, Michigan, Pennsylvania, Virginia and West
Virginia. See "Properties." The Company's operations are diversified by size of
store, merchandising character, and character of the community served. The
Company seeks to satisfy the merchandising needs of its geographic markets,
serving customers of all ages with varied interests and incomes.
The Company's historical competitive advantage is its niche in medium
and small size cities, and in many cases, Elder-Beerman is the dominant supplier
of moderate to better brands of soft goods (e.g., Liz Claiborne, Estee Lauder,
Tommy Hilfiger, Polo, Guess) in such markets. In many of these cities, there is
only one shopping mall, and the Company is a main department store anchor along
with J.C. Penney, Sears, or a discount retailer such as Kmart. These other
anchors generally supply moderate private label goods, which typically
complement the Company's merchandise. The Company's strong metropolitan rivals
have tended to bypass smaller Midwestern cities, leaving Elder-Beerman as the
dominant department store in these smaller markets.
BACKGROUND
Elder-Beerman and its predecessors have been operating department
stores since 1883. Historically, the Company's underlying strategy had been to
manage the bottom-line through an aggressive approach to (a) containing
operating costs, (b) enhancing gross profit percentages within its "moderate to
better" brand merchandise, and (c) expanding its presence from a single store
city retailer into a regional retailer. This strategy enabled the Company to
experience steady sales growth and consistent earnings results beginning in the
mid-1960s and continuing into the early 1990s. During 1992 and through 1994, the
Company undertook a new and high volume merchandising strategy. During 1995, it
became apparent that this strategy had a negative impact on the Company's
financial position, and the Company entered into negotiations with its lenders
for a plan to provide additional liquidity. Such negotiations ultimately were
unsuccessful. In addition, as the need for working capital to fund increased
inventory purchases for the holiday season drew closer, Elder-Beerman's
suppliers began to show concerns about further extensions of trade credit to the
Company in the wake of other bankruptcies in the retail industry. The Company
was faced with an absence of working capital financing and the prospect of being
unable to secure inventory for the 1995 Christmas season.
BANKRUPTCY
On October 17, 1995 (the "Petition Date"), Elder-Beerman and its
subsidiaries, Chargit, Bee-Gee, Margo's LaMode, Inc. ("Margo's"), McCook
Wholesale Corp. ("McCook"), E-B Community Urban Redevelopment Corp. ("E-B"), and
EBA, Inc. ("EBA") (collectively, the "Old Elder-Beerman Companies"), filed
voluntary petitions for relief (the "Reorganization Cases") under chapter 11 of
the United States Bankruptcy Code, as amended (the "Bankruptcy Code"), with the
United States Bankruptcy Court for the Southern District of Ohio, Western
Division (the "Bankruptcy Court"). The Old Elder-Beerman Companies filed their
proposed joint plan of reorganization with the Bankruptcy Court on August 6,
1997, their amended joint plan of reorganization on October 16, 1997, their
second amended joint plan of reorganization on November 7, 1997 and their third
amended joint plan of reorganization on November 18, 1997 (the "Plan"). The Plan
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was confirmed at a hearing before the Bankruptcy Court on December 15, 1997 (the
"Confirmation Date"), and became effective on December 30, 1997, (the "Effective
Date").
The Plan will result in a significant reduction in the total
indebtedness of the Company. More specifically, the Plan provides for, among
other things: (i) the cancellation of certain indebtedness in exchange for cash,
conveyances of collateral and/or new equity interests; (ii) the discharge of
certain prepetition intercompany claims; (iii) the settlement of certain
contingent claims and mutual releases among the Old Elder-Beerman Companies and
other persons or entities (including certain affiliated persons or entities);
(iv) the assumption or rejection of executory contracts and unexpired leases to
which any Old Elder-Beerman Company was a party; (v) the merger of
Elder-Beerman's subsidiaries, other than Bee-Gee and Chargit, with and into
Elder-Beerman, with Elder-Beerman being the surviving entity; and (vi) the
selection of the Company's board of directors.
Additionally, under the terms of the Plan, holders of allowed general
unsecured claims against the Old Elder-Beerman Companies other than Margo's
(collectively, the "General Unsecured Creditors"), including The Elder-Beerman
Stores Corp. Profit Sharing and Stock Ownership Plan (the "ESOP"), will receive
a pro rata share of a cash distribution amount and a pro rata share of
approximately 99% of the shares of the Company's common stock, without par
value, (the "Common Stock") distributed pursuant to the Plan. The ESOP will
receive, on account of its claims, which were estimated to total approximately
$13 million, 5.25% of the distributions made to the General Unsecured Creditors.
Furthermore, Beerman-Peal Holdings, Inc. ("Beerman-Peal") will receive, in full
satisfaction of certain of its allowed interests: (a) 124,036 shares of Common
Stock, (b) warrants to be issued by the Company to purchase up to 2% of the
outstanding Common Stock, which will have a strike price set to reflect a total
equity value for the reorganized Company of approximately $160 million (the "New
Series A Warrants"), and (c) warrants to be issued by the Company to purchase up
to 3% of the outstanding Common Stock, which will have a strike price set to
reflect a total equity value for the reorganized Company of approximately $185
million (the "New Series B Warrants"). All securities issued pursuant to the
Plan will be issued by Elder-Beerman. Substantially all of the Common Stock and
other securities of Elder-Beerman will be owned by prepetition creditors and
prepetition equity holders of the Old Elder-Beerman Companies. Distributions of
Common Stock pursuant to the Plan are subject to dilution from issuance of the
amount of stock and stock options to be awarded to employees under the Company's
Equity and Performance Incentive Plan (the "Incentive Plan"). See "Executive
Compensation -- New Compensatory Programs and Agreements -- Equity and
Performance Incentive Plan." Holders of allowed general unsecured claims against
Margo's will receive a pro rata share of approximately $2.5 million.
BUSINESS
The Company sells a wide range of merchandise, including women's,
men's, and children's apparel and accessories, cosmetics, home furnishings, and
other consumer goods. In addition, as discussed above the Company owns a
specialty shoe store chain and a private label credit card program through its
wholly-owned subsidiaries, Bee-Gee and Chargit, respectively. The Company's
historical competitive advantage is its niche in medium and small size cities,
and in many cases, Elder-Beerman is the dominant supplier of moderate to better
brands of soft goods (e.g., Liz Claiborne, Estee Lauder, Tommy Hilfiger, Polo,
Guess) in such markets. In many of these cities, there is only one shopping
mall, and the Company is a main department store anchor along with J.C. Penney,
Sears, or a discount retailer such as Kmart. These other anchors generally
supply moderate private label goods, which typically complement the Company's
more upscale merchandise. The Company's strong metropolitan rivals have tended
to bypass smaller Midwestern cities, leaving Elder-Beerman as the dominant
department store in these smaller markets.
BUSINESS PLAN AND STRATEGY FOR THE COMPANY
The Company expects its business strategy will continue to be to
improve profitability by focusing on a more productive core department store
business, primarily in Dayton, Ohio and smaller communities in the Midwest, by
seeking to be the dominant destination retailer for fashion apparel,
accessories, cosmetics, shoes, and home accessories for the entire family, while
continuing its tradition of providing strong customer service in key product
areas. In addition, the Company and Bee-Gee aggressively use technology and
business process changes to reduce operating costs and improve operating
performance through productivity gains.
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The Company's long-term business plan (the "Business Plan") is designed
to accomplish these objectives by (a) focusing on its traditional strengths as
the major retailer in its markets; (b) emphasizing major supplier partnerships
to improve sales and margins while improving supply chain integration and
efficiencies; (c) competing with traditional department store competitors
through emphasis on customer service, timely and broad product assortments, and
competitive pricing and promotions in appropriate markets and product areas; (d)
competing with moderate department stores and discounters through merchandise
breadth and advantages in branded and gift areas; (e) focusing price/product
competition in key basic merchandising areas; and (f) leveraging technology to
create a selling culture with "customer-focused" stores, to develop and execute
customer and market specific marketing programs, and to distribute, price, and
promote goods by market.
Merchandising Strategy. The Company carries a broad assortment of goods
to provide fashion, selection, and variety usually found in better leading
department stores that feature better merchandise brands. Although all stores
stock identical core assortments, specific types of goods are distributed to
stores based on the particular characteristic of the local market. The Company
emphasizes "signature" areas critical to its image in its niche market, as a
primary destination for fashion apparel and gifts. The Company also seeks to
increase penetration of its private label credit card program through a
combination of efforts intended to increase the use of cards by existing
Elder-Beerman credit card customers, either through incremental sales or
shifting sales from other credit cards and other retailers, and attracting new
cardholders. In addition, through continued efforts to develop a partnership
with its most significant vendors, the Company is (a) pursuing automated
replenishment of basic stock to increase sales and reduce basic inventories and
(b) using technology and focused merchandising and distribution to reduce
material handling costs and increase speed in moving stock from the vendor to
the selling floor. The Company is implementing certain technological advances
and an enhanced sales training program to aid in the restructuring of its
competitive pricing strategies in key areas toward a more "value price" image.
Expansion Strategy. The Company is implementing a controlled expansion
of new stores with market characteristics consistent with current stores. The
Company believes that sufficient new locations are available in strategic
markets within the Company's current area of operations to support such an
expansion. In addition, the Company believes that opportunities exist to expand
approximately 10 existing stores where current space constraints prevent
adequate presentation of certain core merchandise departments.
Information Systems Strategy. The Company is enhancing its management
information systems, through capital investment and training programs, to (a)
improve the data integrity of financial and merchandise systems; (b) reduce
administrative costs through automation and elimination of paperwork and
redundant controls; (c) utilize Electronic Data Interchange and other industry
standards to increase "floor ready" merchandise receipts; (d) eliminate
paperwork through automatic invoice processing; and (e) improve merchandise
analysis and decision making.
Store Operations Strategy. The Company is enhancing its customer
service image and creating a customer-oriented store environment by (a)
eliminating nonselling activities from stores; (b) using training and recruiting
practices to instill a culture of customer helpfulness and responsiveness; (c)
developing tools and training to enhance selling skills and awareness; (d)
implementing selling productivity measurement and compensation systems directed
at encouraging selling activities and results; and (e) reducing store expenses
through increased use of technology and improved controls.
Human Resource Strategy. The Company is implementing a senior
management and executive compensation program in order to attract, retain, and
provide incentives to the best associates in its markets. The Company seeks
associates with exceptional knowledge, skills, education, and experience
required for their positions and compensates them with a focus on rewarding
productivity. Continued development of associates is accomplished through a
comprehensive core training program and special courses to address leadership,
supervisory management, and creative problem-solving. Overall, the Company
strives to create an environment that focuses on fostering team work, expanding
quality communication, satisfying customers, and enhancing profits.
SEASONALITY
The department store business is seasonal, with a high proportion of
sales and operating income generated in November and December. Working capital
requirements fluctuate during the year, increasing somewhat in mid-summer in
anticipation of the fall merchandising season and increasing substantially prior
to the holiday season when the Company must carry significantly higher inventory
levels. Consumer spending in the peak retail season may be affected by many
factors outside the Company's control including competition, consumer demand and
confidence, weather that affects
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consumer traffic and general economic conditions. A failure to generate
substantial holiday season sales could have a material adverse effect on the
Company.
COMPETITION
The retail industry, in general, and the department store and shoe
store businesses, in particular, are intensely competitive. Generally, the
Elder-Beerman department stores and Bee-Gee family shoe stores are in
competition not only with other department stores and family shoe stores,
respectively, in the geographic areas in which they operate, but also with
numerous other types of retail outlets, including specialty stores, general
merchandise stores, off-price and discount stores, and manufacturer outlets.
Some of the retailers with which the Company competes have substantially greater
financial resources than the Company and may have other competitive advantages
over the Company.
EMPLOYEES
On December 31, 1997, the Company had approximately 7,600 regular and
part-time employees, 7,200 of which are employed by Elder-Beerman's department
stores. Because of the seasonal nature of the retail business, the number of
employees rises to a peak in the holiday season. The Company's management
considers its relations with employees to be satisfactory.
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FINANCIAL INFORMATION
SELECTED HISTORICAL FINANCIAL INFORMATION
The following table sets forth various selected financial information
for the Company as of and for the fiscal years ended February 1, 1997, February
3, 1996, January 28, 1995, January 29, 1994, and January 30, 1993 and the
39-week periods ended November 1, 1997 and November 2, 1996. Such selected
consolidated financial information should be read in conjunction with the
audited and unaudited historical consolidated financial statements of the
Company, including the notes thereto, and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" that appear elsewhere in this
Registration Statement.
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39 WEEKS ENDED FISCAL YEAR ENDED
NOV 1, 1997 NOV 2, 1996 FEB 1, 1997 FEB 3, 1996 (a) JAN 28, 1995 JAN 29, 1994 JAN 30, 1993
----------- ----------- ----------- ----------- ------------ ------------ ------------
DOLLARS IN THOUSANDS DOLLARS IN THOUSANDS
(EXCEPT PER SHARE DATA) (EXCEPT PER SHARE DATA)
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CONSOLIDATED
STATEMENT OF
OPERATIONS DATA
Total Revenues $ 405,980 $ 398,685 $ 597,008 $ 608,931 $ 647,326 $ 633,936 $ 598,318
Income/(Loss) Before
Reorganization Items and
Income Tax Expense
(Benefit) 593 (635) 11,579 (33,631) (4,590) 23,194 18,519
Reorganization Items 12,850 12,339 23,648 19,711 -- -- --
Income/(Loss) Before
Discontinued Operations
(b)(c) (12,257) (12,974) (12,429) (51,010) (2,064) 14,884 11,552
Net Income/(Loss) $ (12,257) $ (12,974) $ (12,429) $ (63,286) $ (13,355) $ 15,865 $ 9,592
Earnings/(Loss) Per
Common Share:
Continuing
Operations $ (1.88) $ (1.99) $ (1.90) $ (7.83) $ (0.32) $ 2.26 $ 1.77
Preferred Stock
Dividend -- -- -- -- (0.14) 0.15 (0.30)
Discontinued
Operations -- -- -- (1.89) (1.73) (0.14) (0.11)
--------- --------- --------- --------- ----------- ----------- -----------
Net Earnings/
(Loss) $ (1.88) $ (1.99) $ (1.90) $ (9.72) $ (2.19) $ 2.27 $ 1.36
========= ========= ========= ========= =========== =========== ===========
Cash Dividends Per Share Paid:
Common $ -- $ -- $ -- $ -- $ 0.22 $ 0.20 $ 0.11
Preferred $ -- $ -- $ -- $ -- $ 1.39 $ 1.39 $ 1.34
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<TABLE>
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39 WEEKS ENDED FISCAL YEAR ENDED
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NOV 1, 1997 NOV 2, 1996 FEB 1, 1997 FEB 3, 1996 (a) JAN 28, 1995 JAN 29, 1994 JAN 30, 1993
----------- ----------- ----------- ---------------------------- ------------ ------------
DOLLARS IN THOUSANDS DOLLARS IN THOUSANDS
(EXCEPT PER SHARE DATA) (EXCEPT PER SHARE DATA)
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BALANCE SHEET
DATA
Total Assets $ 421,998 $ 413,298 $ 365,141 $ 367,069 $ 267,822 $ 285,996 $ 261,781
Short Term Debt 89,410 87,982 57,931 50,100 6,221 -- 42,619
Liabilities Subject to
Compromise 232,454 224,205 231,675 229,409 -- -- --
Long-Term Obligations 5,744 5,689 5,669 3,100 109,487 108,010 63,833
OTHER DATA
Sales Increase/(Decrease)
From Prior Period 2.0% (4.0%) (3.5%) (6.5%) 1.8% 5.6% 9.3%
Dept. Store Comp. Sales 3.9% (2.7%) (1.2%) (8.4%) (3.8%) 0.6% 7.0%
Inc./(Dec.) From Prior
Period(d)
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NOTES TO SELECTED HISTORICAL FINANCIAL INFORMATION:
(a) Fiscal Year ended February 3, 1996 included 53 weeks as
compared to 52 weeks for each of the other fiscal years shown.
(b) The financial information for Margo's is included in
discontinued operations for all period.
(c) The financial information for Bee-Gee is included as part of
continuing operations for all periods except for the initial
reserve for discontinued operations that was recorded in
fiscal 1994 and the subsequent reversal recorded in fiscal
1995.
(d) Comparable store sales include only those department stores
that operated during the applicable full fiscal year.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following is a discussion of the financial condition and results of
operations of the Company for the 39-week periods ending November 1, 1997 and
November 2, 1996, and for the 52-weeks ending February 1, 1997 ("Fiscal 1996"),
53-weeks ending February 3, 1996 ("Fiscal 1995"), and 52-weeks ending January
28, 1995 ("Fiscal 1994"). The Company's fiscal year ends on the Saturday closest
to January 31. The discussion and analysis which follows are based upon and
should be read in conjunction with the Consolidated Financial Statements and the
Notes thereto included elsewhere in this Registration Statement.
RESULTS OF OPERATIONS
39-Weeks Ending November 1, 1997 Compared to the 39-Weeks Ending
November 2, 1996
Net sales for the 39-weeks ending November 1, 1997 increased by 2.0% to
$386.2 million from $378.7 million for the 39-weeks ending November 2, 1996. The
increase is due to a 3.9% comparative store sales increase for the department
store division. The Company closed the outlet section of the downtown Dayton,
Ohio department store, the Fairborn, Ohio furniture store, and the outlet
section of the Hamilton, Ohio department store, which contributed a combined
total of approximately $3.5 million in sales, for the 39-weeks ending November
2, 1996 that were absent in the 39-weeks ending November 1, 1997. The Company's
business is subject to seasonal fluctuations. Approximately one-third of the
Company's annual sales occur in the fourth quarter (i.e., November - January),
as well as a majority of the Company's profits.
Financing revenue from the Company's private label credit card for the
39-weeks ending November 1, 1997 decreased by 1.0% to $19.8 million from $20.0
million for the 39-weeks ending November 2, 1996. The decline is due to a 4.0%
decrease in sales attributed to the Company's private credit card, and a
resulting decline in the outstanding customer accounts receivable. The decline
in finance charges due to outstanding customer accounts receivable has been
largely offset by an increase in late fees charged.
Cost of goods sold, occupancy, and buying expenses increased to 73.3%
of net sales for the 39-weeks ending November 1, 1997 from 72.2% of net sales
for the 39-weeks ending November 2, 1996. This increase is due to $5.9 million
in excess mark-downs in cost of goods sold, due to store closings in the
39-weeks ending November 1, 1997. This increase is partially offset by an
increase in the initial rate of mark-up on goods sold.
Selling, general, and administrative, expenses decreased by $4.5
million to $113.5 million for the 39-weeks ending November 1, 1997 from $118.0
million for the 39-weeks ending November 2, 1996. This improvement is primarily
due to a reduction in payroll and suspension of ongoing payments on certain
computer leases resulting from settlements with the lessors in which such
lessors received claims in the Reorganization Cases, offset partially by an
increase in sales promotion expense. In addition, for the key-employee retention
bonus program $1.5 million has been expensed for the 39-weeks ending November 1,
1997 compared to $2.8 million for the 39-weeks ending November 2, 1996. The
decline is due to an increase in the profit threshold to which such bonus is
tied.
Provision for doubtful accounts remains the same at 1.1% of net sales
for both the 39-weeks ending November 2, 1997 and the 39-weeks ending November
2, 1996, which is consistent with the sales attributed to the Company's private
credit card.
Interest expense increased to $4.6 million for the 39-weeks ending
November 2, 1997 from $3.8 million for the 39-weeks ending November 1, 1996. The
Company has certain interest rate swap agreements and is required to make
adjustments to market value. For the 39-weeks ending November 1, 1997, the swap
adjustment to market resulted in an expense of $0.6 million compared to income
of $0.8 million in the prior period.
Reorganization items increased by $0.6 million to $12.9 million for the
39-weeks ending November 1, 1997 from $12.3 million for the 39-weeks ending
November 2, 1996. The increase is primarily due to a $2.0 million increase in
professional fees partially offset by a $1.6 million reduction in financing cost
expense.
Income taxes were zero for both periods as no tax benefit was recorded
due to valuation allowances.
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Fiscal 1996 Compared to Fiscal 1995
Net sales for Fiscal 1996 decreased 3.5% to $569.6 million from $590.0
million for Fiscal 1995. Fiscal 1995 contains 53 weeks and contained
approximately $4.6 million in net sales for the extra week. The department store
division comparative store sales for Fiscal 1996 and the first 52-weeks of
Fiscal 1995 decreased approximately 0.4%. In Fiscal 1995 two department stores
were closed and two new department stores were opened. In addition, the Bee-Gee
shoe division closed 11 El-Bee shoe outlet stores in Fiscal 1996.
Financing revenue for Fiscal 1996 increased by $8.6 million to $27.5
million from $18.9 million in Fiscal 1995. In Fiscal 1995, prior to the Petition
Date, the Company maintained a financing facility through the sale
("securitization") of customer accounts receivable. With the filing of
bankruptcy the securitization facility was canceled. In fiscal 1995 gross
financing revenue was reduced by $5.9 million of securitization expense.
Cost of goods sold, occupancy, and buying decreased from 77.5% of net
sales in Fiscal 1995 to 72.0% of net sales in Fiscal 1996. This improvement is
attributable to a significant increase in the initial rate of mark-up on goods
sold coupled with a significant decrease in the mark-down rate for Fiscal 1996
compared to Fiscal 1995. In Fiscal 1995, increased markdowns were taken to clear
excess inventories. In Fiscal 1996, the LIFO inventory valuation adjustment
reduced cost of goods sold by $1.9 million compared to an increase in cost of
goods sold of $0.8 million in Fiscal 1995.
Selling, general, and administrative expenses, including key employee
performance bonus plan expense, hiring and recruiting expenses for new
executives, and other income, decreased by $7.8 million to $162.2 million, or
28.5% of net sales, in Fiscal 1996, compared to $170.0 million, or 28.8% of net
sales, in Fiscal 1995. In Fiscal 1996 through expense reduction programs, the
Company was able to reduce expenses in a significant number of expense
categories, particularly in the areas of data processing and sales promotion,
which was partially offset by implementation in Fiscal 1996 of a key employee
retention bonus program and hiring and recruiting expenses. Other income for
Fiscal 1996 relates to mark-to-market adjustments in interest rate swaps.
Provision for doubtful accounts increased $0.8 million to $6.7 million,
or 1.2% of net sales, in Fiscal 1996, compared to $5.9 million, or 1.0% of net
sales, in Fiscal 1995. This increase is primarily the result of an increase in
customer personal bankruptcy filings.
Interest expense decreased $3.1 million to $6.5 million, or 1.1% of net
sales, in Fiscal 1996, compared to $9.6 million, or 1.6% of net sales, in Fiscal
1995. After the Petition Date, the primary method of financing was through a
Debtor-in-Possession ("DIP") short-term financing agreement. The required
financing through the DIP after the Petition Date was significantly less than
the long-term and short-term debt outstanding prior to the Petition Date,
resulting in substantially less interest expense for Fiscal 1996; however, this
benefit was partially offset with higher interest rates associated with the DIP
financing.
Reorganization expense increased $3.9 million to $23.6 million in
Fiscal 1996 compared to $19.7 million in Fiscal 1995. Professional fees in
Fiscal 1996 were $5.0 million higher than Fiscal 1995 because the bankruptcy
filing occurred in October 1995. Other major differences include an expense of
$7.5 million for equipment lease settlements in Fiscal 1996 that was not in
Fiscal 1995, restructuring expenses that were $4.4 million less in Fiscal 1996,
and an expense in Fiscal 1995 of $5.0 million for the market value adjustment of
interest rate swaps.
Income tax expense (benefit) for Fiscal 1996 was an expense of $0.4
million, compared to a benefit of $2.3 million in Fiscal 1995. The tax provision
for Fiscal 1996 is for state and local taxes only, no federal tax benefit is
recorded due to a valuation allowance. Fiscal 1995's tax benefit includes the
carryback of net operating losses for a refund of prior tax paid net of state
and local taxes paid, and was also subject to a valuation allowance.
Discontinued operations for Fiscal 1996 was zero compared to $12.3
million for Fiscal 1995. Fiscal 1995's expense relates to an additional reserve
for the disposing of the Margo's subsidiary, and reversal of the reserve for
discontinued operations set up for Bee-Gee in Fiscal 1994, as the Company had
decided to retain Bee-Gee as a continuing operation in Fiscal 1995. The Margo's
disposal was completed in January 1996 (i.e., Fiscal 1995).
8
<PAGE> 12
Fiscal 1995 Compared to Fiscal 1994
Net sales for Fiscal 1995 decreased by 6.5% to $590.0 million from
$631.1 million in Fiscal 1994. The decrease occurred primarily from October 1995
through January 1996, when sales for the department stores decreased 9.7%
compared to the same period the previous year. This was due to a slow-down in
the receipt of goods from vendors as a result of the Company filing for
bankruptcy protection in October 1995. Also, El-Bee shoe outlet sales declined
5.0% for the year, primarily as a result of closing 44 unprofitable stores. The
department store division opened two new stores in Fiscal 1994 and two new
stores in Fiscal 1995 (prior to filing for bankruptcy protection), and closed
three stores in Fiscal 1994 and closed two stores in Fiscal 1995. Also, Fiscal
1995 contains 53 weeks and contained approximately $4.6 million in net sales for
the extra week.
Financing revenue from the Company's private label credit card for
Fiscal 1995 increased by $2.7 million to $18.9 million, from $16.2 million in
Fiscal 1994. This 16.6% increase in revenue is primarily due to an increase in
the average monthly outstanding balance of customer accounts receivable, due to
a change in mid-1994 decreasing the minimum monthly payment required to 5% of
their account balance from 10%.
Cost of goods sold, occupancy, and buying expense as a percent of net
sales increased to 77.5% in Fiscal 1995 from 74.0% in Fiscal 1994. This increase
is primarily the result of increased mark-downs taken to clear excess
inventories and the write-off of obsolete computer systems.
Selling, general, and administrative, expenses decreased by $1.8
million to $170.0 million, or 28.8% of net sales, in Fiscal 1995 compared to
$171.8 million, or 27.2% of net sales, in Fiscal 1994. The expense reduction was
caused primarily by a reduction in store related payrolls as a result in the
sales decline, and no employee pension expense because the Company was not
profitable.
Provision for doubtful accounts increased by $2.4 million to $5.9
million, or 1.0% of net sales, in Fiscal 1995 compared to $3.5 million, or 0.5%
of net sales in Fiscal 1994. This increase is primarily the result of an
increase in regular write-offs and customer personal bankruptcy filings.
Interest expense in Fiscal 1995 deceased by $0.3 million compared to
Fiscal 1994. The decrease was due to decreased borrowings after the Petition
Date. However, this benefit of reduced debt was partially offset with higher
interest rates associated with the DIP financing.
Reorganization expense was $19.7 million in Fiscal 1995. Items included
as part of this expense are professional fees, restructuring expense primarily
due to store closings, the write-off of pre-bankruptcy loan costs, fee
amortization expense for DIP loans, and an expense for the market value
adjustment of interest rate swaps.
Income tax expense (benefit) for Fiscal 1995 was a benefit of $2.3
million, which includes the carryback of net operating losses for a refund of
prior tax paid, net of state and local taxes paid, and was subject to a
valuation allowance. Fiscal 1994's tax benefit of $2.5 million was
disproportionate to the effective tax rate principally because of tax credits
and other adjustments.
Discontinued operations reflects the estimates of the costs to be
incurred in disposing of the Margo's subsidiary for Fiscal 1995 and Fiscal 1994,
as well as a reserve for Bee-Gee Shoes in Fiscal 1994 which was reversed in
Fiscal 1995. The costs include losses incurred in liquidating all Margo's
assets, as well as terminated lease costs.
LIQUIDITY AND CAPITAL RESOURCES
Prior to the filing for bankruptcy protection in October 1995, the
Company's primary sources of funds were cash flow from operations and borrowings
under various debt agreements
9
<PAGE> 13
and during the Reorganization Cases were cash flow from operations and a
debtor-in-possession Credit Agreement.
After the Effective Date, the Company's principal sources of funds are
cash flow from operations, borrowings under the New Revolving Credit Facility
and New Receivable Securitization Facility ("New Credit Facilities"). The
Company's primary ongoing cash requirements are to fund debt service, make
capital expenditures, and finance working capital. The Company believes that it
will generate sufficient cash flow from operations, as supplemented by its
available borrowings under the New Credit Facilities, to meet anticipated
working capital and capital expenditure requirements as well as debt service
requirements under the New Credit Facilities.
The New Revolving Credit Facility with Citicorp USA, Inc., as the
Agent, and Citicorp Securities, Inc., as the Arranger, provides for revolving
credit loans of up to $125.0 million for seasonal working capital purposes
(including a $20.0 million letter of credit subfacility). The borrowing base
used in determining the aggregate availability for loans and other extensions of
credit under the New Revolving Credit Facility is equal to (a) up to 95% of cash
and (b) eligible finished-goods inventory as follows: January-April, up to 60%;
May-July, up to 50%; August-October, up to 60%; and November-December, up to
65%, less such reserves as the Arranger deems appropriate.
The New Receivable Securitization Facility established with Citibank,
N.A. provides that a master trust established by the Company will issue up to
$125 million of asset-backed certificates in three separate classes to finance
purchase of revolving consumer credit card receivables generated by the
Company's department store operations. All of these certificates will represent
undivided interests in the assets of the master trust. The master trust will
hold all revolving credit card receivables arising from private-label credit
cards of the Company.
The Company's capital expenditures for Fiscal 1996 were $4.8 million,
which were primarily attributable to stores. The Company presently anticipates
that capital expenditures aggregating approximately $22.4 million will be made
in Fiscal 1997, of which $6.2 million relates primarily to data processing and
the remaining $16.2 million will be attributable to store maintenance,
remodeling, and expansions. The Company is reviewing its exposure to the
computer software problems associated with the year 2000, and believes that the
costs associated with correcting the remaining issues will not be material.
The Company has implemented a key employee retention program, which
includes severance payments and bonus payments. Under this program, expenses of
$2.2 million and $4.5 million were recognized in the thirty-nine weeks ended
November 1, 1997 and November 2, 1996, respectively. Expenses of $6.8 million
and $0.5 million were recorded in fiscal 1996 and 1995, respectively. A
reorganization bonus will also be paid to certain employees upon the
substantial consummation of a consensual plan of reorganization. Expenses
related to the reorganization bonus of approximately $2.0 million are expected
to be recorded in the fourth quarter of fiscal 1997. No amounts have been paid
or accrued related to the reorganization bonus as of November 1, 1997. A key
component of the Company's post-emergence business plan is the implementation
of new compensatory programs and agreements. These compensatory arrangements
are expected to have no material impact on the operations and liquidity of the
Company.
PROPERTIES
The following table sets forth certain information with respect to
Elder-Beerman's department store operations and Bee-Gee's shoe store operations,
based on operating data as of February 1, 1997, the end of Elder-Beerman's and
Bee-Gee's most recently completed fiscal year for which information is
available:
<TABLE>
<CAPTION>
SALES FOR FISCAL YEAR
NUMBER GROSS SQUARE FOOTAGE ENDED FEBRUARY 1, 1997
UNIT OF STORES (IN THOUSANDS) (IN MILLIONS)
- ------------------------ --------- -------------------- -----------------------
<S> <C> <C> <C>
Elder-Beerman department 52 4,557.1 $ 535,581.3
store operations
Bee-Gee shoe store 68 277.5 $ 33,975.5
operations
</TABLE>
10
<PAGE> 14
Elder-Beerman currently operates approximately 50 stores, principally
in smaller Midwestern markets in Ohio, Indiana, Illinois, Michigan, Wisconsin,
Kentucky, and West Virginia, and Bee-Gee operates 61 stores (51 shoe outlets and
10 Shoebilee! stores), principally in smaller Midwestern markets in Ohio,
Indiana, Illinois, Michigan, Pennsylvania, Virginia and West Virginia.
Substantially all of the Company's stores are leased properties. The Company
owns, subject to a mortgage, the 302,570 square foot office/warehouse facility
located in Dayton, Ohio, which serves as its principal executive offices. The
Company also has a 20% limited partnership interest in a partnership that owns a
300,000 square foot distribution center located in Fairborn, Ohio.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
PRO FORMA OWNERSHIP OF EQUITY SECURITIES
The following table sets forth information regarding the beneficial
ownership of the Company's Common Stock as of January 15, 1998 by (i) each
person who owns beneficially more than 5% of Common Stock of the Company to the
extent known to management, (ii) each executive officer and director of the
Company, and (iii) all directors and executive officers, as a group. Unless
otherwise indicated, the named persons exercise sole voting and investment power
over the shares that are shown as beneficially owned by them.
11
<PAGE> 15
<TABLE>
<CAPTION>
Number Percent
Beneficial Owner* Title of Class of Shares of Class
- ------------------------------------------ -------------- ----------- ----------
<S> <C> <C> <C>
Stewart M. Kasen Common Stock 1,300 *
Steve C. Mason Common Stock 1,300 *
Frederick J. Mershad Common Stock 47,087 *
John A. Muskovich Common Stock 56,023 *
Thomas J. Noonan Common Stock 1,300 *
Bernard Olsoff Common Stock 1,300 *
Jack A. Staph Common Stock 1,300 *
Jack J. Wiesner Common Stock 1,300 *
Herbert O. Glaser(1) * 30,962(1) *
Max Gutmann(2) * 36,970(2) *
Maxwell B. McArthur(3) -- -- --
Leonard B. Peal(4) * * *
All directors and executive officers as a Common Stock 153,425 *
group (12 persons)
- ----------
* Because the Common Stock will not be issued until after the effective
date of this Registration Statement and because issuance is based on
the allowed claims in the Reorganization Cases and other variables
contained in the Plan, Elder-Beerman is unable to determine, prior to
such time, the information required to be disclosed herein other than
as set forth above, including, without limitation, whether any person
will own 5% or more of the Common Stock and the percentage of
outstanding Common Stock that will be held by any person as of such
date or the number of shares Messrs. Glaser, Gutmann, and Peal will
beneficially own on account of their claims or interests in the
Reorganization Cases. Elder-Beerman will make such information publicly
available through an appropriate filing with the Securities and
Exchange Commission (the "SEC") once such information becomes
available.
1 Effective August 1997, Mr. Glaser is no longer employed by the Company.
The 30,962 shares represent those shares that were issued to Mr.
Glaser pursuant to the Reorganization Bonus Order (as defined herein).
The Company expects that Mr. Glaser will receive additional shares on
account of his claims in the Reorganization Cases. As described above,
the Company is currently unable to determine the number of such
additional shares.
2 As of the Effective Date, Mr. Gutmann is no longer employed by the
Company. The 36,970 shares represent those shares that were issued to
Mr. Gutmann pursuant to the Reorganization Bonus Order (as defined
herein). The Company expects that Mr. Gutmann will receive additional
shares on account of his claims in the Reorganization Cases. As
described above, the Company is currently unable to determine the
number of such additional shares.
3 Effective May 31, 1997, Mr. McArthur is no longer employed by the
Company.
4 Effective February 28, 1997, Mr. Peal is no longer employed by the
Company.
</TABLE>
12
<PAGE> 16
DIRECTORS AND EXECUTIVE OFFICERS
Directors and Executive Officers
The following table sets forth information regarding those persons
currently serving as the executive officers and directors of the Company.
Certain biographical information regarding each of the Company's current
directors and executive officers is described below the table.
Name Age Position
- ---------------------- ---- -------------------------------------------------
Frederick J. Mershad 54 Chairman of the Board and Chief Executive Officer
John A. Muskovich 50 President, Chief Operating Officer, Chief
Financial Officer and Director
James M. Zamberlan 51 Executive Vice President, Stores
Steven D. Lipton 46 Senior Vice President, Controller
Perry J. Schiller 39 Senior Vice President and Treasurer
Scott J. Davido, Esq 36 Senior Vice President, General Counsel, and
Secretary
Stewart M. Kasen . 58 Director
Steve C. Mason 62 Director
Thomas J. Noonan 58 Director
Bernard Olsoff 68 Director
Laura H. Pomerantz 50 Director
Jack A. Staph 52 Director
John J. Wiesner 59 Director
13
<PAGE> 17
Frederick J. Mershad has served as Chairman of the Board and Chief
Executive Officer since December 1997 and as President and Chief Executive
Officer of Elder-Beerman since January 1997. Prior to this time, Mr. Mershad
served as President and Chief Executive Officer of the Proffitt's division of
Proffitt's, Inc. ("Proffitt's") from February 1995 to December 1996; Executive
Vice President, Merchandising Stores for Proffitt's from May 1994 to January
1995; Senior Vice President, General Merchandise Manager, Home Store for Rich's
Department Store, Inc. from August 1993 to May 1994; and Executive Vice
President, Merchandising and Marketing of the McRae's Department Stores division
of Proffitt's from June 1990 to August 1993.
John A. Muskovich has served as President, Chief Operating Officer,
Chief Financial Officer and Director of Elder-Beerman since December 1997 and
served as Executive Vice President of Administration of Elder-Beerman since
February 1996. Prior to this time, Mr. Muskovich served in the Business
Administration Group for Kmart Corp. from September 1995 to February 1996;
President of the Federated Claims Services Group with Federated Department
Stores, Inc. ("Federated") from February 1992 to August 1995; Vice President of
Benefits of Federated from 1994 to 1995; and Vice President, Corporate
Controller of Federated from 1988 to 1992.
James M. Zamberlan has served as Executive Vice President, Stores of
Elder-Beerman since July 1997. Prior to this time, Mr. Zamberlan served as
Executive Vice President of Stores for Bradlee's, Inc. from September 1995 to
January 1997 and also served as Senior Vice President of Stores for the Lazarus
Division of Federated Department Stores, Inc. from November 1989 to August 1995.
Steven D. Lipton has served as Senior Vice President, Controller of
Elder-Beerman since March 1996. Prior to this time, Mr. Lipton served as
Operating Vice President of Payroll for Federated Financial & Credit Services
from September 1994 to January 1996 and served as Vice President and Controller
of the Lazarus Division of Federated from February 1990 to August 1994.
Perry J. Schiller has served as Senior Vice President and Treasurer of
Elder-Beerman since November 1995. Prior to this time, Mr. Schiller served as
the Director of Internal Audit for Elder-Beerman from October 1993 to November
1995 and served as a Senior Manager of Financial Audit for Deloitte & Touche LLP
from May 1988 to October 1993.
Scott J. Davido, Esq. has served as Senior Vice President, General
Counsel, and Secretary of Elder-Beerman since January 1998. Prior to this time,
Mr. Davido was a partner with Jones, Day, Reavis & Pogue, a law firm. Mr. Davido
was employed by this law firm, since December 1996 and as an associate since
September 1987.
Stewart M. Kasen has served as a Director of Elder-Beerman since
January 1998. Prior to this time, Mr. Kasen served as Chairman of the Board,
President, and Chief Executive Officer of Best Products Company, Inc., a
Richmond, Virginia retailer, from 1994 through May 1996, President and Chief
Executive Officer from 1991 to 1994, and President and Chief Operating Officer
from 1989 to 1991. Mr. Kasen is also currently a Director of O'Sullivan
Industries Holdings, Inc., Factory Card Outlet Corp., Bibb Co., and K2 Inc.
Steven C. Mason has served as a Director of Elder-Beerman since January
1998. Prior to this time, Mr. Mason served as Chairman of the Board and Chief
Executive Officer of Mead Corp., a paper products company, from 1992 to 1997.
Mr. Mason is also currently a Director of PPG Industries, Inc.
Thomas J. Noonan, Jr. has served as a Director of Elder-Beerman since
January 1998. Mr. Noonan has served as Managing Director of The Coopergate
Group, a financial investment and management company, since May 1997. Mr.
Noonan also serves as Executive Vice President and Chief Financial Officer of
Herman's Sporting Goods, a sporting goods retailer, since October 1994. Prior
to this time, Mr. Noonan served as Managing Director and Chief Executive
Officer of TFGII, a financial investment and management company, from January
1993 to October 1994, and as Executive Vice President of Intrenet Inc., a
trucking holding company, from October 1990 to March 1993. Mr. Noonan is also
currently a Director of Intrenet Inc. and Richman Gordman 1/2 Price Stores Inc.
14
<PAGE> 18
Bernard Olsoff has served as a Director of Elder-Beerman since January
1998. Prior to this time, Mr. Olsoff served as President, Chief Executive
Officer and Chief Operating Officer of Frederick Atkins, an international retail
merchandising and product development organization for department stores, from
1994 to April 1997, and President and Chief Operating Officer from 1987 to 1994.
Laura H. Pomerantz has served as Director of Elder-Beerman since
January 1998. Mrs. Pomerantz has served as a Senior Managing Director of Newmark
& Company Real Estate, Inc., a commercial real estate company, since August
1996. Prior to this time, Mrs. Pomerantz served as Senior Managing Director of
S.L. Green Real Estate Company, a commercial real estate company, from August
1995 to July 1996, and was affiliated with Koeppel Tenor Real Estate Services,
Inc., a commercial real estate company, from March 1995 through July 1995.
Prior to this time, Mrs. Pomerantz served as Executive Vice President
and Director of The Leslie Fay Companies, Inc. ("Leslie Fay"), an apparel
design and manufacturing company, from January 1993 to November 1994, and a
Senior Vice President and Vice President of Leslie Fay from 1986 through 1992.
Jack A. Staph has served as a Director of Elder-Beerman since January
1998. Mr. Staph has served in an unrestricted advisory capacity to CVS Corp.
since June 1997. Prior to this time, Mr. Staph served as Senior Vice President,
Secretary, and General Counsel of Revco D.S., Inc., a retail pharmacy company,
from October 1972 to August 1997. Mr. Staph is also currently a Director of
Delta Holdings, Inc.
John J. Wiesner has served as a Director of Elder-Beerman since January
1998. Prior to this time, Mr. Wiesner served as Chairman of the Board of
Directors, President, and Chief Executive Officer of C.R. Anthony, a regional
apparel retailer, from 1987 to 1997.
CERTAIN CORPORATE GOVERNANCE MATTERS
Under the Ohio General Corporation Law (the" OGCL"), the business and
affairs of Elder-Beerman are managed under the direction of the Board of
Directors of Elder-Beerman (the "Board of Directors").
The Amended Articles of Incorporation (the "Amended Articles") and the
Amended Regulations provide that the size of the Board of Directors will be
established from time to time only (a) by an affirmative vote of a majority of
the total number of directors that the Company would have if there were no
vacancies on the Board of Directors or (b) by the affirmative vote of the
holders of at least 72% of the voting stock, voting together as a single class,
except as may be provided in any designation containing the express terms of
preferred stock to be issued pursuant to resolution of the Board of Directors (a
"Preferred Stock Designation"); provided, however, that the number of directors
shall not be less than nine nor more than 11, except as may be provided in any
Preferred Stock Designation. When so fixed, such number shall continue to be the
authorized number of directors until changed by the shareholders or directors.
The Amended Articles and the Amended Regulations also provide that the
directors of Elder-Beerman, other than those who may be expressly elected by
virtue of the terms of any Preferred Stock Designation, are classified with
respect to the time for which they severally hold office into three classes, as
nearly equal in size as possible and consisting of not less than three directors
in each class, with the directors in each class serving for three-year terms and
until their successors are elected, except that the initial terms of the initial
directors of Elder-Beerman after the Effective Date expire at the 1999, 2000, or
2001 annual meeting of the shareholders of Elder-Beerman, depending upon the
particular class in which each such director is placed. Except as may be
otherwise provided in any Preferred Stock Designation, at each annual meeting of
shareholders of the Company, the successors of the class of directors whose
terms expire at that meeting shall be elected by plurality vote of all votes
cast at such meeting to hold office for a term expiring at the annual meeting of
shareholders held in the third year following the year of their election. Except
as provided otherwise in any Preferred Stock Designation, directors may be
elected by the shareholders (a) at an annual meeting of shareholders or (b) if
no annual meeting is held or if an annual meeting is held but directors are not
elected, at a special meeting of shareholders called for that purpose. Neither
the holding of a special meeting of shareholders nor the election of directors
at a special meeting of shareholders will, by itself, shorten the term of any
incumbent director. Except as may be provided in any Preferred Stock
Designation, any vacancy that occurs on the Board of Directors, including any
vacancy that results from an increase in the number of directors and any vacancy
that results from death, resignation, disqualification, removal, or other cause,
may be filled only (i) by the affirmative vote of a majority of the remaining
directors then in office, even though less than a quorum of the Board of
Directors, or by a sole remaining director, or (ii) by the affirmative vote of
the shareholders after a vote to increase the number of directors at a meeting
called for that purpose. Any director elected to fill a vacancy created by the
death, resignation, disqualification, or removal of an incumbent director will
hold office for the remainder of the term of the class of directors in which the
vacancy was created.
Pursuant to the Amended Regulations, no annual meeting of shareholders
was held in 1997 or will be held in 1998. The first annual meeting of the
shareholders of Elder-Beerman following the Effective Date will be held in May
1999, following the completion of Elder-Beerman's 1998 fiscal year, at such time
and on such business day as the Board of Directors determines. Pursuant to the
Amended Regulations the Board of Directors could postpone the date of this first
15
<PAGE> 19
annual meeting for up to 30 days. Any amendment to such postponement provision
requires approval by shareholders holding at least 72% of the voting power of
Elder-Beerman.
The Amended Regulations provide that nominations for election of
directors, except as may be otherwise provided in any Preferred Stock
Designation, shall be made at an annual meeting of shareholders by or at the
direction of the Board of Directors, or any committee thereof, or by any
shareholder entitled to vote in the election of directors at such meeting. The
Amended Regulations require that a shareholder's notice of intent to nominate
candidates for election as directors must be delivered to or mailed and received
at the principal executive offices of Elder-Beerman not less than 60 days, nor
more than 90 days, prior to the annual meeting of shareholders; provided,
however, that if public announcement of the date of the annual meeting is not
made at least 105 calendar days prior to the date of the annual meeting, notice
by the shareholder to be timely must be received not later than the close of
business on the tenth calendar day following the day on which such announcement
of the date of the meeting was so communicated. The Amended Regulations further
require that the notice by the shareholder set forth certain information
concerning such shareholder and the shareholder's nominees, including their
names and addresses, proof that such shareholder is entitled to vote at such
annual meeting, the class and number of shares of Elder-Beerman owned or
beneficially owned by such shareholder and the shareholder's nominees, any
agreements between the relevant parties pursuant to which the nomination is to
be made, such other information as would be required to be included in a proxy
statement soliciting proxies for the election of the nominees of such
shareholder, and the consent of each nominee to serve as a director of
Elder-Beerman, if so elected. The chairman of the meeting may refuse to
acknowledge the nomination of any person not made in compliance with these
requirements.
BOARD COMMITTEES
The Amended Code of Regulations of Elder-Beerman (the "Amended
Regulations") provide that the Board of Directors may establish an executive
committee or any other committees as it may from time to time determine are
necessary. The Board of Directors has established an Executive Committee, an
Audit Committee, a Compensation Committee and a Nominating and Corporate
Governance Committee. The Executive Committee consists of Messrs. Mershad,
Mason, Muskovich and Staph, the Nominating and Corporate Governance Committee
consists of Messrs. Mershad and Mason and Mrs. Pomerantz, the Audit Committee
consists of Messrs. Noonan, Kasen and Olsoff, and the Compensation Committee
consists of Messrs. Olsoff, Staph and Wiesner. Each of the Audit Committee and
the Compensation Committee are comprised entirely of non-employee directors.
Under the Amended Regulations, a committee will possess and may exercise all of
the power and authority granted to it by the Board of Directors consistent with
the OGCL, provided that such committees may not fill vacancies among the
directors or any committee thereof.
The Executive Committee will possess and may exercise, subject to the
control and direction of the Board of Directors, all the powers of the Board of
Directors in the management and control of the business of Elder-Beerman,
regardless of whether such powers are specifically conferred by the Amended
Articles or Amended Regulations.
The Audit Committee is expected to review: (a) the professional
services to be provided by Elder-Beerman's independent auditors and the
independence of such firm from management of Elder-Beerman; (b) the scope of the
audit by Elder-Beerman's independent auditors; (c) the annual financial
statements of Elder-Beerman; (d) Elder-Beerman's systems of internal accounting
controls; and (e) such other matters with respect to the accounting, auditing,
and financial reporting practices and procedures of Elder-Beerman as it may find
appropriate or as may be brought to its attention. The Audit Committee is
expected to meet from time to time with members of Elder-Beerman's internal
audit staff.
The Compensation Committee is expected to: (a) review executive
salaries, (b) administer the bonus, stock option and other incentive
compensation plans of Elder-Beerman, and (c) approve the salaries and other
benefits of the executive officers of Elder-Beerman. See "Executive Compensation
- -- New Compensatory Programs and Agreements." In addition, the Compensation
Committee is expected to advise and consult with Elder-Beerman's management
regarding pension and other benefit plans and compensation policies and
practices of Elder-Beerman.
The Nominating and Corporate Governance Committee is expected to
initially be responsible for exercising all powers of the Board of Directors to:
(a) select, evaluate and nominate candidates for election to the Board; (b)
evaluate the performance of the overall Board of Directors and its individual
members; and (c) ensure effective operations of the Board of Directors and
overall corporate governance of Elder-Beerman.
16
<PAGE> 20
EXECUTIVE COMPENSATION
The compensation discussion that follows has been prepared based on the
actual compensation paid and benefits provided during the fiscal year ended
February 1, 1997 by the Company to certain executive officers as of February 1,
1997. The existing employment, compensation, and benefit arrangements of the
Company are described below. Compensation and benefit arrangements of the
Company that were terminated as of the Effective Date are not described below.
CASH COMPENSATION TABLE
The following table sets forth the compensation paid or payable by the
Company during the fiscal year ended February 1, 1997 to Mr. Gutmann, Mr.
Mershad, and the four most highly compensated executive officers of the Company
as of February 1, 1997.
<TABLE>
<CAPTION>
ANNUAL
COMPENSATION
----------------------
SALARY BONUS
NAME AND PRINCIPAL POSITION ($) ($)
- ------------------------------------------ ----------- ---------
<S> <C> <C>
MAX GUTMANN (1)........................... 368,846 160,000
Chairman of the Board
FREDERICK J. MERSHAD (2).................. 19,231 633,632
President and Chief Executive Officer
HERBERT O. GLASER (3)..................... 325,789 134,000
Vice Chairman
JOHN A. MUSKOVICH......................... 192,239 67,908
Executive Vice President
- -Administration
MAXWELL B. MCARTHUR (4)................... 161,545 48,800
Executive Vice President Stores
LEONARD B. PEAL (5)....................... 160,450 8,000
Executive Vice President - Cost/Leased
<FN>
- ----------
(1) Mr. Gutmann served as Chairman and Chief Executive Officer
during fiscal year 1996, but was replaced as Chief Executive
Officer by Mr. Mershad during January 1997, the last month of
the fiscal year.
(2) Mr. Mershad began serving as President and Chief Executive
Officer of Elder-Beerman during January 1997, the last month
of the 1996 fiscal year. In accordance with his employment
contract, Mr. Mershad received a signing bonus of $633,632 as
reimbursement for forfeiting his performance bonus, restricted
stock grants, and stock option grants that he would have
received from his prior employer.
(3) Effective August 1997, Mr. Glaser is no longer employed by the
Company.
(4) Effective May 31, 1997, Mr. McArthur is no longer employed by
the Company.
(5) Effective February 28, 1997, Mr. Peal is no longer employed by
the Company.
</TABLE>
EXISTING COMPENSATORY PLANS AND AGREEMENTS
Information as to the Company's current compensatory plans and
agreements that remained in effect following the Effective Date is set forth
below. See "-- New Compensatory Programs and Agreements" for a description of
the new plans and agreements that were or will be adopted as of or following the
Effective Date.
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KEY EMPLOYEE RETENTION PROGRAM
On December 14, 1995, the Bankruptcy Court entered an order authorizing
the Company's key employee retention program (the "KERP Order"). This program
includes four principal components:
(a) The program authorized the Company to enter into termination
agreements with approximately 20 of their senior management
employees. The benefits available in any termination agreement
were in addition to severance benefits to which the employee
was entitled, provided that such employee could not receive
more than 18 months' salary in termination/severance benefits;
(b) The program established a master severance plan for certain
key employees. Approximately 450 key employees are covered by
this master severance plan. The benefits payable under this
plan, which are not to exceed $9 million in the aggregate, are
in substitution for the benefits that covered employees would
otherwise receive under the alternative base severance pay
program. Employees are eligible to receive the greater of the
benefits under these two plans;
(c) The program established a bonus program consisting of bonuses
paid annually and at mid-year, if the Company met
predetermined financial goals. The Company paid out
approximately $5.0 million in bonuses for the 1996-97 fiscal
year. The Company estimates that it will pay a total of
approximately $2.0 million in bonuses for the 1997-98 fiscal
year. In addition to these bonuses, which were based on a
percentage of the applicable employee's salary, the Company's
management was given authority to award additional amounts to
covered employees in its discretion; and
(d) The program includes a base severance pay plan for
rank-and-file employees equal to one week of severance pay for
each full year of employment.
REORGANIZATION BONUS
Pursuant to an order entered by the Bankruptcy Court on November 15,
1996, as amended (the "Reorganization Bonus Order"), Messrs. Gutmann, Glaser,
and Muskovich will receive the equivalent of two-years of their respective
salaries as a lump sum reorganization bonus upon the substantial consummation of
a consensual plan of reorganization. These bonuses will be paid through a
distribution of cash and Common Stock in the same proportion as the
distributions that will be made to unsecured creditors under the Plan.
CALCULATION OF CERTAIN SEVERANCE AND BONUS BENEFITS PAID TO SENIOR
EXECUTIVES
On July 10, 1997, the Bankruptcy Court entered a Stipulation and Order
concerning the calculation of the severance pay and reorganization bonuses
payable to Messrs. Gutmann and Glaser pursuant to the KERP Order and the
Reorganization Bonus Order. This Stipulation and Order provides that to the
extent that Messrs. Gutmann or Glaser are otherwise entitled to such benefits,
all such benefits shall be payable to Messrs. Gutmann and Glaser on the basis
that their respective annual salaries are $400,000 and $335,000, respectively,
notwithstanding any downward adjustments made or to be made to those salaries.
Effective as of August 1, 1997 and December 30, 1997, Elder-Beerman terminated
the employment of Mr. Glaser and Mr. Gutmann, respectively. In accordance with
the terms of the KERP Order, Elder-Beerman paid both Mr. Glaser and Mr. Gutmann
severance pay equal to one year's salary in connection with their respective
termination. As part of the releases provided under the Plan, the Company will
release any potential claims, demands, rights, or causes of action it may have
against Messrs. Gutmann and Glaser to recover the payment of these severance
benefits.
NEW COMPENSATORY PROGRAMS AND AGREEMENTS
GENERAL
One of the key elements of the Company's Business Plan is an executive
compensation program designed to attract, retain, and provide incentives to
directors, officers, and key employees for the Company and to provide such
persons
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<PAGE> 22
appropriate incentives and rewards for superior performance. See "Business --
Business -- Business Plan and Strategy for the Company." Accordingly, the
Company instituted a new senior management and executive compensation program
(the "New Benefit Program") that includes changes in (a) base salaries, (b)
annual incentives, (c) long-term incentives, (d) perquisites, and (e) employment
and change-of-control agreements. The New Benefit Program is intended to attract
and retain key employees over the long term, encourage employee stock ownership,
and provide incentives for career advancement with the Company. Approval of the
Plan was deemed to constitute approval of the New Benefit Program by holders of
certain claims and interests who are to receive Common Stock pursuant to the
Plan. The Equity and Performance Incentive Plan (described below) came into
existence as of the Confirmation Date. Generally, however, employee agreements
and employee benefit plans implementing the New Benefit Program did not become
effective until the Effective Date occurred. The following discussion summarizes
the principal terms of the New Benefit Program.
EQUITY AND PERFORMANCE INCENTIVE PLAN
The Company's new Equity and Performance Incentive Plan (the "Equity
and Performance Incentive Plan") includes both annual and long-term (i.e., three
or more years) incentives. Under the Equity and Performance Incentive Plan, the
Company first expects to motivate and reward designated key employees for the
achievement of annual corporate, departmental, and/or individual goals and
objectives through new annual incentives. The new annual incentives compensate
key employees chosen by the Board of Directors' Compensation Committee based on
three performance levels -- threshold, target, and optimum. These performance
levels are predetermined on both an individual level for each key employee,
based on a percentage of the key employee's base salary, and on a company wide
level. If the Company achieves the threshold level under the company-wide
performance criteria, key employees will be eligible to receive a cash bonus
payment based on the threshold incentive percentage. Key employees may receive
additional bonus payments if they meet their goals in other performance
categories such as department, region, store, and individual.
The Equity and Performance Incentive Plan also allows key employees
entitled to receive an annual incentive bonus to defer voluntarily up to 50% of
their annual incentive bonus and instead receive Deferred Shares (as hereinafter
defined). These Deferred Shares are 100% vested at all times and may be
exercised on the earliest of (a) the third anniversary of the date awarded, (b)
the date the employee's employment is terminated for reasons other than death,
(c) the employee's death, or (d) an unforeseeable financial emergency of the
employee. To provide key employees with the incentive to defer, the Equity and
Performance Incentive Plan also grants Restricted Shares (as described below)
equal in value to 25% of the amount deferred. These Restricted Shares will
become 100% vested on the third anniversary of the date of grant if such
employee remains in the continuous employ of the Company.
In the event of the retirement, death, or disability of a key employee
prior to the determination of any annual incentive, and in the event the Board
of Directors determines that the key employee's goals have been met, such
employee or employee's beneficiary will be eligible to receive a pro rata
portion of the award. However, if such employee's employment terminates for any
reason other than retirement, death, or disability, the employee will forfeit
his or her right to any award not paid to the key employee prior to such
termination of employment. If a key employee is employed on the date a change in
control occurs, his annual incentive bonus for such year will not be less than
such award for the immediately preceding year.
The Equity and Performance Incentive Plan also permits equity-related
grants as long-term incentives that are intended to motivate and reward certain
employees for the achievement of long-term corporate goals and to balance annual
goals with strategic plans. These long-term incentives also offer capital
accumulation potential for employees and align employees' interests with
shareholder interests. Only certain senior executives, as determined by the
Board of Directors, are eligible to receive grants under the long-term incentive
portion of the Equity and Performance Incentive Plan. The shares awarded as
long-term incentives may not exceed the equivalent of 2,250,000 shares plus any
shares relating to awards that expire or are forfeited or canceled (the
"Long-Term Incentive Reserve"). The Equity and Performance Plan have an
evergreen provision that provides that, in any acquisition, merger, or secondary
offering, the Long-Term Incentive Reserve shall remain constant.
The Equity and Performance Incentive Plan permits grants in a variety
of forms. First, the Board of Directors may authorize the granting of stock
options ("Option Rights") to designated employees and non-employee directors.
Option Rights provide the right to purchase Common Stock at a predetermined
price per share (which, in
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<PAGE> 23
the case of non-qualified stock options, may not be less than 75% of the fair
market value on the date of grant and, in the case of incentive stock options as
described in Section 422 of the Internal Revenue Code, may not be less than fair
market value on the date of grant). The grant may provide for payment of the
option price by one or more methods. The grant may also provide for the
automatic grant of additional Option Rights, known as Related Option Rights, to
an employee or non-employee director upon the exercise of Option Rights using
Common Stock or other defined consideration as payment. Options granted to
non-employee directors become exercisable one-third on each of the first three
anniversaries of the date of grant for so long as the individual remains a
non-employee director. Options granted to employees become exercisable 20% on
each of the first five anniversaries of the date of grant for so long as the
employee remains in the continuous employ of the Company. No Option Rights may
be exercised more than ten years from the date of grant. All Option Rights
provide for the earlier exercisability of the Option Rights in the event of
retirement, death, or disability of the employee or non-employee director or a
change in control of the Company. Any grant of Option Rights may specify
performance goals that must be achieved as a condition to exercise such rights.
Second, the Board of Directors may authorize the granting of
appreciation rights ("Appreciation Rights") to designated employees.
Appreciation Rights represent the right to receive from the Company an amount,
determined by the Board of Directors and expressed as a percentage not exceeding
100%, of the difference between the base price established for such rights and
the market value of the Common Stock on the date the rights are exercised.
Appreciation Rights can be tandem (i.e., granted with Option Rights to provide
an alternative to exercise of the Option Rights) or free-standing. Tandem
Appreciation Rights may only be exercised at a time when the related Option
Right is exercisable and the spread is positive, and requires that the related
Option Right be surrendered for cancellation. Free-standing Appreciation Rights
must have a base price per right that does not exceed a maximum specified by the
Board of Directors on the date of grant, may specify the period of employment
that is necessary before such Appreciation Rights become exercisable, may
provide for the exercise of the Appreciation Rights only in the event of
retirement, death, or disability of the employee or a change in control of the
Company and must be evidenced by an agreement executed on behalf of the Company
and accepted by the employee describing such Appreciation Rights and other terms
and provisions. Such grant may also include that payment may be made by one or
more methods of payment and may specify performance goals that must be achieved
as a condition to exercise such rights.
Third, the Board of Directors may authorize the granting of restricted
shares ("Restricted Shares") to designated employees and non-employee directors.
Restricted Shares constitute an immediate transfer of ownership to the recipient
in consideration of the performance of services. The recipient has dividend and
voting rights on such shares. Restricted Shares must be subject to a
"substantial risk of forfeiture" of the Restricted Shares, within the meaning of
Section 83 of the Internal Revenue Code. To enforce these forfeiture provisions,
the transferability of Restricted Shares is prohibited or restricted in the
manner prescribed by the Board of Directors on the date of grant for the period
during which such forfeiture provisions are to continue. Any grant of Restricted
Shares (a) may specify performance goals which, if achieved, will result in
termination or early termination of the restrictions applicable to such shares,
(b) may require that any or all dividends or other distributions paid thereon
during the period of such restrictions be automatically deferred and reinvested
in additional Restricted Shares, which may be subject to the same restrictions
as the underlying award, and (c) must be evidenced by an agreement executed on
behalf of the Company and accepted by the employee.
Fourth, the Board of Directors may authorize the granting of deferred
shares ("Deferred Shares") to designated employees. Deferred Shares constitute
an agreement to issue shares to the recipient in the future in consideration of
the performance of services, but subject to the fulfillment of such conditions
as the Board of Directors may specify. The Board of Directors must fix a
deferral period of at least one year at the time of grant, and may provide for
the earlier termination of the deferral period in the event of retirement,
hardship, death, or disability of the employee or a change in control of the
Company. During the deferred period, the employee has no right to transfer any
rights under his or her award and has no ownership or voting rights in the
Deferred Shares, but the Board of Directors may, at or after the grant date,
authorize the payment of dividend equivalents on such shares on either a
current, deferred, or contingent basis, either in cash or in additional Common
Stock. Each grant of Deferred Shares is evidenced by an agreement executed on
behalf of the Company and accepted by the employee.
Finally, the Board of Directors may authorize the granting of
performance shares ("Performance Shares") and performance units ("Performance
Units") to designated employees upon achievement of specified performance
objectives. A Performance Share is the equivalent of one share of Common Stock
and a Performance Unit is denominated in dollars. The employee is given one or
more performance goals to meet within a specified period, not less than one
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<PAGE> 24
year (the "Performance Period"). The specified Performance Period may be subject
to earlier termination in the event of retirement, death, or disability of the
employee or a change in control of the Company. A minimum level of acceptable
achievement also will be established. If, by the end of the Performance Period,
the employee has achieved the specified performance goals, the employee will be
deemed to have fully earned the Performance Shares or Performance Units. If the
designated employee has not achieved the performance goals, but has attained or
exceeded the predetermined minimum level of acceptable achievement, the employee
will be deemed to have partly earned the Performance Shares or Performance Units
in accordance with a predetermined formula. To the extent earned, the
Performance Shares or Performance Units will be paid to the employee at the time
and in the manner determined by the Board of Directors as set forth in each
grant. The Board of Directors may, at or after the date of grant of Performance
Shares, provide for the payment of dividend equivalents to the holder thereof on
either a current or deferred or contingent basis, either in cash or in
additional Common Stock. Each grant of Performance Shares or Performance Units
is evidenced by an agreement executed on behalf of the Company and accepted by
the employee.
The Equity and Performance Incentive Plan is administered by the Board
of Directors, which may from time to time delegate all or any part of its
authority under the Equity and Performance Incentive Plan to an agent or a
committee or subcommittee of the Board of Directors.
The Equity and Performance Incentive Plan offers a large, up-front
grant of an aggregate of 788,020 Option Rights and an aggregate of 86,793
Restricted Shares that is intended to cover the first three years following the
Effective Date. All initial grants of Options Rights to designated employees
vest 20% per year over five years as long as the employee remains in the
continuous employ of the Company. All initial grants of Option Rights to
non-employee directors vest one-third per year over three years as long as they
remain directors. All initial grants of Restricted Shares vest one-third per
year over three years as long as the employee remains in the continuous employ
of the Company or as long as the director remains a director, as appropriate.
For the top two executives, 80% of the targeted gain opportunity is allocated to
nonqualified Option Rights and 20% to Restricted Share awards. The other
executives receive 100% of their grant in nonqualified Option Rights.
EMPLOYMENT AGREEMENTS AND THE SEVERANCE PAY PLAN
The Company also provides employment agreements that include severance
pay for certain key executives in order to assist in recruiting and to promote
long-term security during uncertain times. These executives serve the Company
under their respective agreements starting on the Effective Date and ending on
the second or third anniversary, as applicable, of the Effective Date with an
automatic yearly extension thereafter, unless the employer or the executive has
given written notice of termination not less than 120 days prior to the yearly
renewal date. The employment agreements set forth (a) the executive's
compensation and benefits; (b) the employer's right to terminate the executive
for cause or otherwise; (c) the amounts to be paid by the employer in the event
of the executive's termination, death, or disability while rendering services;
(d) the executive's duty of strict confidence and to refrain from conflicts of
interest; (e) the executive's obligations not to compete for the term of the
agreement plus one year unless the executive terminated his employment for good
reason or the employer terminates the executive other than for cause; and (f)
the executive's right to receive severance payments if he or she (i) is
terminated within two years of a change in control without cause, (ii)
voluntarily terminates for defined good reasons within two years of a change of
control, (iii) terminates his or her employment for any reason, or without
reason, during the thirty-day period immediately following the first anniversary
of a change in control, or (iv) is terminated in connection with but prior to a
change in control and termination occurs following the commencement of any
discussions with any third party that ultimately results in a change in control.
Specifically, under the employment agreements, the amount of any severance
payment by the Company will be the greater of 2.99 times the Internal Revenue
Code "base amount" as described in Section 280G of the Internal Revenue Code or
two times his most recent base salary and bonus. Severance payments made under
the employment agreements will reduce any amounts that would be payable under
any other severance plan or program, including the master severance plan for
certain key employees. A tax gross-up also will be paid if the severance pay
exceeds the limit imposed by the Internal Revenue Code. In addition, the
executive will continue to be eligible for health benefits, perquisites, and
fringe benefits generally made available to senior executives for two years
following his or her termination, unless the executive waives such coverage,
fails to pay any amount required to maintain such coverage, or obtains new
employment providing substantially similar benefits.
The Company entered into employment agreements similar to those
described above with Frederick J. Mershad, Chairman and Chief Executive Officer,
and John A. Muskovich, President, Chief Operating Officer, and Chief
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<PAGE> 25
Financial Officer. Such employment agreements were effective as of the Effective
Date and will end on the third anniversary of the Effective Date. These
employment agreements will be automatically renewed every year on the
anniversary date of the employment agreement for an additional one year period,
unless such executive provides the Company or the Company provides the executive
with 180 days prior notice terminating this yearly renewal. In general, the
employment agreements provide that if such executive officer is terminated for
any reason other than for cause or following a change in control, he will
receive payments equal to the remaining base salary that would have been
distributed to him by the Company under the remaining term of his employment
agreement and the incentive compensation earned by the executive for the most
recent fiscal year. In the event such executive (a) is terminated within two
years of a change in control without cause, (b) voluntarily terminates within
two years of a change in control, or (c) is terminated in connection with but
prior to a change in control and termination occurs following the commencement
of any discussions with any third party that ultimately results in a change in
control, he will receive a severance payment equal to the greater of 2.99 times
the Internal Revenue Code "base amount" as described in Section 280G of the
Internal Revenue Code or two times his most recent base salary and bonus and the
executive will continue to be eligible for health benefits, perquisites, and
fringe benefits generally made available to senior executives following his
termination, unless the executive obtains new employment providing substantially
similar benefits. A tax gross-up also will be paid if the severance pay exceeds
the limits imposed by the Internal Revenue Code. Mr. Mershad's employment
agreement shall supersede his current employment agreement with Elder-Beerman.
Under the Severance Pay Plan for Key Employees (the "Severance Plan for
Key Employees"), upon a change of control, designated key employees who are not
covered by the contracts disclosed above are entitled to severance pay if the
key employee (a) is terminated within 18 months of a change in control without
cause, (b) voluntarily terminates for defined good reasons within 18 months of a
change of control, or (c) is terminated not more than 90 days prior to a change
in control and termination occurs following the commencement of any discussions
with any third party that ultimately results in a change in control. Each key
employee so terminated, who is a Senior Vice President, Vice President, or is
otherwise designated by the Board of Directors to receive severance pay at the
same multiple as a Senior Vice President shall receive a lump sum severance
payment in an amount equal to 1 1/2 times the employee's base salary plus his
incentive pay. Each of the remaining designated key employees shall receive a
lump sum payment in an amount equal to the key employee's base salary plus
incentive pay. In addition, each terminated key employee will continue to be
eligible for health and life insurance benefits for one year following such
termination unless such employee waives such coverage, fails to pay any amount
required to maintain such coverage, or becomes eligible for other group health
coverage. However, any severance payment is conditioned upon the employee's
agreeing in writing to keep in strict confidence any trade secrets or
confidential business information and to return, in good condition, all property
belonging to the employer. The employee must also agree to release the employer
for certain claims, demands, damages, and actions that the employee may have on
account of the termination. The Company also will require any successor to
assume and agree to perform the obligations under both the employment agreements
and the Severance Pay Plan for Key Employees.
In addition, multiple arrangements (including plans and individual
employment and termination agreements) are in effect providing for severance
pay, including the severance arrangements established pursuant to the KERP Order
that continued in effect beyond the Effective Date. The termination of an
employee who is covered under more than one severance arrangement may trigger
severance payments under only one severance arrangement or under more than one
severance arrangement. However, the Company intends for the severance
arrangements to coordinate so that an employee eligible to receive payments
under more than one severance arrangement receives no more than the largest
amount payable to him under any one severance arrangement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Effective Date, the Company never had a Compensation
Committee or other committee of the Board of Directors performing similar
functions. Previously, decisions concerning compensation of executive officers
of the Company were made by the Company's Chief Executive Officer. The Board of
Directors will establish a Compensation Committee soon after the Effective Date.
See "Directors and Executive Officers -- Board Committees."
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DIRECTOR COMPENSATION
Commencing in calendar 1998, each director of Elder-Beerman who is not
an employee of Elder-Beerman or any of its subsidiaries will be paid an annual
base retainer fee of $15,000, with the choice to take such retainer as cash or
in the form of a discounted stock option. Non-employee directors also will be
paid $1,500 for each meeting of the Board of Directors attended and $500 for any
committee meeting of the Board of Directors attended. Each such director is also
expected to receive an initial grant of (a) 1,300 shares of restricted stock and
(b) 4,000 options to purchase shares of Common Stock. Members of the Board of
Directors who are also employees of any of Elder-Beerman or any of its
subsidiaries will receive no additional compensation for service on the Board of
Directors.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company, Bee-Gee, and Margo's lease or leased real estate from
entities (the "Related Entities") that are affiliated with Beerman-Peal, which,
prior to the Effective Date, owned 100% of the Company. The Related Entities are
owned by various Beerman stockholders, officers, directors, and family members
thereof. The Company does not expect that any of these persons will own,
individually or beneficially, more than 5% of the Common Stock of the Company
or be a director or officer of the Company after the Effective Date.
In fiscal 1996, the Company leased ten of its stores and its
distribution center from Related Entities and paid aggregate rent to the Related
Entities of $3,703,055, and Bee-Gee leased four of its stores and its corporate
offices from Related Entities and paid aggregate rent to the Related Entities of
$282,393. In fiscal 1995, the Company leased ten of its stores and its
distribution center from Related Entities and paid aggregate rent to the Related
Entities of $3,938,490, Bee-Gee leased six of its stores and its corporate
offices from Related Entities and paid aggregate rent to the Related Entities of
$400,844, and Margo's leased its corporate offices and distribution center from
Related Entities and paid aggregate rent to the Related Entities of $97,917. In
1994, the Company leased ten of its stores and its distribution center from
Related Entities and paid aggregate rent to the Related Entities of $3,050,795,
Bee-Gee leased six of its stores and its corporate offices from Related Entities
and paid aggregate rent to the Related Entities of $265,478, and Margo's leased
its corporate offices and distribution center from Related Entities and paid
aggregate rent to the Related Entities of $80,417.
Raymond Clayman, formerly a director of the Company, served as a
principal in the Law Offices of Raymond Clayman, which has provided legal
services to the Company for the fiscal years ended February 3, 1996 and January
28, 1995 and for which the Company paid legal fees of approximately $288,400 and
$300,700, respectively.
LEGAL PROCEEDINGS
The Company, Bee-Gee and Margo's each are currently parties to the
Reorganization Cases. See "Business-Bankruptcy" for a description of the
Reorganization Cases.
In addition, Beerman-Peal and certain of its affiliated entities (the
"Beerman Entities") have asserted various Claims (with "Claim" being defined as
such term is defined in section 101(5) of the Bankruptcy Code) against the Old
Elder-Beerman Companies in the Reorganization Cases. Many of these Claims relate
to Elder-Beerman and Bee-Gee store properties that certain Beerman Entities
currently lease or formerly leased to the Old Elder-Beerman Companies. The Old
Elder-Beerman Companies have asserted certain claims, rights, and causes of
action against certain of the Beerman Entities. In addition, based on certain
actions of certain of Elder-Beerman's former directors, the Old Elder-Beerman
Companies believe that they may have breach of fiduciary duty and equitable
subordination claims against certain Beerman Entities.
A New Tax Indemnification Agreement, entered into as of the Effective
Date, describes several federal tax matters related to deconsolidation of the
consolidated taxpayer group of companies including the Old Elder-Beerman
Companies, of which Beerman-Peal is the common parent, which resulted upon
consummation of the Plan on the Effective Date. These tax matters include issues
in connection with the filing of future tax returns, the conduct of future tax
audits, and the preservation and orderly utilization of Elder-Beerman's tax
attributes in accordance with applicable tax laws and regulations.
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The Old Elder-Beerman Companies and the Beerman Entities agreed to
resolve the various remaining unresolved claims that they asserted against each
other upon the terms and subject to the conditions of the New Tax
Indemnification Agreement and a Comprehensive Settlement Agreement, which was
effective as of the Effective Date. The obligations set forth in the New Tax
Indemnification Agreement provide additional consideration for certain of the
releases set forth in the Comprehensive Settlement Agreement.
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ABSENCE OF PUBLIC MARKET
The Company's Common Stock is not currently listed or admitted to
unlisted trading privileges on a national securities exchange or included for
quotation through an inter-dealer quotation system of a registered national
securities association. The Company also is not aware of any dealer or "market
maker" in the Common Stock and, consequently, the trading market for such
securities is limited.
The Company has filed an application with The Nasdaq Stock Market to
list the Common Stock on the Nasdaq National Market.
HOLDERS
Because issuance of the Common Stock is based on the allowed claims in
the Reorganization Cases and other receivables contained in the Plan,
Elder-Beerman is unable to determine, prior to such issuance, the number of
record holders of Common Stock. There were no record holders of Preferred Stock
as of the Effective Date. All outstanding shares of Common Stock, and all shares
of Common Stock issued upon the exercise of New Warrants, are eligible for
resale unless the holder thereof is deemed to be an "underwriter" with respect
to such securities, an "affiliate" of the issuer of such securities or a
"dealer." Section 1145(b) of the Bankruptcy Code defines four types of
"underwriters":
(a) persons who purchase a claim against, an interest in, or a
claim for administrative expense against the debtor with a
view to distributing any security received in exchange for
such a claim or interest ("accumulators");
(b) persons who offer to sell securities offered under a plan for
the holders of such securities ("distributors");
(c) persons who offer to buy securities from the holders of such
securities, if the offer to buy is (i) with a view to
distributing such securities and (ii) made under a
distribution agreement; and
(d) a person who is an "issuer" with respect to the securities, as
the term "issuer" is defined in Section 2(11) of the
Securities Act of 1933, as amended (the "Securities Act").
Under section 2(11) of the Securities Act, an "issuer" includes any "affiliate"
of the issuer, which means any person directly or indirectly through one or more
intermediaries controlling, controlled by, or under common control with the
issuer. Under section 2(12) of the Securities Act, a "dealer" is any person who
engages either for all or part of his or her time, directly or indirectly, as
agent, broker, or principal, in the business of offering, buying, selling, or
otherwise dealing or trading in securities issued by another person. Whether any
particular person would be deemed to be an "underwriter" or an "affiliate" with
respect to any security to be issued pursuant to the Plan or to be a "dealer"
would depend upon various facts and circumstances applicable to that person.
Accordingly, the Company expresses no view as to whether any person would be an
"underwriter" or an "affiliate" with respect to any security to be issued
pursuant to the Plan or to be a "dealer."
In connection with prior bankruptcy cases, the staff of the SEC has
taken the position that resales by accumulators and distributors of securities
distributed under a plan of reorganization are exempt from the registration
under the Securities Act if effected in "ordinary trading transactions." The
staff of the SEC has indicated in this context that a transaction may
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be considered an "ordinary trading transaction" if it is made on an exchange or
in the over-the-counter market and does not involve any of the following
factors:
(a) (i) concerted action by the recipients of securities issued
under a plan in connection with the sale of such securities or
(ii) concerted action by distributors on behalf of one or more
such recipients in connection with such sales;
(b) the use of informational documents concerning the offering of
the securities prepared or used to assist in the resale of
such securities, other than a bankruptcy court-approved
disclosure statement and supplements thereto, and documents
filed with the SEC pursuant to the Exchange Act of 1934, as
amended (the "Exchange Act"); or
(c) the payment of special compensation to brokers and dealers in
connection with the sale of such securities designed as a
special incentive to the resale of such securities (other than
the compensation that would be paid pursuant to arm's-length
negotiations between a seller and a broker or dealer, each
acting unilaterally, not greater than the compensation that
would be paid for a routine similar-sized sale of similar
securities of a similar issuer).
The Company has not, however, sought the views of the SEC on this matter and,
therefore, no assurance can be given regarding the proper application of the
"ordinary trading transaction" exemption described above. Any person intending
to rely on such exemption is urged to consult his or her own counsel as to the
applicability thereof to his or her circumstances.
In addition, Securities Act Rule 144 provides an exemption from
registration under the Securities Act for certain limited public resales of
unrestricted securities by "affiliates" of the issuer of such securities. Rule
144 allows a holder of unrestricted securities that is an affiliate of the
issuer of such securities to sell, without registration, within any three month
period a number of shares of such unrestricted securities that does not exceed
the greater of 1% of the number of outstanding securities in question or the
average weekly trading volume in the securities in question during the four
calendar weeks preceding the date on which notice of such sale was filed
pursuant to Rule 144, subject to the satisfaction of certain other requirements
of Rule 144 regarding the manner of sale, notice requirements, and the
availability of current public information regarding the issuer. The Company
believes that, pursuant to section 1145(c) of the Bankruptcy Code, the Common
Stock and the New Warrants to be issued pursuant to the Plan and the Common
Stock issuable upon the exercise of New Warrants will be unrestricted securities
for purposes of Rule 144.
GIVEN THE COMPLEX NATURE OF THE QUESTION OF WHETHER A PARTICULAR PERSON
MAY BE AN UNDERWRITER, THE COMPANY MAKES NO REPRESENTATIONS CONCERNING THE RIGHT
OF ANY PERSON TO TRADE IN THE COMMON STOCK AND NEW WARRANTS TO BE DISTRIBUTED
PURSUANT TO THE PLAN OR THE NEW COMMON STOCK ISSUABLE UPON THE EXERCISE OF THE
NEW WARRANTS. THE COMPANY RECOMMENDS THAT HOLDERS OF CLAIMS AND INTERESTS
CONSULT THEIR OWN COUNSEL CONCERNING WHETHER THEY MAY FREELY TRADE SUCH
SECURITIES.
DIVIDENDS
As of the Effective Date, each share of new Common Stock is entitled to
participate equally in any dividend declared by the Board of Directors and paid
by the Company. But the Company does not anticipate paying any dividends on the
new Common Stock in the foreseeable future. In addition, covenants in certain
debt instruments to which the Company is a party will restrict the ability of
the Company to pay dividends, and may prohibit the payment of dividends and
certain other payments. In particular, the Company anticipates that the
agreement for its new revolving credit facility includes a customary covenant
prohibiting the Company from paying any dividends or making any other
distributions to shareholders.
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RECENT SALES OF UNREGISTERED SECURITIES
Except as set forth below, the Company does not have any recent sales
of unregistered securities.
The new Common Stock and the New Warrants will be issued pursuant to
the Plan in satisfaction of certain allowed claims against, or interests in, the
Company. Based upon the exemptions provided by section 1145 of the Bankruptcy
Code, the Company believes that none of such securities will be required to be
registered under the Securities Act in connection with their issuance and
distribution pursuant to the Plan.
DESCRIPTION OF REGISTRANT'S SECURITIES
COMMON STOCK
The Company is authorized to issue 25 million shares of Common Stock,
without par value.
Subject to such rights of the holders of any class or series of
preferred stock as may be fixed by the Company's Board of Directors or by law
when and if any class or series is created and issued, the holders of Common
Stock are entitled to one vote for each share held of record on all matters
submitted to a vote of stockholders. Subject to preferential rights that may be
applicable to any preferred stock of the Company, holders of Common Stock are
entitled to receive ratably such dividends as may be declared by the Company's
Board of Directors out of funds legally available therefor. However, the Company
does not presently anticipate that dividends will be paid on Common Stock in the
foreseeable future. In the event of a liquidation, dissolution, or winding up of
the Company, holders of Common Stock will be entitled to share ratably in all
assets remaining after payment of liabilities and the liquidation preference of
any preferred stock of the Company. Holders of Common Stock of the Company have
no preemptive, subscription, redemption, or conversions rights.
All of the outstanding shares of Common Stock issued pursuant to the
Plan are or will, upon such issuance, be fully paid and nonassessable. Subject
to the terms and conditions set forth in Elder-Beerman's Share Purchase Rights
Agreement, each share of Common Stock issued pursuant to the Plan is accompanied
by a New Share Purchase Right. See "-- Share Purchase Rights Agreement" below.
The Company has filed an application with The Nasdaq Stock Market to list the
stock and the accompanying Share Purchase Rights on the Nasdaq National Market.
In addition to the provisions relating to the Board of Directors
described above, the Amended Articles and Amended Regulations provide, in
general, that: (a) shareholder action can be taken at an annual or special
meeting of shareholders; (b) except as directed below, special meetings of
shareholders may be called for any proper purpose or purposes, including the
election of directors, by (i) the Chairman of the Board, (ii) the President,
(iii) a majority of the Board of Directors, (iv) any person or persons holding
at least 50% of all shares outstanding and entitled to vote at such meeting, or
(v) holders of shares that are entitled to call a special meeting of the
shareholders by virtue of any Preferred Stock Designation for the purposes
provided in the terms of such Preferred Stock Designation; (c) written notice of
every meeting of the shareholders stating the time, place, and purposes for
which the meeting is called must be given by or at the direction of the
President, a Vice President, the Secretary, or an Assistant Secretary to each
shareholder of record; and (d) the Board of Directors may postpone, for up to
thirty days, any previously scheduled annual or special meeting of shareholders.
The Amended Regulations also require that shareholders desiring to bring any
business before any annual meeting of shareholders deliver written notice
thereof to the Secretary of Elder-Beerman not less than 60, nor more than 90
calendar days, prior to the meeting of shareholders; provided, however, that if
the date of the annual meeting is not publicly announced by Elder-Beerman more
than 105 calendar days prior to the meeting, notice by the shareholder to be
timely must be delivered to the Secretary of Elder-Beerman not later than the
close of business on the tenth day following the day on which such announcement
of the date of the annual meeting was so communicated. The Amended Regulations
further require that the notice by the shareholder set forth a description in
reasonable detail of the business to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting and certain
information concerning the shareholder proposing such business and the
beneficial owner, if any, on whose behalf the proposal is made, including their
names and addresses, the class and number of shares of Elder-Beerman that are
owned beneficially and of record by each of them, and any material interest of
either of them in the business proposed to be brought before the annual meeting.
Upon the written request of the holders of not less than 50% of Elder-Beerman's
voting stock to the Chairman, the President, or
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the Secretary, such officer is required to call a annual meeting of shareholders
for the purposes specified in such written request and fix a record date for the
determination of shareholders entitled to notice of and vote at such annual
meeting (which record date may not be later than 60 days after the date of
receipt of notice of such meeting).
Under applicable provisions of Ohio law, shareholder approval is
required to adopt amendments to a company's articles of incorporation, except
that a company's board of directors may adopt certain amendments relating to
unissued or treasury shares, changes in the number of authorized shares
necessitated by a conversion, option program, redemption, or provisions that
were, at one time, necessary for a merger or consolidation. Under Ohio law, an
Ohio corporation's code of regulations may be amended only by action of its
shareholders. The Amended Articles and Amended Regulations provide that the
provisions relating to the time and place of shareholder meetings, who may call
a special meeting of shareholders, the order of business at shareholder
meetings, the number, nomination, classification election, and term of directors
on the Board of Directors, allowing directors to fill vacancies on the Board of
Directors, the removal of directors by shareholders, the elimination of
cumulative voting in the election of directors, allowing the corporation to
reacquire capital stock of the corporation, and forbidding preemptive rights
with respect to unissued shares and treasury stock may not be amended, altered,
superseded, or repealed in any respect without the affirmative vote of the
holders of at least 72% of the voting stock of Elder-Beerman, voting together as
a single class; provided, however, that these provisions shall not alter the
voting entitlement of shares that, by virtue of any Preferred Stock Designation,
are expressly entitled to vote on any amendment to the Amended Articles or
Amended Regulations.
In addition to the matters discussed above, the OGCL contains certain
provisions that may have the effect of delaying, deterring, or preventing a
change in control of Elder-Beerman. All information set forth below regarding
the OGCL is necessarily general in nature and reference should be made to the
OGCL for more specific, detailed information.
Section 1701.831 of the OGCL (the "Control Share Act") regarding
shareholder review of control share acquisitions applies to Elder-Beerman. Under
the Control Share Act, any "control share acquisition" of an Ohio corporation
having fifty or more shareholders (an "Ohio Public Company") shall be made only
with the prior authorization of the shareholders of the Ohio Public Company in
accordance with the provisions of the Control Share Act. A "control share
acquisition" is defined as the acquisition, directly or indirectly, by any
person of shares of an Ohio Public Company that, when added to all other shares
of the corporation in respect of which such person may exercise or direct the
exercise of voting power, would entitle such person, immediately after such
acquisition, directly or indirectly, alone or with others, to exercise or direct
the exercise of the voting power of the corporation in the election of directors
within any of the following ranges of voting power: (a) one fifth or more, but
less than one third; (b) one third or more, but less than a majority; or (c) a
majority or more.
The Control Share Act requires that the acquiring person deliver an
"acquiring person's statement" to the Ohio Public Company. The Ohio Public
Company must then hold a special meeting of its shareholders to vote upon the
proposed acquisition within 50 days after receipt of such acquiring person's
statement, unless the acquiring person agrees to a later date. The Control Share
Act further specifies that the shareholders of the Ohio Public Company must
approve the proposed control share acquisition by certain percentages at a
special meeting of shareholders at which a quorum is present. In order to comply
with the Control Share Act, the acquiring person may only acquire the stock of
the Ohio Public Company upon the affirmative vote of: (a) a majority of the
voting power of the Ohio Public Company that is represented in person or by
proxy at the special meeting and (b) a majority of the voting power of the Ohio
Public Company that is represented in person or by proxy at the special meeting,
excluding those shares of the corporation deemed to be "interested shares."
"Interested shares" are defined to mean shares in respect of which the voting
power is controlled by any of the following persons: (i) an acquiring person;
(ii) any officer of the Ohio Public Company; and (iii) any employee who is also
a director of the Ohio Public Company. "Interested shares" also includes shares
of the Ohio Public Company that are acquired, directly or indirectly, by any
person after the date of the first public disclosure of the proposed acquisition
and prior to the date of the special meeting, if either (A) the aggregate
consideration paid by such person, and any person acting in concert with him,
for such shares of the Ohio Public Company exceeds $250,000 or (B) the number of
shares acquired by such person, and any person acting in concert with him,
exceeds one-half of one percent of the outstanding shares of the Ohio Public
Company.
Elder-Beerman is also subject to Chapter 1704 of the OGCL, which
generally prohibits a wide range of business combinations and other transactions
(including mergers, consolidations, asset sales, loans, disproportionate
distributions of property, and disproportionate issuances or transfers of shares
or rights to acquire shares) between an Ohio Public Company
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and a person that owns, alone or with other related parties, shares representing
at least 10% of the voting power of the Ohio Public Company (an "Interested
Shareholder"). Such prohibitions continue for a period of three years after such
person becomes an Interested Shareholder, unless, prior to the date that the
Interested Shareholder became such, the board of directors approve either the
transaction or the acquisition of the Ohio Public Company's shares that resulted
in the person becoming an Interested Shareholder. Following the three-year
moratorium period, the Ohio Public Company may engage in covered transactions
with an Interested Shareholder only if, among other things, (a) the transaction
receives the approval of the holders of two-thirds of all the voting shares or
the approval of the holders of a majority of the voting shares held by persons
other than an Interested Shareholder or (b) the remaining shareholders receive
an amount for their shares equal to the higher of the highest amount paid in the
past by the Interested Shareholder for the Ohio Public Company's shares or the
amount that would be due the shareholders if the Ohio Public Company were to
dissolve.
Under Ohio's Control Bid Statute, no person may make a control bid for
the Common Stock of Elder-Beerman pursuant to a tender offer or a request or
invitation for tenders until such person has filed with the Ohio Division of
Securities (the "Division") and Elder-Beerman a control bid information
statement. A "control bid" is defined by Section 1707.01 of the OGCL as the
purchase or offer to purchase any equity security of an issuer located in Ohio,
which has more than 10% of its record equity security holders who are residents
of Ohio, from a resident of Ohio where, after such purchase, the offeror would
own, directly or indirectly, more than 10% of any class of the issued and
outstanding equity securities of such issuer. Within three calendar days of the
filing of the control bid information statement, the Division may summarily
suspend the continuation of the control bid if the Division determines that the
information given in the information statement does not provide full disclosure
to offerees of all material information relating to the control bid. A hearing
will be scheduled within 10 days of any such suspension. In addition, no offeror
may make a control bid that is not made to all holders residing in Ohio, or that
is not made to such holders on the same terms as the control bid made to holders
residing outside of the state of Ohio. Further, no offeror may acquire from any
resident of Ohio any equity security within two years following the last
acquisition of any security of the same class pursuant to a control bid by such
offeror unless the resident is afforded, at the time of the later acquisition, a
reasonable opportunity to dispose of the security to the offeror upon
substantially the same terms of those provided in the earlier control bid.
For the purpose of preventing manipulative practices by a person who
makes a proposal, or publicly discloses the intention or possibility of making a
proposal, to acquire control of Elder-Beerman, Section 1707.043 of the OGCL
states that any profit realized, directly or indirectly, from the disposition of
any equity securities of Elder-Beerman by a person who, within 18 months before
the disposition, directly or indirectly, alone or in concert with others, made a
proposal, or publicly disclosed the intention or possibility of making a
proposal, to acquire control of Elder-Beerman, inures to Elder-Beerman and is
recoverable by Elder-Beerman by an action brought within two years after the
date of the disposition of such securities.
Finally, the OGCL provides for the right of Elder-Beerman's Board of
Directors to consider the interests of various constituencies, including
employees, customers, suppliers, and creditors of Elder-Beerman, as well as the
communities in which Elder-Beerman is located, in addition to the interest of
Elder-Beerman and its shareholders, in discharging its duties in determining
what is in the best interests of Elder-Beerman.
The foregoing provisions of the Amended Articles; the provisions of the
Amended Regulations relating to advance notice of shareholder nominations; and
the provisions of the Share Purchase Rights Agreement described under "-- Share
Purchase Rights Agreement," together with applicable state law, may discourage
or make more difficult the acquisition of control of Elder-Beerman by means of a
tender offer, open market purchase, proxy fight, or otherwise. These provisions
are intended to discourage, or may have the effect of discouraging, certain
types of coercive takeover practices and inadequate takeover bids and to
encourage persons seeking to acquire control of Elder-Beerman first to negotiate
with Elder-Beerman. The management of the Company believes that the foregoing
measures, many of which are substantially similar to the takeover-related
measures in effect for many other publicly-held companies, provide benefits, by
enhancing Elder-Beerman's potential ability to negotiate with the proponent of
an unsolicited proposal to acquire or restructure Elder-Beerman, which outweigh
the disadvantages of discouraging such proposals because, among other things,
negotiation of such proposals could result in an improvement of their terms. In
addition, management of the Company believes that such takeover-related measures
aid in protecting shareholders from takeover bids that the directors of such
companies have determined to be inadequate. While there necessarily can be no
assurance in this regard, the management of the Company also believes that the
foregoing measures are not likely to have a material impact on market prices for
Common Stock and the New Warrants in circumstances other than those described
above in light of, among other factors, the existence of generally comparable
measures in effect for other publicly-held companies and management's belief
that market prices will
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be influenced most significantly by Elder-Beerman's actual results of
operations, general market and economic conditions, and other traditional
determinants of stock market prices rather than takeover-related measures and
other corporate governance provisions. Nevertheless, such collective
anti-takeover effects could prevent shareholders from realizing a premium for
the sale of their shares in an acquisition of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Norwest Banks
Minnesota, N.A.
PREFERRED STOCK
GENERAL
As of the Effective Date of the Plan, Elder-Beerman was authorized to
issue 5 million shares of New Preferred Stock, without par value (the "New
Preferred Stock"). The Board of Directors has the authority to issue preferred
stock from time to time in one or more classes or series and to fix the price,
rights, preferences, privileges, and restrictions thereof, including dividend
rights, dividend rates, conversion rights, terms or redemption, redemption
prices, liquidation preferences, and the number of shares constituting a class
or series or the designation of such class or series, without any further vote
or action by Elder-Beerman's shareholders. The New Preferred Stock may be issued
in distinctly designated classes, may be convertible into Common Stock and may
rank prior to the Common Stock as to dividend rights, liquidation preferences,
or both. Also the express terms of shares of a different series of any
particular class of preferred stock shall be identical except for such
variations as may be permitted by law. Without limiting the foregoing,
Elder-Beerman is authorized to issue three initial classes of New Preferred
Stock that will be designated New Class A Preferred Stock, New Class B Preferred
Stock, and New Class C Preferred Stock, with voting rights as set forth below.
NEW CLASS A PREFERRED STOCK
Each holder of New Class A Preferred Stock is entitled to 100 votes per
share and, except as otherwise required by law, shall vote together with the
Common Stock as a single class on all matters properly submitted to a vote at a
meeting of the shareholders.
NEW CLASS B PREFERRED STOCK
Each holder of New Class B Preferred Stock is entitled to one vote per
share and, except as otherwise required by law, shall vote together with the
Common Stock as a single class on all matters properly submitted to a vote at a
meeting of shareholders.
NEW CLASS C PREFERRED STOCK
Holders of New Class C Preferred Stock have no voting rights.
NEW WARRANTS
The New Warrants will be issued in two series (the "New Warrants"), the
New Series A Warrants and the New Series B Warrants, and will be issued under
the New Form Warrant Agreement to be effective as of the Effective Date between
Elder-Beerman and the holders of the New Warrants. Each New Warrant, when
exercised, will entitle the holder thereof to acquire: (a) in the case of the
New Series A Warrants, approximately 250,000 shares of Common Stock at an
exercise price of $12.80 per share (representing 2% of the outstanding Common
Stock at a total equity value of $160 million) or (b) in the case of the New
Series B Warrants, approximately 375,000 shares of Common Stock at an exercise
price of $14.80 per share (representing 3% of the outstanding Common Stock at a
total equity value of $185 million). The New Warrants will expire on the fifth
anniversary of the Effective Date.
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FUTURE ISSUANCES OF STOCK
In addition to the Common Stock to be issued pursuant to the Plan,
Elder-Beerman is authorized to issue additional shares of capital stock from
time to time following the Effective Date to the extent permitted under the
Amended Articles, the Amended Regulations, the Plan, and applicable law.
SHARE PURCHASE RIGHTS AGREEMENT
As of the Effective Date, Elder-Beerman entered into a Rights Agreement
(the "Rights Agreement") with Norwest Bank Minnesota, N.A. (the "Rights
Agent"), which agreement was approved by the Bankruptcy Court upon confirmation
of the Plan. Under the Rights Agreement, the Board of Directors has declared a
dividend on the Common Stock of one right (a "Right") to purchase one
one-hundredth of a share of New Class A Preferred Stock, without par value (the
"Preferred Shares"), of Elder-Beerman at a price per one one-hundredth of a
Preferred Share, subject to adjustment, of $60.00 (the "Purchase Price"). Under
the Rights Agreement, the Rights are evidenced by the Common Stock share
certificates until the earlier (the "Distribution Date") of: (a) the close of
business on the first date (the "Share Acquisition Date") of public
announcement that a person (other than a person that has maintained beneficial
ownership of at least 20% of the outstanding shares of Common Stock since the
Effective Date, Elder-Beerman, a subsidiary or employee benefit or stock
ownership plan of Elder-Beerman or any of its affiliates or associates),
together with its affiliates and associates, has acquired beneficial ownership
of 20% or more of the outstanding shares of Common Stock (any such person or
group being hereinafter called an "Acquiring Person") or (b) the close of
business on the tenth business day (or such later date as may be specified by
the Board of Directors) following the commencement of a tender offer or
exchange offer by any person (other than Elder-Beerman, a subsidiary or
employee benefit or stock ownership plan of Elder-Beerman, or any of its
affiliates or associates), the consummation of which would result in beneficial
ownership by such person of 20% or more of the outstanding shares of Common
Stock.
Rights are exercisable to purchase Preferred Shares only after the
Distribution Date occurs and prior to the occurrence of a Flip-in Event, as
described below. A Distribution Date resulting from the commencement of a tender
offer or exchange offer described in clause (b) above could precede the
occurrence of a Flip-in Event and thus result in the Rights being exercisable to
purchase Preferred Shares. A Distribution Date resulting from any occurrence
described in clause (a) above would necessarily follow the occurrence of a
Flip-in Event and thus result in the Rights being exercisable to purchase Common
Stock or other securities as described below.
Under the Rights Agreement, in the event (a "Flip-in Event") that (a)
any person or group, together with its affiliates and associates, becomes an
Acquiring Person, (b) any Acquiring Person or any affiliate or associate thereof
merges into or combines with Elder-Beerman and Elder-Beerman is the surviving
corporation, (c) any Acquiring Person or any affiliate or associate thereof
effects certain other transactions with Elder-Beerman, or (d) during such time
as there is an Acquiring Person, Elder-Beerman effects certain transactions, in
each case as described in the Rights Agreement, then, in each such case, proper
provision will be made so that from and after the later of the Distribution Date
and the date of the occurrence of such Flip-in Event each holder of a Right,
other than Rights that are or were owned beneficially by an Acquiring Person
(which, from and after the date of a Flip-in Event, will be void), will have the
right to receive, upon exercise thereof at the then-current exercise price of
the Right, that number of shares of Common Stock (or, under certain
circumstances, an economically equivalent security or securities of the
Elder-Beerman) that at the time of such Flip-in Event have a market value of two
times the exercise price of the Right.
In the event (a "Flip-over Event") that, at any time after a person has
become an Acquiring Person, (a) Elder-Beerman merges with or into any person and
Elder-Beerman is not the surviving corporation, (b) any person merges with or
into Elder-Beerman and Elder-Beerman is the surviving corporation, but all or
part of the Common Stock is changed or exchanged for stock or other securities
of any other person or cash or any other property, or (c) 50% or more of
Elder-Beerman's assets or earning power, including securities creating
obligations of Elder-Beerman, are sold, in each case as described in the Rights
Agreement, then, and in each such case, proper provision will be made so that
each holder of a Right, other than Rights which have become void, will
thereafter have the right to receive, upon the exercise thereof at the
then-current exercise price of the Right, that number of shares of common stock
(or, under certain circumstances, an economically equivalent security or
securities) of such other person that at the time of such Flip-over Event have a
market value of two times the exercise price of the Right.
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From and after the later of the Share Acquisition Date and the
Distribution Date, Rights (other than any Rights that have become void) will be
exercisable to purchase shares of Common Stock as described above, upon payment
of the aggregate exercise price in cash. In addition, at any time after the
later of the Share Acquisition Date and the Distribution Date and prior to the
acquisition by any person or group of affiliated or associated persons of 50% or
more of the outstanding shares of Common Stock, Elder-Beerman may exchange the
Rights (other than any rights that have become void), in whole or in part, at an
exchange ratio of one share of Common Stock per Right (subject to adjustment).
For all purposes of the Rights Agreement, any person that, as of the
Effective Date, has beneficial ownership of 20% or more of the then-outstanding
shares of Common Stock, or that becomes the beneficial owner of 20% or more of
the then-outstanding shares of Common Stock solely as a result of a reduction in
the number of shares of Common Stock outstanding, will not be deemed to have
become an Acquiring Person unless and until such time as (a) such person, or any
affiliate or associate of such person, thereafter becomes the beneficial owner
of additional shares of Common Stock representing 1% or more of the
then-outstanding Common Stock or (b) any other person that is the beneficial
owner of shares of Common Stock representing 1% or more of the then-outstanding
Common Stock thereafter becomes an affiliate or associate of such person.
Elder-Beerman will be able, at its option, to redeem the Rights in
whole, but not in part, at a price of $.01 per Right, subject to adjustment (the
"Redemption Price"), at any time prior to the close of business on the date of
the first occurrence of a Flip-in Event or Flip-over Event. Immediately upon any
redemption of the Rights, the right to exercise the Rights will terminate and
the only right of the holders of Rights will be to receive the Redemption Price.
The Company will be able to amend the Rights Agreement without the
approval of any holders of Right certificates, including amendments that
increase or decrease the Purchase Price, that add other events requiring
adjustment to the Purchase Price payable and the number of the Preferred Shares
or other securities issuable upon the exercise of the Rights or that modify
procedures relating to the redemption of the Rights, except that no amendment
may be made that decreases the stated Redemption Price to an amount less than
$.01 per Right. The Rights Agreement will expire on (a) the first anniversary of
the Effective Date or (b) such later date as the Board of Directors, by
resolution adopted prior to the first anniversary of the Effective Date, may
establish, but not later than the tenth anniversary of the Effective Date. In
accordance with the foregoing, the Board of Directors (a) will have the right to
reconsider any of the terms of the Rights Agreement at any time and (b) may take
such action with respect to the Rights Agreement as the Board of Directors deems
appropriate.
The Rights are being registered under the Exchange Act, together with
the Common Stock, pursuant to this Registration Statement. The Company has filed
an application with The Nasdaq Stock Market to list the Common Stock and the
accompanying Right on the Nasdaq National Market. In the event that the Rights
become exercisable, the Company will register the Preferred Shares for which the
Rights may be exercised, in accordance with applicable law.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
EXISTING INDEMNIFICATION OBLIGATIONS
The Company's Amended Regulations provides for the indemnification of
the directors and officers of the Company, and persons serving at the request of
the Company's Board of Directors as a director, trustee, officer, employee, or
agent of another entity, for claims against them arising from and after the
Effective Date to the fullest extent permitted by Ohio law. Under Ohio law, a
director is not liable for monetary damages unless it is proven by clear and
convincing evidence that his action or failure to act was undertaken with
deliberate intent to cause injury to the corporation or with reckless disregard
for the best interests of the corporation. There is, however, no comparable
provision limiting the liability of officers or other agents of a corporation.
Under Ohio law, Ohio corporations are authorized to indemnify
directors, officers, and agents within prescribed limits and must indemnify them
under certain circumstances. Determinations regarding discretionary
indemnification are to be made by a majority vote of a quorum of disinterested
directors or, if a quorum is not available, by independent counsel, the
shareholders, the court of common pleas, or the court in which the proceeding
was brought. Ohio law does not provide statutory authorization for a corporation
to indemnify directors and officers for settlements, fines, or judgments in the
context
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of derivative suits. However, it provides that directors (but not officers) are
entitled to mandatory advancement of expenses, including attorneys' fees,
incurred in defending any action, including derivative actions, brought against
the director, provided the director agrees to cooperate with the corporation
concerning the matter and to repay the amount advanced if it is proved by clear
and convincing evidence that his act or failure to act was done with deliberate
intent to cause injury to the corporation or with reckless disregard for the
corporation's best interests.
Ohio law does not authorize payment of expenses or judgments to an
officer or other agent after a finding of negligence or misconduct in a
derivative suit absent a court order. Indemnification is required, however, to
the extent such person succeeds on the merits. In all other cases, if a director
or officer acted in good faith and in a manner he reasonably believed to be in
(or not opposed to) the best interests of the company, indemnification is
discretionary except as otherwise provided by a company's articles of
incorporation, code of regulations, or by contract except with respect to the
advancement of expenses of directors.
In addition to the statutory right to indemnify, Ohio law provides
express authority for Ohio corporations to procure not only insurance policies,
but also to furnish protection similar to insurance, including trust funds,
letters of credit, and self-insurance, or to provide similar protection such as
indemnity against loss of insurance.
TREATMENT OF INDEMNIFICATION OBLIGATIONS UNDER THE PLAN
The obligations of the Company to indemnify any person serving as one
of its directors, officers, or employees as of or following the Petition Date,
by reason of such person's prior or future service in such a capacity, or as a
director, officer, or employee of another corporation, partnership, or other
legal entity, to the extent provided in the applicable articles of
incorporation, code of regulations, or similar constituent documents or by
statutory law or written agreement of or with the Company, were deemed and
treated as executory contracts and were assumed by the Company or applicable
subsidiary of the Company pursuant to the plan and section 365 of the Bankruptcy
Code as of the Effective Date. Accordingly, such indemnification obligations
survived and were unaffected by entry of the confirmation order, irrespective of
whether such indemnification is owed for an act or event occurring before or
after the Petition Date. The obligations of the Company or applicable subsidiary
of the Company to indemnify any person who, as of the Petition Date, was no
longer serving as a director or officer of such entity, which indemnity
obligation arose by reason of such person's prior service in any such capacity,
or as a director, officer, or employee of another corporation, partnership, or
other legal entity, whether provided in the applicable articles of
incorporation, code of regulations, or similar constituent documents or by
statutory law (including Texas law with respect to Margo's and Ohio law with
respect to the other Old Elder-Beerman Companies), written agreement, policies,
or procedures of or with such entity, terminated and were discharged pursuant to
section 502(e) of the Bankruptcy Code or otherwise, as of the Effective Date;
provided, however, that, to the extent that such indemnification obligations no
longer gave rise to contingent Claims that can be disallowed pursuant to section
502(e) of the Bankruptcy Code, such indemnification obligations were deemed and
treated as executory contracts that were rejected by the applicable entity
pursuant to the Plan and section 365 of the Bankruptcy Code, as of the Effective
Date, and any Claims arising from such indemnification obligations (including
any rejection damage claims) were subject to the bar date provisions of the
Plan.
NEW INDEMNIFICATION AGREEMENTS
The Company entered into indemnification agreements, effective as of
the Effective Date, with each of its directors and officers and each of the
directors and officers of the Company's subsidiaries. The indemnification
agreements provide for, among other things, (a) the indemnification of the
indemnitee by the Company for conduct in the capacities described above, (b) the
advancement of attorneys' fees and other expenses, and (c) the establishment,
upon approval by the Board of Directors at its option, of trusts or other
funding mechanisms to fund the Company's indemnification obligations thereunder.
FINANCIAL STATEMENTS
The Company's audited consolidated financial statements for the years
ended February 1, 1997, February 3, 1996, and January 28, 1995, respectively,
and the Company's unaudited condensed consolidated financial statements for the
32
<PAGE> 36
39-week periods ended November 1, 1997 and November 2, 1996, respectively, are
set forth at the end of this Registration Statement and begin on page F-1.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Company's
independent public accountants during the last two fiscal years.
FINANCIAL STATEMENTS AND EXHIBITS
FINANCIAL STATEMENTS
The following financial statements of the Company are included at the
indicated page in this Registration Statement:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Consolidated Balance Sheets (unaudited) as of November 1, 1997 and November 2, 1996...................F-2
Condensed Consolidated Statements of Operations (unaudited) for the 39-weeks ended November 1, 1997 and
November 2, 1996.......................................................................................F-3
Condensed Consolidated Statements of Cash Flows (unaudited) for the 39-weeks ended November 1, 1997 and
November 2, 1996.......................................................................................F-4
Notes to Condensed Consolidated Financial Statements (unaudited)................................................F-5
Independent Auditors' Report....................................................................................F-9
Consolidated Balance Sheets as of February 1, 1997 and February 3, 1996........................................F-10
Consolidated Statements of Operations for the fiscal years ended February 1, 1997, February 3, 1996 and
January 28, 1995......................................................................................F-12
Consolidated Statements of Shareholders' Equity for the fiscal years ended February 1, 1997, February 3, 1996
and January 28, 1995..................................................................................F-13
Consolidated Statements of Cash Flows for the fiscal years Ended February 1, 1997, February 3, 1996 and
January 28, 1995......................................................................................F-14
Notes to Consolidated Financial Statements.....................................................................F-15
</TABLE>
33
<PAGE> 37
EXHIBITS
A. Exhibit Index
Exhibit
Number Description of Exhibit
------ ----------------------
2 Third Amended Joint Plan of Reorganization of The
Elder-Beerman Stores Corp. and
its Subsidiaries dated November 17, 1997*
3(a) Form of Amended Articles of Incorporation*
3(b) Form of Amended Code of Regulations*
4(a) Form of Stock Certificate for Common Stock*
4(b) Form of Registration Rights Agreement*
4(c) Form of Rights Agreement*
4(d) Form of Warrant Agreement*
10(a)(i) Form of Pooling and Servicing
Agreement*
10(a)(ii) Form of Series 1997-1 Supplement*
10(a)(iii) Form of Certificate Purchase Agreement*
10(a)(iv) Form of Loan Agreement*
10(a)(v) Form of Intercreditor Agreement*
10(a)(vi) Form of Parent Undertaking Agreement*
10(a)(vii) Form of Purchase Agreement (Chargit)*
10(a)(viii) Form of Purchase Agreement (Elder-Beerman)*
10(a)(ix) Form of Subordinated Note*
10(b)(i) Form of Credit Agreement*
10(b)(ii) Form of Borrower Pledge Agreement*
10(b)(iii) Form of Chargit Pledge Agreement*
10(b)(iv) Form of Security Agreement*
10(b)(v) Form of Chargit Guaranty*
10(b)(vi) Form of Bee-Gee Guaranty*
10(b)(vii) Form of Revolving Note*
10(b)(viii) Form of Assignment of Account*
10(c) Form of Employment Agreement for Senior Vice Presidents*
10(d) Form of Employment Agreement for Executive Vice Presidents*
10(e) Form of Severance Pay Plan for Key Employees of the Company*
10(f) Form of Director Indemnification Agreement*
10(g) Form of Officer Indemnification Agreement*
10(h) Form of Director and Officer Indemnification Agreement*
34
<PAGE> 38
10(i) Form of The Elder-Beerman Stores Corp. Equity and Performance
Incentive Plan*
10(j) Form of Restricted Stock Agreement for Non-Employee Director*
10(k) Form of Restricted Stock Agreement*
10(l) Form of Deferred Shares Agreement*
10(m) Form of Nonqualified Stock Option Agreement for Non-Employee
Director*
10(n) Form of Nonqualified Stock Option Agreement*
10(o) Form of Employee Stock Purchase Plan*
10(p) Form of Comprehensive Settlement Agreement*
10(q) Form of Tax Indemnification Agreement*
10(r) Form of Tax Sharing Agreement*
21 Subsidiaries of the Company*
27 Financial Data Schedule*
- -------------------
* Previously filed
B. Financial Statement Schedules
None.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Company has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
THE ELDER-BEERMAN STORES CORP.
Date: February 12, 1998 By: /s/ Scott J. Davido, Esq.
----------------------------
Scott J. Davido, Esq., Senior Vice
President, General Counsel and Secretary
35
<PAGE> 39
INDEX TO HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Consolidated Balance Sheets (unaudited) as of November 1, 1997 and November 2, 1996...................F-2
Condensed Consolidated Statements of Operations (unaudited) for the 39-weeks ended November 1, 1997 and
November 2, 1996.......................................................................................F-3
Condensed Consolidated Statements of Cash Flows (unaudited) for the 39-weeks ended November 1, 1997 and
November 2, 1996.......................................................................................F-4
Notes to Condensed Consolidated Financial Statements (unaudited)................................................F-5
Independent Auditors' Report....................................................................................F-9
Consolidated Balance Sheets as of February 1, 1997 and February 3, 1996........................................F-10
Consolidated Statements of Operations for the fiscal years ended February 1, 1997, February 3, 1996 and
January 28, 1995......................................................................................F-12
Consolidated Statements of Shareholders' Equity for the fiscal years ended February 1, 1997, February 3, 1996
and January 28, 1995..................................................................................F-13
Consolidated Statements of Cash Flows for the fiscal years Ended February 1, 1997, February 3, 1996 and
January 28, 1995......................................................................................F-14
Notes to Consolidated Financial Statements.....................................................................F-15
</TABLE>
F-1
<PAGE> 40
THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES
(Debtors in Possession)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nov. 1, Nov. 2,
1997 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 8,882 $ 7,483
Customer accounts receivable 134,306 140,637
Merchandise inventories 188,604 180,217
Refundable income taxes 10,359
Other current assets 25,302 11,302
--------- ---------
Total current assets 357,094 349,998
Property, net 57,639 51,541
Other assets 7,265 11,759
--------- ---------
64,904 63,300
--------- ---------
Total assets $ 421,998 $ 413,298
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIENCY IN ASSETS)
Current liabilities:
Current portion of long-term obligations $ 89,410 $ 87,982
Accounts payable 59,398 44,989
Accrued liabilities 26,562 30,048
Liabilities of discontinued operations 9,917 10,053
--------- ---------
Total current liabilities 185,287 173,072
Long-term obligations 5,744 5,689
Deferred Lease Incentives 4,632 4,741
Liabilities subject to compromise 232,454 224,205
Commitments and contingencies
Shareholders' equity (deficiency in assets):
Series B convertible preferred stock 7 7
Common stock 6,511 6,511
Additional paid-in capital 23,283 23,283
Deficit (35,920) (24,210)
--------- ---------
(6,119) 5,591
--------- ---------
Total liabilities and
shareholders' equity (deficiency
in assets) $ 421,998 $ 413,298
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
F-2
<PAGE> 41
THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES
(Debtors in Possession)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
--------------------------
Nov. 1, Nov. 2,
1997 1996
--------- ---------
<S> <C> <C>
Revenues:
Net sales $ 386,179 $ 378,682
Financing 19,801 20,003
--------- ---------
Total revenues 405,980 398,685
Costs and expenses:
Costs of merchandise sold, occupancy
and buying expenses 283,127 273,397
Selling, general and administrative 113,456 117,999
Provision for doubtful accounts 4,187 4,147
Interest expense 4,617 3,777
--------- ---------
Total costs and expenses 405,387 399,320
Income before reorganization items
and income taxes 593 (635)
Reorganization items 12,850 12,339
--------- ---------
Loss before income taxes (12,257) (12,974)
Income taxes
--------- ---------
Net (loss) $ (12,257) $ (12,974)
========= =========
Net (Loss) per common share $ (1.88) $ (1.99)
========= =========
Average common shares outstanding (thousands) 6,511 6,511
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
F-3
<PAGE> 42
THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES
(Debtors in Possession)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
Thirty-nine Weeks Ended
------------------------
Nov. 1, Nov. 2,
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net(loss) $(12,257) $(12,974)
Adjustments to reconcile net loss to net
cash used in operating activities:
Provision for doubtful accounts 4,187 4,147
Provision for depreciation & amortization 8,961 9,629
Net loss on disposal of assets 481 1,675
Changes in noncash assets and liabilities:
Accounts receivable 9,321 (408)
Merchandise inventories (61,754) (60,893)
Other current assets (3,649) (916)
Income tax refunds 128
Other long-term assets 768 79
Discontinued operations (196) (2,290)
Accounts payable 41,301 18,914
Accrued liabilities (3,996) 804
-------- --------
Net cash used in operating activities (16,705) (42,233)
-------- --------
Cash flows from investing activities:
Capital expenditures (12,498) (3,070)
Proceeds from sale of fixed assets 1,200
Proceeds from disposal of investments 300
-------- --------
Net cash used in investing activities (12,498) (1,570)
-------- --------
Cash flows from financing activities:
Net borrowings under DIP Facility 31,479 37,830
Payments on long-term obligations (160) (155)
Debt acquisition costs (325) (1,052)
-------- --------
Net cash provided by financing activities 30,994 36,623
-------- --------
Increase (decrease) in cash and equivalents 1,791 (7,180)
Cash and equivalents at beginning of year 7,091 14,663
-------- --------
Cash and equivalents at end of thirty-nine weeks $ 8,882 $ 7,483
======== ========
Supplemental Cash Flow Information:
Interest paid $ 5,244 $ 4,957
Income taxes paid 150
Supplemental Non-Cash Investing
and Financing Activities:
Property acquired from lease incentives $ $ 339
</TABLE>
See notes to condensed consolidated financial statements.
F-4
<PAGE> 43
THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES
(Debtors in Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Dollars in thousands, except share data)
A - FINANCIAL STATEMENTS
The interim financial statements are unaudited. In the opinion of management,
all adjustments (which consist only of normal recurring adjustments) necessary
to present fairly the financial position and results of operations for the
interim periods presented have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted or condensed. It is suggested that the condensed consolidated
financial statements be read in conjunction with the financial statements and
notes thereto for the year ended February 1, 1997. The results of operations for
the period ended November 1, 1997, may not necessarily be indicative of the
operating results for the full year.
B - CHAPTER 11 PROCEEDINGS
On October 17, 1995 ("the Filing Date"), The Elder-Beerman Stores Corp.
("Elder-Beerman") and each of its wholly-owned subsidiaries; The El-Bee Chargit
Corp., The Bee-Gee Shoe Corp., Margo's La Mode, Inc., McCook Wholesale Corp.,
E-B Community Urban Redevelopment Corporation and EBA, Inc., (collectively the
"Corporation"), filed petitions for relief under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") with the United States Bankruptcy Court
(the "Bankruptcy Court") For the Southern District of Ohio, Western Division.
Pursuant to an order of the Bankruptcy Court, the individual Chapter 11 cases
were consolidated for procedural purposes only and are being jointly
administered by the Bankruptcy Court. The Corporation is currently operating as
debtor in possession, subject to the approval of the Bankruptcy Court for
certain of its proposed actions. Additionally, certain creditors of the
Corporation have formed two official committees pursuant to the Bankruptcy Code.
Such committees (as well as other parties in interest) have the right to review
and object to transactions outside of the ordinary course of the Corporation's
business and are expected to participate in the approval of the plan of
reorganization.
Under Chapter 11, actions in respect of certain claims against the Corporation
in existence prior to the filing of the petitions for relief under the
Bankruptcy Code are stayed while the Corporation continues business operations
as debtors in possession. In addition, under the Bankruptcy Code, the
Corporation may reject executory contracts, including lease obligations. Parties
affected by these rejections may file claims with the Bankruptcy Court in
accordance with the reorganization process. Substantially all liabilities as of
the petition date are subject to settlement under the plan of reorganization to
be voted upon by the creditors and approved by the Bankruptcy Court. The
Corporation expects to file the plan in fiscal 1997.
The Corporation is in default under the terms of substantially all prepetition
loan and note agreements and certain equipment and store leases. The amounts
outstanding in respect to these agreements are subject to settlement under the
reorganization proceedings. Generally, as a result of the bankruptcy, the
contractual terms of prepetition debt obligations are suspended. The Corporation
did not accrue or pay interest on debt subsequent to the Filing Date, except as
permitted. The financial statements do not include accrued interest on
prepetition unsecured debt of $27,605 and $14,110 at November 1, 1997 and
November 2, 1996, respectively. In the accompanying consolidated balance sheets,
liabilities subject to settlement under the Chapter 11 proceedings are
classified as liabilities subject to compromise and are comprised of the
following:
F-5
<PAGE> 44
<TABLE>
<CAPTION>
Nov. 1, Nov. 2,
1997 1996
-------- --------
<S> <C> <C>
Accounts payable and accrued liabilities $ 93,884 $ 84,785
Unsecured debt 131,900 131,900
Secured debt 2,455 2,455
Capital lease obligations 2,222 3,072
Accrued interest 1,993 1,993
-------- --------
Total $232,454 $224,205
======== ========
</TABLE>
These amounts represent management's best estimate of all known or potential
claims. Such claims remain subject to future adjustments with respect to
disputed claims depending on negotiations with creditors and actions of the
Bankruptcy Court in the Chapter 11 case. Consequently, the amount included in
the Consolidated Balance Sheet as "Liabilities Subject to Compromise" may be
subject to adjustment.
Certain prepetition liabilities have been paid after obtaining the approval of
the Bankruptcy Court, including certain wages and benefits of employees,
insurance costs, department leases, reclamation claims, and contractors' costs.
Under the provisions of the Bankruptcy Code the Corporation has the right to
reject leases. Lessors may file claims for damages incurred from such
rejections, which would be treated as prepetition liabilities. Claims filed in
respect to leases for real property may not exceed the greater of an amount
equal to (a) one year's rental payments or (b) payments for a period equal to
15% of the remaining term of the lease, but not in excess of three years rent.
The Corporation is actively engaged in the process of reviewing its executory
contracts and final decisions with respect to assuming or rejecting contracts;
approval by the Bankruptcy Court is still pending.
Outstanding prepetition accounts payable have been reported net of prepetition
accounts receivable and deposits from various vendors and their representatives.
Additional prepetition liabilities may arise as a result of claims filed by
parties affected by the Corporation's bankruptcy filing. These claims will be
analyzed and either settled or disputed in the bankruptcy proceedings.
Ultimately the adjustment of the total liabilities of the Corporation remains
subject to Bankruptcy Court approved plan of reorganization, and accordingly,
the total amount of such liabilities is not presently determinable. Pursuant to
an order of the Bankruptcy Court, the Corporation presently has the exclusive
right to file a plan of reorganization through March 16, 1998.
C - GOING CONCERN
The Corporation's consolidated financial statements have been prepared on a
going concern basis, which contemplates continuity of operations, realization of
assets and the liquidation of liabilities and commitments in the normal course
of business. The bankruptcy filings raise substantial doubt about its ability to
continue as a going concern. The appropriateness of using the going concern
basis is dependent upon, among other things, confirmation of a plan of
reorganization, future profitable operations, and the ability to generate
sufficient cash from operations and financing sources to meet obligations. In
this regard, management developed and is executing a plan which includes
improving gross margins and reducing costs and possibly closing certain retail
store locations. While under protection of Chapter 11, the Corporation may sell
or otherwise dispose of assets, liquidate or settle liabilities, for amounts
other than those reflected in the accompanying consolidated financial
statements. Further, a plan of reorganization could materially change the
amounts reported in the accompanying consolidated financial statements. The
accompanying
F-6
<PAGE> 45
consolidated financial statements do not include any adjustments relating to the
recoverability of the value of recorded asset amounts or the amounts and
classification of liabilities that might be necessary as a result of the plan of
reorganization.
D - ACCOUNTING POLICIES
On an interim basis, all costs subject to recurring year-end adjustments have
been estimated and allocated ratably to the quarters. No income taxes have been
provided as a valuation allowance has been established for the entire amount of
deferred tax assets resulting from the Company's net losses.
E - REORGANIZATION ITEMS
Reorganization costs consist of the following:
Thirty-nine Weeks Ended
-----------------------
Nov. 1, Nov. 2,
1997 1996
-------- --------
Professional fees $ 8,713 $ 6,684
Restructuring 3,683 3,546
Financing costs 454 2,109
------- -------
Total $12,850 $12,339
======= =======
Subsequent to the Chapter 11 filings, the Corporation began restructuring its
business and decided, amount other things, to close stores and and terminate
employees. Severance payments and other store closing costs are in restructuring
costs. Financing costs include the amortization of fees associated with the DIP
Facility.
F - LONG-TERM OBLIGATIONS
In connection with the Chapter 11 filing, on October 17, 1995, Elder-Beerman and
Chargit entered into a Postpetition Loan and Security Agreement (the DIP
Facility) with Citibank N.A. Substantially all assets are pledged as collateral
for the DIP Facility.
In October 1995, the Bankruptcy Court signed an order approving the DIP
Facility, which had a maturity of January 31, 1997. On September 30, 1996, the
DIP Facility was extended to October 31, 1997. Further extension was approved on
August 31, 1997 through January 31, 1998.
F-7
<PAGE> 46
G - DISCONTINUED OPERATIONS
In fiscal 1994, the Corporation adopted formal plans to dispose of its
subsidiaries Margo's La Mode, Inc. ("Margo's") and The Bee-Gee Shoe Corp. ("Bee
Gee"). During fiscal 1995, the Corporation was unsuccessful in its attempt to
sell Margo's and decided to liquidate the subsidiary.
In fiscal, 1996, management determined the value of Bee Gee would be more
effectively realized by retaining Bee Gee as a part of the Corporation's ongoing
operations. Accordingly, the consolidated balance sheets, statements of
operations and cash flows reflect Bee Gee as a part of continuing operations.
H - COMMITMENTS AND CONTINGENCIES
Litigation - The Corporation is a party to various legal actions and
administrative proceedings and subject to various claims arising in the ordinary
course of business. Management believes the outcome of any of the litigation
matters that will have a material effect on the Corporation's results of
operations, cash flows or financial position have been appropriately accrued.
As discussed in Note A, on October 17, 1995, the Corporation and its
subsidiaries filed voluntary petitions in the Bankruptcy Court under Chapter 11
of the Bankruptcy Code. All material civil litigation commenced against the
Corporation and those referenced subsidiaries prior to that date has been stayed
under the Bankruptcy Code.
Other Claims - The Elder-Beerman Stores Corp. Profit-Sharing and Stock Ownership
Plan Committee has made claims relevant to Fiscal Year 1998, 1997 and 1996 for
corporate contributions and payment of certain expenses. The Corporation
believes that such contributions are discretionary and the expenses are not
liabilities of the Corporation.
Letter of Credit - At November 1, 1997, the Corporation had outstanding
commercial and standby letters of credit totaling $9,077 under the DIP Facility
and with other banks, relating to trade financing and insurance activities.
Insurance - The Corporation is self-insured for employee medical and workers'
compensation subject to limitation for which insurance has been purchased.
Management believes that those claims reported and not paid and claims incurred,
but not yet reported, are appropriately accrued.
F-8
<PAGE> 47
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
The Elder-Beerman Stores Corp.:
We have audited the accompanying consolidated balance sheets of The
Elder-Beerman Stores Corp. and subsidiaries (Debtors in Possession) (the
"Corporation") as of February 1, 1997 and February 3, 1996 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three fiscal years in the period ended February 1, 1997. These
financial statements are the responsibility of the Corporation'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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Corporation as of February 1,
1997 and February 3, 1996 and the results of their operations and their cash
flows for each of the three fiscal years in the period ended February 1, 1997,
in conformity with generally accepted accounting principles.
As discussed in Notes A and B, the Corporation has filed for reorganization
under Chapter 11 of the Federal Bankruptcy Code. The accompanying financial
statements do not purport to reflect or provide for the consequences of the
bankruptcy proceedings. In particular, such financial statements do not purport
to show (a) as to assets, their realizable value on a liquidation basis or their
availability to satisfy liabilities; (b) as to prepetition liabilities, the
amounts that may be allowed for claims or contingencies, or the status and
priority thereof; (c) as to shareholder accounts, the effect of any changes that
may be made in the capitalization of the Corporation; or (d) as to operations,
the effect of any changes that may be made in its business.
The accompanying consolidated financial statements have been prepared assuming
that the Corporation will continue as a going concern. As discussed in Note B,
the bankruptcy filings raise substantial doubt about its ability to continue as
a going concern. The continuation of its business as a going concern is
contingent upon, among other things, future profitable operations, the ability
to generate sufficient cash from operations and financing sources to meet
obligations, and the development and confirmation of a plan of reorganization.
Management's plans concerning these matters are also discussed in Note B. The
consolidated financial statements do not include any adjustments that might
result from the outcome of the uncertainties referred to herein and in the
preceding paragraph.
April 18, 1997
Dayton, Ohio
F-9
<PAGE> 48
<TABLE>
<CAPTION>
THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES
(DEBTORS IN POSSESSION)
CONSOLIDATED BALANCE SHEETS
- -----------------------------------------------------------------------------------------
FEBRUARY 1, FEBRUARY 3,
1997 1996
ASSETS (DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 7,091 $ 14,665
Customer accounts receivable (less allowance for doubtful
accounts: fiscal 1996 - $3,800; fiscal 1995 - $3,200) 147,814 144,376
Merchandise inventories 126,850 119,305
Refundable income taxes 10,336 10,354
Assets of discontinued operations 3 581
Other current assets 10,572 4,922
-------- --------
Total current assets 302,666 294,203
-------- --------
PROPERTY:
Land and improvements 1,177 1,177
Buildings and leasehold improvements 54,361 61,225
Furniture, fixtures and equipment 76,047 72,535
-------- --------
Total cost 131,585 134,937
Less accumulated depreciation and amortization 77,782 74,816
-------- --------
Property, net 53,803 60,121
-------- --------
OTHER ASSETS 8,672 12,745
-------- --------
TOTAL $365,141 $367,069
======== ========
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE> 49
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
FEBRUARY 1, FEBRUARY 3,
1997 1996
(DOLLARS IN THOUSANDS,
LIABILITIES AND SHAREHOLDERS' EQUITY EXCEPT SHARE DATA)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term obligations $ 57,931 $ 50,100
Accounts payable 18,877 18,177
Accrued liabilities:
Compensation and related items 8,696 5,126
Other taxes 6,421 5,840
Rent 2,009 2,061
Other 12,458 18,417
Liabilities of discontinued operations 10,216 11,100
--------- ---------
Total current liabilities 116,608 110,821
--------- ---------
LONG-TERM OBLIGATIONS - Less current portion
5,669 3,100
DEFERRED LEASE INCENTIVES
5,051 5,172
LIABILITIES SUBJECT TO COMPROMISE 231,675 229,409
COMMITMENTS AND CONTINGENCIES (Note Q)
SHAREHOLDERS' EQUITY:
Series B convertible preferred stock, $.01 par value, 1,250,000 shares
authorized, 662,474 issued and outstanding (aggregate liquidation
preference $12,700)
7 7
Common stock, $1 stated value, 10,000,000 shares
authorized, 6,510,733 shares
issued and outstanding
6,511 6,511
Additional paid-in capital 23,283 23,283
Deficit (23,663) (11,234)
--------- ---------
Total shareholders' equity 6,138 18,567
--------- ---------
TOTAL $ 365,141 $ 367,069
========= =========
</TABLE>
F-11
<PAGE> 50
THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES
(DEBTORS IN POSSESSION)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
- ----------------------------------------------------------------------------------------------------------
YEAR ENDED
--------------------------------------------
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C> <C>
REVENUES:
Net sales $ 569,557 $ 590,018 $ 631,100
Financing 27,451 18,913 16,226
--------- --------- ---------
Total revenues 597,008 608,931 647,326
--------- --------- ---------
COSTS AND EXPENSES:
Cost of merchandise sold, occupancy and buying expenses 410,067 457,122 466,785
Selling, general and administrative expenses 156,892 169,919 171,774
Key employees performance bonus plan expense 4,994 - -
Hiring and recruiting expenses for new executives 1,435 86 -
Provision for doubtful accounts 6,680 5,878 3,459
Interest expense 6,467 9,557 9,898
Other income (1,106) - -
--------- --------- ---------
Total costs and expenses 585,429 642,562 651,916
--------- --------- ---------
INCOME (LOSS) BEFORE REORGANIZATION ITEMS
AND INCOME TAX EXPENSE (BENEFIT) 11,579 (33,631) (4,590)
REORGANIZATION ITEMS (23,648) (19,711) -
--------- --------- ---------
LOSS BEFORE INCOME TAX EXPENSE (BENEFIT)
AND DISCONTINUED OPERATIONS (12,069) (53,342) (4,590)
INCOME TAX EXPENSE (BENEFIT) 360 (2,332) (2,526)
--------- --------- ---------
LOSS BEFORE DISCONTINUED OPERATIONS (12,429) (51,010) (2,064)
DISCONTINUED OPERATIONS - (12,276) (11,291)
--------- --------- ---------
NET LOSS $ (12,429) $ (63,286) $ (13,355)
========= ========= =========
EARNINGS (LOSS) PER COMMON SHARE:
Continuing operations $ (1.90) $ (7.83) $ (0.32)
Preferred stock dividend (0.14)
Discontinued operations (1.89) (1.73)
--------- --------- ---------
$ (1.90) $ (9.72) $ (2.19)
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-12
<PAGE> 51
THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES
(DEBTORS IN POSSESSION)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------------------
TOTAL
PREFERRED ADDITIONAL RETAINED SHARE-
STOCK COMMON PAID-IN EARNINGS HOLDERS'
SERIES B STOCK CAPITAL (DEFICIT) EQUITY
<S> <C> <C> <C> <C> <C>
SHAREHOLDERS' EQUITY AT
JANUARY 29, 1994 $ 7 $ 6,511 $ 11,358 $ 74,745 $ 92,621
CASH DIVIDENDS:
Common stock ($.22 per share) (1,432) (1,432)
Preferred stock - Class B ($1.39 per share) (921) (921)
PROPERTY DIVIDEND (6,985) (6,985)
CONTRIBUTION TO CAPITAL 11,925 11,925
NET LOSS (13,355) (13,355)
--- ------- -------- --------- -------
SHAREHOLDERS' EQUITY AT
JANUARY 28, 1995 7 6,511 23,283 52,052 81,853
NET LOSS (63,286) (63,286)
--- ------- -------- --------- -------
SHAREHOLDERS' EQUITY AT
FEBRUARY 3, 1996 7 6,511 23,283 (11,234) 18,567
NET LOSS (12,429) (12,429)
--- ------- -------- --------- -------
SHAREHOLDERS' EQUITY AT
FEBRUARY 1, 1997 $ 7 $ 6,511 $ 23,283 $ (23,663) $ 6,138
==== ======== ========= =========== =======
</TABLE>
See notes to consolidated financial statements.
F-13
<PAGE> 52
THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES
(DEBTORS IN POSSESSION)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
---------------------------------------------
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (12,429) $ (63,286) $ (13,355)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Provision for doubtful accounts 6,680 5,878 3,459
Deferred income taxes - 5,270 1,861
Provision for depreciation and amortization 13,139 15,768 11,716
Loss on disposal of assets 1,737 6,640 421
Loss on equipment settlements 7,457 - -
Changes in noncash assets and liabilities:
Customer accounts receivable (10,118) (9,621) (24,409)
Merchandise inventories (7,545) 23,980 10,213
Other current assets (5,331) (2,841) 279
Other long-term assets 916 (1,202) -
Discontinued operations - 583 8,317
Accounts payable (2,709) 66,850 (2,502)
Accrued liabilities (2,478) 8,063 (4,445)
Deferred lease incentives 365 1,048 (4,099)
--------- --------- ---------
Net cash provided by (used in) operating activities (10,316) 57,130 (12,544)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of customer accounts receivable, net 15,000
Capital expenditures (4,759) (11,401) (12,753)
Proceeds from surrender of insurance policies 271 3,000 -
Proceeds from sale of property 1,200 - -
Proceeds from sale of investment 300 - -
Acquisition of securitized receivables - (115,000) -
--------- --------- ---------
Net cash used in investing activities (2,988) (123,401) 2,247
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of senior notes 50,000
Net borrowings (payments) on bankers' acceptance and revolving lines of credit - 29,500 (39,900)
Payments on long-term obligations (991) (1,200) (8,944)
Debt acquisition costs (1,052) (3,875) (741)
Contribution to capital 11,925
Cash dividends paid (2,353)
Net borrowings under DIP Facility 7,773 50,000 -
--------- --------- ---------
Net cash provided by financing activities 5,730 74,425 9,987
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS (7,574) 8,154 (310)
---------
CASH AND EQUIVALENTS - Beginning of year 14,665 6,511 6,821
--------- --------- ---------
CASH AND EQUIVALENTS - End of year $ 7,091 $ 14,665 $ 6,511
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 6,929 $ 11,053 $ 10,388
Income taxes paid 335 300 5,823
SUPPLEMENTAL NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property acquired from lease incentives $ 366 $ 1,956 $ 584
Property acquired from lease settlements 3,142 - -
Property dividend - - 6,985
</TABLE>
See notes to consolidated financial statements.
F-14
<PAGE> 53
THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES
(DEBTORS IN POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
- -------------------------------------------------------------------------------
A. CHAPTER 11 PROCEEDINGS
On October 17, 1995 ("the Filing Date"), The Elder-Beerman Stores Corp.
("Elder-Beerman") and each of its wholly-owned subsidiaries, The El-Bee
Chargit Corp., The Bee-Gee Shoe Corp., Margo's La Mode, Inc., McCook
Wholesale Corp., E-B Community Urban Redevelopment Corporation and EBA,
Inc., (collectively the "Corporation"), filed petitions for relief under
Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code")
with the United States Bankruptcy Court (the "Bankruptcy Court") for the
Southern District of Ohio, Western Division. Pursuant to an order of the
Bankruptcy Court, the individual Chapter 11 cases were consolidated for
procedural purposes only and are being jointly administered by the
Bankruptcy Court. The Corporation is currently operating as debtor in
possession, subject to the approval of the Bankruptcy Court for certain of
its proposed actions. Additionally, certain creditors of the Corporation
have formed two official committees pursuant to the Bankruptcy Code. Such
committees (as well as other parties in interest) have the right to review
and object to transactions outside of the ordinary course of the
Corporation's business and are expected to participate in the approval of
the plan of reorganization.
Under Chapter 11, actions in respect of certain claims against the
Corporation in existence prior to the filing of the petitions for relief
under the Bankruptcy Code are stayed while the Corporation continues
business operations as debtors in possession. In addition, under the
Bankruptcy Code, the Corporation may reject executory contracts, including
lease obligations. Parties affected by these rejections may file claims
with the Bankruptcy Court in accordance with the reorganization process.
Substantially all liabilities as of the petition date are subject to
settlement under the plan of reorganization to be voted upon by the
creditors and approved by the Bankruptcy Court. The Corporation expects to
file the plan in fiscal 1997.
At February 1, 1997, the Corporation is in default under the terms of
substantially all prepetition loan and note agreements and certain
equipment and store leases. The amounts outstanding in respect to these
agreements are subject to settlement under the reorganization proceedings.
Generally, as a result of the bankruptcy, the contractual terms of
prepetition debt obligations are suspended. The Corporation did not accrue
or pay interest on debt subsequent to the Filing Date, except as
permitted. The financial statements do not include accrued interest on
prepetition unsecured debt of $17,483 and $4,251 at February 1, 1997 and
February 3, 1996, respectively. In the accompanying consolidated balance
sheets, liabilities subject to settlement under the Chapter 11 proceedings
are classified as liabilities subject to compromise and are comprised of
the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Accounts payable and accrued liabilities $ 92,209 $ 86,597
Unsecured debt 131,900 131,900
Secured debt 2,455 5,250
Capital lease obligations 2,834 3,657
Accrued interest 2,277 2,005
--------- ---------
Total $ 231,675 $ 229,409
========= =========
</TABLE>
F-15
<PAGE> 54
These amounts represent management's best estimate of all known or
potential claims. Such claims remain subject to future adjustments with
respect to disputed claims depending on negotiations with creditors and
actions of the Bankruptcy Court in the Chapter 11 case. Consequently, the
amount included in the Consolidated Balance Sheet as "Liabilities Subject
to Compromise" may be subject to adjustment.
Certain prepetition liabilities have been paid after obtaining the
approval of the Bankruptcy Court, including certain wages and benefits of
employees, insurance costs, department leases, reclamation claims, and
contractors' costs.
Under the provisions of the Bankruptcy Code the Corporation has the right
to reject leases. Lessors may file claims for damages incurred from such
rejections, which would be treated as prepetition liabilities. Claims
filed in respect to leases for real property may not exceed the greater of
an amount equal to (a) one year's rental payments or (b) payments for a
period equal to 15% of the remaining term of the lease, but not in excess
of three years rent. The Corporation is actively engaged in the process of
reviewing its executory contracts and final decisions with respect to
assuming or rejecting contracts; approval by the Bankruptcy Court is still
pending.
Outstanding prepetition accounts payable have been reported net of
prepetition accounts receivable and deposits from various vendors and
their representatives.
Additional prepetition liabilities may arise as a result of claims filed
by parties affected by the Corporation's bankruptcy filing. These claims
will be analyzed and either settled or disputed in the bankruptcy
proceedings. Ultimately the adjustment of the total liabilities of the
Corporation remains subject to a Bankruptcy Court approved plan of
reorganization, and accordingly, the total amount of such liabilities is
not presently determinable. Pursuant to an order of the Bankruptcy Court,
the Corporation presently has the exclusive right to file a plan of
reorganization through August 18, 1997.
B. GOING CONCERN
The Corporation's consolidated financial statements have been prepared on
a going concern basis, which contemplates continuity of operations,
realization of assets and the liquidation of liabilities and commitments
in the normal course of business. The bankruptcy filings raise substantial
doubt about its ability to continue as a going concern. The
appropriateness of using the going concern basis is dependent upon, among
other things, confirmation of a plan of reorganization, future profitable
operations, and the ability to generate sufficient cash from operations
and financing sources to meet obligations. In this regard, management
developed and is executing a plan which includes improving gross margins
and reducing costs and possibly closing certain retail store locations.
While under the protection of Chapter 11, the Corporation may sell or
otherwise dispose of assets, and liquidate or settle liabilities, for
amounts other than those reflected in the accompanying consolidated
financial statements. Further, a plan of reorganization could materially
change the amounts reported in the accompanying consolidated financial
statements. The accompanying consolidated financial statements do not
include any adjustments relating to the recoverability of the value of
recorded asset amounts or the amounts and classification of liabilities
that might be necessary as a result of the plan of reorganization.
F-16
<PAGE> 55
C. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS - The Corporation operates principally in midwestern
states, through retail department stores and free-standing shoe stores.
The women's specialty stores (Margo's La Mode, Inc.) were liquidated in
1995 (see Note N). Beerman-Peal Holdings, Inc. owns all outstanding common
stock of the Corporation.
ESTIMATES - The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of The Elder-Beerman Stores Corp. and subsidiaries
(including The El-Bee Chargit Corp., a finance subsidiary). All
significant intercompany balances and transactions have been eliminated in
consolidation.
FISCAL YEAR - The Corporation's fiscal year ends on the Saturday nearest
January 31. Fiscal year 1996 consists of 52 weeks, fiscal year 1995
consists of 53 weeks and fiscal year 1994 consists of 52 weeks ended
February 1, 1997, February 3, 1996 and January 28, 1995, respectively.
CASH AND EQUIVALENTS - The Corporation considers all highly liquid
investments with maturities of three months or less at the date of
purchase to be cash equivalents.
CUSTOMER ACCOUNTS RECEIVABLE - Customer accounts receivable are classified
as current assets since the average collection period is generally less
than one year.
MERCHANDISE INVENTORIES - Retail inventory is determined principally by
the retail method applied on a last-in, first-out (LIFO) basis and is
stated at the lower of cost or market. If the first-in, first-out (FIFO)
basis had been used, inventories would be higher by $8,048 at February 1,
1997 and $7,252 at February 3, 1996.
PROPERTY is stated at cost less accumulated depreciation determined by the
straight-line method over the expected useful lives of the assets. Assets
held under capital leases and related obligations are recorded initially
at the lower of fair market value or the present value of the minimum
lease payments. The straight-line method is used to amortize such
capitalized costs over the lesser of the expected useful life of the asset
or the life of the lease.
OTHER ASSETS include the value assigned to lease agreements acquired in an
acquisition which is being amortized over the lease terms. The Corporation
continually evaluates, based upon income and/or cash flow projections and
other factors as appropriate, whether events and circumstances have
occurred that indicate that the remaining estimated useful life of the
asset warrants revision or that the remaining balance of this asset may
not be recoverable.
During fiscal year 1995, the Corporation adopted Statement of Financial
Accounting Standard (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." Upon the
adoption of FASB No. 121, the Corporation recognized an impairment loss of
$551 related to the value assigned to lease agreements associated with
closed stores, which is included in cost of merchandise sold, occupancy
and buying expenses.
FINANCIAL INSTRUMENTS - The Company utilizes interest rate swap agreements
to manage its interest rate risks when receivables are sold under asset
securitization programs or other borrowings. The Company does not hold or
issue derivative financial instruments for trading purposes. The Company
does not have derivative financial instruments that are held or issued and
accounted for as hedges of anticipated transactions. Amounts currently due
to or from interest rate swap counterparties are recorded in interest
F-17
<PAGE> 56
expense in the period in which they accrue. Gains or losses on terminated
interest rate swap agreements are included in long-term liabilities or
assets and amortized to interest expense over the shorter of the original
term of the agreements or the life of the financial instruments to which
they are matched. Gains or losses on the mark to market for interest rate
swap agreements that do not qualify for hedge accounting are recorded as
income or expense each period.
REVENUES are recognized on merchandise inventory sold upon receipt by the
customer.
PRE-OPENING COSTS associated with opening new stores are charged to
expense over the first fiscal year of store operations.
INCOME TAXES - The Corporation files a consolidated income tax return.
Deferred income taxes are provided for temporary differences between the
tax basis of an asset or liability and its reported amount in the
financial statements less any valuation allowance (see Note I).
EARNINGS (LOSS) PER COMMON SHARE are computed by dividing net income
(loss) less preferred stock dividends, if any, by the weighted average
number of common shares outstanding, and common stock equivalents, if
dilutive. The average number of common shares outstanding during fiscal
1996, 1995 and 1994 was 6,510,733.
The Corporation calculates earnings per share using methods prescribed by
Accounting Principles Board Opinion (APB) No. 15, "Earnings per Share." In
February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share,"
which replaces APB No. 15 and requires adoption for periods ending after
December 15, 1997. The Statement will require dual presentation of basic
and diluted earnings per share on the face of the statement of operations.
The Corporation believes that the basic and diluted earnings (loss) per
share calculated pursuant to SFAS No. 128 are not materially different
from primary earnings (loss) per share calculated under APB No. 15.
RECLASSIFICATIONS - Certain amounts in the fiscal 1995 and fiscal 1994
financial statements have been reclassified to conform with the 1996
presentation.
F-18
<PAGE> 57
D. CUSTOMER ACCOUNTS RECEIVABLE
Customer accounts receivable, which represent finance subsidiary
receivables (Note E), are classified as shown in the following table.
Interest is charged at an annual rate of 18% to 21%, depending on state
law.
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
TYPE OF ACCOUNT 1997 1996
<S> <C> <C>
Optional and other $ 140,623 $ 134,793
Deferred payment 12,239 14,324
--------- ---------
Total 152,862 149,117
Less:
Allowance for doubtful accounts (3,800) (3,200)
Unearned interest (1,248) (1,541)
--------- ---------
Customer accounts receivable, net $ 147,814 $ 144,376
========= =========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
<S> <C> <C> <C>
Allowance for doubtful accounts:
Balance, beginning of year $ 3,200 $ 1,700 $ 1,709
Provision 6,680 5,878 3,459
Charge offs, net of recoveries (6,080) (4,378) (3,468)
------- ------- -------
Balance, end of year $ 3,800 $ 3,200 $ 1,700
======= ======= =======
</TABLE>
Customer accounts receivable result from the Corporation's proprietary
credit card sales to customers residing principally in the midwestern
states. As such, the Corporation believes it is not dependent on a given
industry or business for its customer base and therefore has no
significant concentration of credit risk.
Deferred payment accounts include the remaining unearned interest charge
to be received. Unearned interest is amortized to finance income using the
effective interest method.
F-19
<PAGE> 58
E. FINANCE SUBSIDIARY
The El-Bee Chargit Corp. ("Chargit") purchases substantially all
Elder-Beerman and subsidiaries' proprietary credit card receivables; such
receivables are purchased at a 2% discount. Customer accounts receivable
held by the finance subsidiary are included in Note D; purchase discounts
are eliminated in consolidation.
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
BALANCE SHEETS 1997 1996
<S> <C> <C>
Assets:
Customer accounts receivable - net $ 147,814 $ 144,376
Unamortized purchase discount (3,057) (2,983)
Intercompany - prepetition 4,845 4,845
Other assets 2,295 2,882
--------- ---------
Total $ 151,897 $ 149,120
========= =========
Liabilities and shareholders' equity:
Liabilities $ 2,286 $ 3,811
Intercompany - postpetition 114,769 124,251
Liabilities subject to compromise 445 452
Shareholders' equity 34,397 20,606
--------- ---------
Total $ 151,897 $ 149,120
========= =========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
STATEMENTS OF OPERATIONS 1997 1996 1995
<S> <C> <C> <C>
Revenues:
Financing (net of securitization expense of $5,933,
and $5,125 for fiscal 1995 and 1994, respectively) $ 27,451 $ 18,913 $ 16,226
Purchase discount 5,277 5,594 5,843
-------- -------- --------
Total revenues 32,728 24,507 22,069
-------- -------- --------
Expenses:
Selling, general and administrative 6,517 6,486 5,728
Provision for doubtful accounts 6,680 5,878 3,459
Other income (1,106) - -
-------- -------- --------
Total expenses 12,091 12,364 9,187
-------- -------- --------
Income before reorganization items and income taxes 20,637 12,143 12,882
Reorganization items - 5,288 -
-------- -------- --------
Income before income taxes $ 20,637 $ 6,855 $ 12,882
======== ======== ========
</TABLE>
F-20
<PAGE> 59
Prior to the Filing Date, the Corporation had a variable rate asset
securitization agreement with a commercial bank whereby it could sell up
to $115,000 of customer accounts receivable. The Corporation sold
approximately $115,000 of customer accounts receivable under this
agreement. These receivables were sold with a repurchase liability for
balances ultimately determined to be uncollectible. As a result of the
bankruptcy filing, the Corporation discontinued its accounts receivable
sale program and terminated its asset securitization agreement. Upon
termination of the accounts receivable sale program, the interest rate
swaps were unmatched and a $5,025 mark to market adjustment was recorded
as reorganization expense in fiscal 1995.
Through the Filing Date, the Corporation utilized interest rate swap
agreements to effectively establish long-term fixed rates on receivables
sold under the asset securitization agreement, thus reducing the impact of
interest rate changes on future income. These swap agreements involved the
receipt of variable rate amounts in exchange for fixed rate interest
payments over the life of the agreement. The differential between the
fixed and variable rates to be paid or received was accrued as interest
rates changed and recognized as an adjustment to finance income related to
the receivables sold. Notional amounts of effective swap agreements hedged
against receivables sold were $55,000 at October 17, 1995. At February 1,
1997, the Corporation has outstanding swap agreements with notional
amounts totaling $55,000. A portion of these swaps have been hedged
against the DIP Facility through October 31, 1997 (Note G).
During 1995, but prior to the Filing Date, the Corporation entered into
interest rate swaps under a master agreement with notional amounts of
$50,000 with an effective date subsequent to the Filing Date. The
Corporation violated and defaulted on the master agreement which includes
a penalty for default. As of the Filing Date, the estimated market value
of the interest rate swaps under the master agreement is recorded as a
liability subject to compromise and included in reorganization expense.
The Corporation is exposed to credit related losses in the event of
non-performance by the counterparties to the swap agreements. The
Corporation does not anticipate non-performance by any of its
counterparties. The Corporation is exposed to market related losses on the
unmatched portion of interest rate swaps. In fiscal 1996, the mark to
market adjustment of $1,106 is recorded as other income. The amounts the
Corporation ultimately will realize could differ materially in the near
term from the market values recorded at February 1, 1997.
F. OTHER LONG-TERM ASSETS
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
<S> <C> <C>
Value assigned to lease agreements $ 2,681 $ 2,900
Receivables from developers 2,380 3,883
Unamortized debt issuance costs 454 2,462
Other 3,157 3,500
------- -------
Total other long-term assets $ 8,672 $12,745
======= =======
</TABLE>
Receivables from developers represent receivables related to lease
incentives, in the form of construction reimbursements and advertising
allowances and are included in other long-term assets because payment of
certain construction reimbursements by the developer to the Corporation
will coincide with the Corporation's lease assumption and/or payments for
construction work performed.
F-21
<PAGE> 60
G. LONG-TERM OBLIGATIONS
In connection with the Chapter 11 filing, on October 17, 1995,
Elder-Beerman and Chargit entered into a Postpetition Loan and Security
Agreement (the DIP Facility) with Citibank N.A. Substantially all assets
are pledged as collateral for the DIP Facility.
In October 1995, the Bankruptcy Court signed an order approving the DIP
Facility, which had a maturity of January 31, 1997. On September 30, 1996,
the DIP Facility was extended to October 31, 1997. The DIP Facility
provides for borrowings and letters of credit in an aggregate amount of
$175,000 as of February 1, 1997, subject to a borrowing base formula based
primarily on eligible accounts receivable and merchandise inventories. The
DIP Facility contains financial covenants related to certain permitted
reorganization expenditures, working capital, capital expenditures and
attainment of earnings before interest, taxation, depreciation,
amortization and reorganization items. In addition, the agreement contains
certain other restrictive covenants including limitations on the
incurrence of additional liens and indebtedness, the amount of prepetition
claim payments, and a prohibition on payment of dividends.
Commitment and related fees of $1,052 and $3,179 paid during fiscal years
1996 and 1995, respectively, in connection with the origination of and
amendments to the DIP Facility are amortized as reorganization expense
over the term of the DIP Facility.
The DIP Facility includes borrowing sublimits relating to merchandise
inventories and letters of credit. Regarding merchandise inventories, the
Corporation may borrow on up to $65,000 of eligible merchandise
inventories. The sublimit for letters of credit is $20,000. Borrowings
bear interest at either prime plus .50% or LIBOR plus 1.50%. The prime and
LIBOR borrowing rates at February 1, 1997 were 8.25% and 5.4375%,
respectively. The rate on average daily outstanding letters of credit is
1.5% per annum. Additionally, the Corporation is required to pay a
commitment fee of .5% per annum of the average daily unused portion of the
total amount available under the DIP Facility. As of February 1, 1997, the
Corporation had $57,773 in outstanding borrowings and $6,960 of
outstanding letters of credit.
As a result of the Chapter 11 filing (see Note A), debt outstanding at the
Filing Date has been classified as "Liabilities Subject to Compromise". No
principal or interest payments on prepetition debt will be made without
Bankruptcy Court approval or until a reorganization plan defining the
repayment terms has been confirmed. In addition, the Corporation is in
default of substantially all of its prepetition debt agreements. The
Corporation's defaults will be settled as part of the reorganization plan.
F-22
<PAGE> 61
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
<S> <C> <C>
DIP Facility, due October 31, 1997, 6.9375% to 8.75% $ 57,773 $ 50,000
Revolving credit arrangement 3,600 3,600
Unsecured credit facility:
Eurodollar borrowings 40,000 40,000
Bankers' acceptances 13,300 13,300
Competitive bid advances 5,000 5,000
Unsecured senior notes payable, Series A-C 50,000 50,000
Unsecured senior notes payable 20,000 20,000
Mortgage note payable, 9.75% 2,727 2,795
Industrial development revenue bonds, variable rates based on
published index of tax-exempt bonds or prime, 3.66% 5,555 5,655
Capital lease obligations (Note H) 2,834 3,657
-------- --------
Total 200,789 194,007
Less:
Liabilities subject to compromise 137,189 140,807
DIP Facility 57,773 50,000
Current portion of long-term obligations, not subject
to compromise 158 100
-------- --------
Net long-term obligations $ 5,669 $ 3,100
======== ========
</TABLE>
Maturities of borrowings not classified as liabilities subject to
compromise are $57,931 in 1997, $163 in 1998, $170 in 1999, $177 in 2000,
$185 in 2001, and $4,974 thereafter.
As of October 17, 1995, the Corporation ceased accruing interest on
unsecured prepetition debt. All or a portion of such interest
(approximately $17,483 at February 1, 1997 and $4,251 at February 3, 1996)
may not be payable unless permitted by the bankruptcy court.
During fiscal 1996 and 1995, the Corporation utilized interest rate swap
agreements to reduce the impact of interest rate changes on portions of
its variable rate debt. Swaps with a notional amount of $45,000 have been
matched against the DIP Facility since the Filing Date. During 1996, the
weighted average rate paid, net of amortization of the recorded market
value liability, was 5.8% and the weighted average rate received was 5.6%.
The differential between the fixed rates paid and variable rates received
is recognized as an adjustment to interest expense.
Collateral for the industrial development revenue bonds and the mortgage
note payable is land, buildings, furniture, fixtures and equipment with a
net book value of $5,998 at February 1, 1997. Mechanics' liens have been
filed for improvements made to certain properties.
F-23
<PAGE> 62
H. LEASES
The Corporation leases retail store properties and certain equipment.
Generally, leases are net leases which require the payment of executory
expenses such as real estate taxes, insurance, maintenance and other
operating costs, in addition to minimum rentals. Leases for retail stores
generally contain renewal or purchase options, or both, and generally
provide for contingent rentals based on a percentage of sales. At February
1, 1997, the Corporation is in default under the terms of certain
equipment and retail property leases.
Minimum annual rentals, for leases having initial or remaining
noncancelable lease terms in excess of one year at February 1, 1997, are
as follows:
<TABLE>
<CAPTION>
CAPITAL
OPERATING LEASES LEASES
--------------------------------------- ------------
RELATED
FISCAL YEAR OTHER PARTY TOTAL
<S> <C> <C> <C> <C>
1997 $ 15,349 $ 3,078 $ 18,427 $ 1,032
1998 13,669 3,073 16,742 768
1999 11,468 3,072 14,540 529
2000 9,539 3,028 12,567 469
2001 9,095 2,086 11,181 290
Thereafter 68,198 16,610 84,808 277
------- ------- ------- ---
Minimum lease payments $ 127,318 $ 30,947 $ 158,265 3,365
========== ========= ==========
Less imputed interest 531
------
Present value of net minimum lease
payments $ 2,834
=======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
RENT EXPENSE 1997 1996 1995
<S> <C> <C> <C>
Operating leases:
Minimum $ 20,489 $ 23,228 $ 13,585
Contingent 2,136 2,766 2,599
--------- --------- --------
Total rent expense $ 22,625 $ 25,994 $ 16,184
========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
ASSETS HELD UNDER CAPITAL LEASES 1997 1996
<S> <C> <C>
Buildings $ 11,033 $ 11,033
Less accumulated depreciation and amortization 9,565 9,120
--------- --------
Net $ 1,468 $ 1,913
======== =======
</TABLE>
Assets acquired under capital leases are included in the consolidated
balance sheets as property, while the related obligations are included in
liabilities subject to compromise (see Note A).
F-24
<PAGE> 63
I. INCOME TAXES
Income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
<S> <C> <C> <C>
Current:
Federal $ - $(10,400) $ (6,138)
State and local 360 504 442
-------- -------- --------
360 (9,896) (5,696)
-------- -------- --------
Deferred:
Net operating losses and tax credit carryforwards (13,560) (6,487) -
Interest 6,119 - -
Deferred income 1,513 (270) 150
Inventory 2,398 (1,766) 223
Depreciation (3,726) (1,108) (447)
Restructuring 1,393 136 -
Discontinued operations (Note N) 158 (274) (4,286)
Other (790) (1,462) 1,935
Valuation allowance 6,495 20,787 -
-------- -------- --------
- 9,556 (2,425)
-------- -------- --------
Income tax expense (benefit) $ 360 $ (340) $ (8,121)
======== ======== ========
Income statement classification:
Continuing operations $ 360 $ (2,332) $ (2,526)
Discontinued operations - 1,992 (5,595)
-------- -------- --------
Total $ 360 $ (340) $ (8,121)
======== ======== ========
</TABLE>
The income tax provision varies from the statutory rate primarily because
of the valuation allowance and certain expenses not deductible for tax
purposes.
The current tax benefit in fiscal 1995 includes the carryback of net
operating losses for a refund of prior taxes paid. The refund request was
filed with the Internal Revenue Service ("IRS") by the Corporation's
parent, Beerman-Peal Holdings, Inc.
In fiscal 1995, the IRS issued a notice of proposed adjustment to the
Corporation asserting the Corporation owed additional federal income taxes
with respect to its consolidated income tax returns filed for the fiscal
years 1989, and 1992 through 1994. The case was tried in Bankruptcy Court.
A decision was rendered in March 1997 rejecting the IRS claim in its
entirety; the IRS has appealed the Bankruptcy Court's decision to the
District Court. Management believes the effect of any adjustment to
federal and state income tax returns resulting from the audit will not
have a material effect on the Corporation's financial position, results of
operations or cash flows.
F-25
<PAGE> 64
Deferred income taxes consist of the following:
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
<S> <C> <C>
Deferred tax assets:
Net operating losses and tax credit carryforwards $ 20,047 $ 6,487
Discontinued operations 2,362 2,520
Deferred income 2,406 3,919
Bad debts 1,414 1,121
Inventory basis 1,208 3,606
Deferred compensation 1,092 1,092
Restructuring 511 1,904
Other 4,706 6,286
-------- --------
33,746 26,935
Valuation allowance (27,282) (20,787)
-------- --------
Total deferred tax assets 6,464 6,148
-------- --------
Deferred tax liabilities:
Interest expense 6,119 -
Depreciation 219 3,945
Other 126 2,203
-------- --------
Total deferred tax liabilities 6,464 6,148
-------- --------
Net $ 0 $ 0
======== ========
</TABLE>
The net operating loss carryforwards, tax credit carryforwards, and other
deferred tax assets will result in future benefits only if the Corporation
has taxable income in future periods. Under current accounting
pronouncements, future taxable income cannot be assumed. In addition, net
operating losses may be reduced due to the bankruptcy proceeding and the
IRS assessment previously discussed. Accordingly, a 100% valuation
allowance has been recorded.
The federal net operating loss carryforward is approximately $49,482 and
is available to reduce federal taxable income through 2011. The tax credit
carryforward is approximately $2,728; $632 will expire in 2009 and 2010,
and the balance is an indefinite carryforward.
J. EMPLOYEE BENEFIT PLAN
A defined-contribution employee benefit plan (the "Plan") covers
substantially all employees. The Corporation may contribute to the Plan
based on a percentage of compensation and on a percentage of income before
income taxes. No contributions were made in fiscal year 1996 and 1995
(Note Q). Corporate contributions to the Plan were approximately $1,391 in
fiscal year 1994. Eligible employees can make contributions to the Plan
through payroll withholdings of one to fifteen percent of their annual
compensation. The Plan includes an employee stock ownership (ESOP)
component. At February 1, 1997, the Plan held all of the outstanding
Preferred Shares of the Corporation (Note M). Under the ESOP component,
the Corporation is required to repurchase these shares from the Plan, to
the extent necessary, for the Plan to provide participant distributions.
Such Preferred Share repurchases would require approval of the Bankruptcy
Court.
F-26
<PAGE> 65
K. DEFERRED COMPENSATION AND BONUS PLAN
The Corporation has unfunded deferred compensation plans for certain
retired and current executive officers, management personnel and the board
of directors. Upon establishment of the key employee bonus programs,
certain deferred compensation agreements were waived by the executives. At
February 1, 1997 and February 3, 1996, the deferred compensation
obligations of $3,122 are included in accounts payable and accrued
liabilities as Liabilities Subject to Compromise (see Note A). Deferred
compensation expense, including service cost and interest on the accrued
obligation, was $406 and $492 in 1995 and 1994, respectively. No such
expense was incurred during the current year. The assumed discount rate is
generally 6%.
The Corporation established a key employee bonus program for the duration
of its Chapter 11 reorganization. Bonus amounts are determined primarily
on operating results and continued employment.
L. TRANSACTIONS WITH RELATED PARTIES
Transactions with related parties are as follows:
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
<S> <C> <C>
Customer accounts receivable $ 368 $ 400
Other current assets 60 563
Other long-term assets 460 -
Accounts payable and other liabilities 536 190
Liabilities subject to compromise 951 506
</TABLE>
See Note I for federal refundable income tax request filed by parent
company.
Repayment of certain obligations of the Corporation owed to a vendor are
guaranteed by a related party.
The Corporation leases real estate under operating leases from certain
affiliated entities and directors, and made payments to these related
parties totaling $3,742, $4,129 and $2,996 in fiscal years 1996, 1995 and
1994, respectively.
M. SHAREHOLDERS' EQUITY
PREFERRED STOCK - Each Series B Preferred Share provides cumulative
dividends at $1.39 per share and is convertible to .7 shares of common
stock. Shares may be called, after January 31, 1999, at the option of the
Corporation for a price of $20.32 declining to $19.17 in 2005 and
thereafter. These shareholders are also entitled to receive out of the
assets of the Corporation liquidating distributions in the amount of
$19.17 per share upon any voluntary or involuntary liquidation of the
Corporation. At February 1, 1997, there were 463,732 shares of common
stock reserved for conversion of Series B Preferred Shares. Dividends in
arrears at February 1, 1997 and February 3, 1996 were $1,842 and $921,
respectively.
RETAINED EARNINGS - Stock repurchases and dividend payments would require
approval of the Bankruptcy Court. No dividends were declared or paid
during fiscal year 1996 and 1995. The Corporation declared and distributed
a $6,985 dividend in the form of property during fiscal year 1994. The
dividend was recorded at the net book value of the property transferred.
F-27
<PAGE> 66
N. DISCONTINUED OPERATIONS
In fiscal 1994, the Corporation adopted formal plans to dispose of its
subsidiaries Margo's La Mode, Inc. ("Margo's") and The Bee-Gee Shoe Corp.
("Bee Gee") and recorded reserves for loss on disposal of $9,834, net of
tax benefit of $5,066. During fiscal 1995, the Corporation was
unsuccessful in its attempt to sell Margo's and decided to liquidate the
subsidiary. In connection with the liquidation, Margo's has rejected all
of its existing operating leases. During fiscal 1996 and 1995, the
Corporation closed 5 and 44 Bee Gee locations, respectively, and rejected
certain leases. The ultimate settlement of these liabilities is contingent
upon approval of the creditors' committees and the Bankruptcy Court. The
remaining assets of Bee Gee were held for sale at February 3, 1996.
During fiscal 1996, management determined the value of Bee Gee would be
more effectively realized by retaining Bee Gee as a part of the
Corporation's ongoing operations. Accordingly, the balance sheet for
fiscal 1995 and the results of operations for fiscal 1995 and fiscal 1994
have been reclassified to continuing operations.
<TABLE>
<CAPTION>
MARGO'S
LA MODE, INC.
---------------------------
YEAR ENDED
---------------------------
FEBRUARY 1, FEBRUARY 3,
ASSETS AND LIABILITIES OF DISCONTINUED OPERATIONS: 1997 1996
<S> <C> <C>
Merchandise inventories
Income tax receivable
Other current assets $ 3 $ 581
Property, net
------- -------
Assets of discontinued operations $ 3 $ 581
======= =======
Accounts payable $ 38 $ 88
Other liabilities 125 249
Liabilities subject to compromise 9,743 9,847
Reserve for loss on disposal 310 916
------- -------
Liabilities of discontinued operations $10,216 $11,100
======= =======
</TABLE>
Based on management's estimates and the change in the disposition strategy
of Margo's in 1995, the Corporation provided an additional reserve of
$19,262 (including income tax expense of $1,992) for the discontinued
operations of Margo's. The discontinued operations expense of $12,276 for
fiscal 1995 includes the additional reserve for Margo's net of the
reversal of reserves for Bee Gee of $6,986 as a result of management's
decision in fiscal 1996, previously discussed. The amounts shown above do
not include amounts owed to or due from the parent. Margo's operating
losses of $451, $16,419 and $1,517 were charged against the reserve for
discontinued operations for fiscal years 1996, 1995 and 1994,
respectively. Margo's net sales in the period of disposal were $34,227 in
1995 and $26,551 in 1994. Margo's loss for 1994 prior to adopting a formal
plan of disposal was $1,457, net of tax benefit of $529.
F-28
<PAGE> 67
O. REORGANIZATION ITEMS
Reorganization costs consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------
FEBRUARY 1, FEBRUARY 3,
1997 1996
<S> <C> <C>
Professional fees $ 8,612 $ 3,586
Equipment lease settlements 7,458 -
Restructuring 4,497 8,897
Financing costs 3,081 2,203
Market value adjustments of interest rate swaps - 5,025
------- -------
Total $23,648 $19,711
======= =======
</TABLE>
Subsequent to the Chapter 11 filings, the Corporation began restructuring
its business and decided, among other things, to close two outlet stores
and certain Bee Gee locations and discontinue certain vendors in fiscal
1995 and to close a furniture store in fiscal 1996. Property impairment,
severance payments and certain store closing costs are included in
restructuring costs. The Corporation negotiated various equipment lease
settlements during the year. Equipment lease settlement costs primarily
resulted from renegotiated leases where cash payments and unsecured claims
were granted in exchange for ownership of the equipment and relief from
other claims previously filed.
In 1995, the market value adjustments of interest rate swaps represent the
recognition of losses on interest rate swap s previously hedged against
accounts receivable sold. Financing costs include the write-off of the
unamortized balance of previously deferred financing costs and
amortization of fees associated with the DIP Facility.
P. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
CASH AND EQUIVALENTS - The carrying amount approximates fair value
because of the short maturity of those instruments.
ACCOUNTS RECEIVABLE AND DIP FACILITY - The net carrying amount
approximates fair value because of the relatively short average
maturity of the instruments.
LONG-TERM DEBT - It is not practicable to estimate the fair value of
the Corporation's long-term debt as the quoted market prices for the
same or similar issues and the current rates offered to the
Corporation for debt of the same remaining maturities are not
available as a result of the Corporation's Chapter 11 status.
INTEREST RATE SWAP AGREEMENTS - The fair value of interest rate
swaps is based on the quoted market prices which the Corporation
would pay to terminate the swap agreements at the reporting date.
F-29
<PAGE> 68
LIABILITIES SUBJECT TO COMPROMISE - Subsequent to the filing under
Chapter 11, a market has developed for the trading of prepetition
claims against the Corporation. However, as the market for claims
against Corporations under Chapter 11 is not well developed, no
reliable source of market prices is available.
The estimated fair value of the Corporation's financial instruments,
excluding liabilities subject to compromise and long-term debt are as
follows:
<TABLE>
<CAPTION>
FEBRUARY 1, 1997 FEBRUARY 3, 1996
-----------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Financial assets (liabilities):
Cash and equivalents $ 7,091 $ 7,091 $ 14,215 $ 14,215
Customer accounts receivable 147,814 147,814 144,376 144,376
DIP Facility (57,773) (57,773) (50,000) (50,000)
Financial instruments - interest rate
swaps (1,415) (1,415) (3,100) (3,100)
Unrecognized financial instruments -
interest rate swaps (579) (844) (925) (1,440)
</TABLE>
Q. COMMITMENTS AND CONTINGENCIES
LITIGATION - The Corporation is a party to various legal actions and
administrative proceedings and subject to various claims arising in the
ordinary course of business. Management believes the outcome of any of the
litigation matters that will have a material effect on the Corporation's
results of operations, cash flows or financial position have been
appropriately accrued.
As discussed in Note A, on October 17, 1995, the Corporation and its
subsidiaries filed voluntary petitions in the Bankruptcy Court under
Chapter 11 of the Bankruptcy Code. All material civil litigation commenced
against the Corporation and those referenced subsidiaries prior to that
date has been stayed under the Bankruptcy Code.
OTHER CLAIMS - The Elder-Beerman Stores Corp. Profit-Sharing and Stock
Ownership Plan Committee has made claims relevant to fiscal 1996 and
fiscal 1995 corporate contributions and payment of certain expenses. The
Corporation believes that such contributions are discretionary and the
expenses are not liabilities of the Corporation.
LETTERS OF CREDIT - At February 1, 1997, the Corporation had outstanding
commercial and standby letters of credit totaling $11,717 under the DIP
facility and with other banks, relating to trade financing and insurance
activities.
INSURANCE - The Corporation is self-insured for employee medical and
workers' compensation subject to limitation for which insurance has been
purchased. Management believes that those claims reported and not paid and
claims incurred, but not yet reported, are appropriately accrued.
* * * * * *
F-30
