Filed Pursuant to Rule 424(b)(1)
Registration No. 33-97100
3,572,000 SHARES
[LOEHMANN'S LOGO]
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by the
Company.
Prior to this offering, there has been no public market for the Common Stock
of the Company. See "Underwriting" for a discussion of factors considered in
determining the initial public offering price. The Common Stock has been
approved for quotation on the Nasdaq National Market, subject to official notice
of issuance, under the symbol "LOEH."
The Company has two classes of authorized common stock, Common Stock, which
is offered hereby, and Class B Common Stock. Holders of Common Stock are
entitled to one vote per share and holders of Class B Common Stock are not
entitled to vote, but each share of Class B Common Stock is convertible into one
share of Common Stock. See "Description of Capital Stock."
The Common Stock offering is being conducted concurrently with, and is
conditioned upon, the public offering by the Company of $100.0 million aggregate
principal amount of 11 7/8% Senior Notes due 2003 pursuant to a separate
prospectus. See "Prospectus Summary--The Debt Offering" and "Use of Proceeds."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
[CAPTION]
<TABLE>
Price to Underwriting Proceeds to
Public Discount (1) Company (2)
<S> <C> <C> <C>
Per Share......................... $17.00 $1.19 $15.81
Total (3)......................... $60,724,000 $4,250,680 $56,473,320
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting estimated offering expenses of $748,000.
(3) Certain of the Company's stockholders have granted to the Underwriters a
30-day option to purchase up to 535,800 additional shares of Common Stock
solely to cover over-allotments, if any. If the Underwriters exercise this
option in full, the Price to Public will total $69,832,600, the Underwriting
Discount will total $4,888,282 and the Proceeds to Selling Stockholders will
total $8,470,998. See "Security Ownership of Certain Beneficial Owners" and
"Underwriting." The Company will not receive any of the proceeds from the
sale of shares by the Selling Stockholders.
The shares of Common Stock are offered by the several Underwriters named
herein when, as and if delivered to and accepted by the Underwriters and subject
to their right to reject any orders in whole or in part. It is expected that
delivery of the certificates representing the shares will be made against
payment therefor at the office of Montgomery Securities on or about May 10,
1996.
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MONTGOMERY SECURITIES
SALOMON BROTHERS INC
ROBERTSON, STEPHENS & COMPANY
May 7, 1996
<PAGE>
The inside front cover of the prospectus contains an artist's rendering of the
Manhattan store scheduled to open Fall 1996, three photographs depicting
different views of the interior of the Company's stores, a photograph of
a woman wearing designer clothing and a photograph of the exterior of one
of the Company's stores. The inside back cover of the prospectus contains
two photographs depicting different views of the interior of the Company's
stores and one photograph of a woman wearing designer clothing.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and consolidated financial statements appearing elsewhere in this
Prospectus. Unless otherwise indicated, all information in this Prospectus,
including the share and per share information, assumes consummation of the
reincorporation of Loehmann's Holdings, Inc. ("Holdings") from Maryland to
Delaware and the subsequent merger of Holdings into its wholly-owned subsidiary,
Loehmann's, Inc. (together, the "Holdings Merger"), as further described herein,
including the conversion of each share of Holdings common stock into
approximately 0.22 shares of the common stock, par value $.01 per share, of
Loehmann's, Inc. (the "Common Stock"). See "The Company" and "Underwriting." As
used in this Prospectus, references to a fiscal year refer to the Company's
fiscal year ended or ending on the Saturday closest to January 31 of the
following year.
THE COMPANY
Loehmann's, Inc. ("Loehmann's" or the "Company"), founded in 1921 as the
"Original Designer Outlet," is a leading specialty retailer of well known
designer and brand name women's fashion apparel, accessories and shoes offered
at prices that are typically 25% to 50% below department store prices. The
Company believes it has developed a unique franchise as the largest national
upscale off-price specialty retailer--one that differentiates itself from finer
department stores by offering similar merchandise at significantly lower prices,
and from other off-price apparel retailers by offering a broad range of designer
and bridge merchandise. The Company currently operates 71 stores in major
metropolitan markets located in 23 states. The Company is embarking on an
expansion strategy to capitalize on the strength of its franchise and
well-recognized name.
The following factors serve as the Company's key strengths and
distinguishing characteristics:
. The Company, like finer department stores, is known for carrying designer
and bridge labels by prominent designers such as Donna Karan, Calvin
Klein, Anne Klein, Adrienne Vittadini, Tahari, Dana Buchman, Andrea Jovine
and Emanuel Ungaro, among others. However, unlike finer department stores,
the Company offers such merchandise for sale at a substantial discount.
. Loehmann's high quality image and affluent customer base uniquely position
the Company as a principal choice for well known designers who believe
their prestige will be preserved by having their merchandise offered by
Loehmann's as opposed to other off-price retailers.
. The Company provides in-season high quality merchandise to its stores on a
daily basis as a result of its flexible purchasing strategy, low-price,
cyclical markdown policy and efficient inventory management systems.
. The Company has a low-cost operating structure as a result of its
no-frills store format, lean corporate overhead and disciplined real
estate strategy.
In recent years, the Company has sought to broaden its appeal and increase
margins through the addition of new product categories such as shoes and a
broader range of accessories and intimate apparel. Since the introduction or
expansion of these categories starting in fiscal 1992, gross margins have
increased from 26.4% for fiscal 1992 to 31.1% for fiscal 1995. In addition, to
prepare for its store expansion program, the Company has made significant
investments in merchandising, planning, allocation and MIS infrastructure and
has continued to refine its store format.
To capitalize on its unique franchise, the Company has embarked on a new
store expansion program under which it intends to open seven stores in fiscal
1996 and seven to ten stores in each of the next two fiscal years. Two of the
seven stores planned for fiscal 1996 already have been opened. Based on its
historical operating experience, the Company believes that its larger stores
typically experience
3
<PAGE>
enhanced operating performance with increased inventory turns, higher margins
and increased profitability. The Company's eight stores which exceed 23,000
square feet averaged $11.7 million in net sales in fiscal 1995 as compared to
$4.7 million for the balance of the Company's stores which were open for the
entire year in fiscal 1995. These eight stores generated store contribution as a
percentage of net sales of 15.1% as compared to 13.3% for the balance of the
Company's stores. To take advantage of the favorable economics associated with
its larger stores, the Company's prototype for its new stores is 25,000 to
35,000 square feet compared to the Company-wide average of approximately 16,000
square feet.
The Company's planned store openings for fiscal 1996 will be located in
existing markets where the Loehmann's franchise is well established and in
central business districts which have appealing demographics, such as New York
and Boston. As part of its store opening program, the Company intends to open a
new 60,000 square foot flagship store in downtown Manhattan at the site that
recently housed Barneys' Seventh Avenue Men's Store in Fall 1996.
RECENT DEVELOPMENTS
In February and March 1996, the Company opened two of the seven new stores
planned for fiscal 1996, one in Merrick, New York and the other in Houston,
Texas. Both of the new stores reflect the Company's new, larger store format:
the Merrick store is approximately 20,000 square feet and the Houston store is
approximately 23,000 square feet. The Company also has signed leases for each of
the remaining five stores planned for fiscal 1996, which will average
approximately 30,000 square feet (excluding the planned 60,000 square foot
flagship Manhattan store). In connection with these new store openings, the
Company expects to close two smaller stores, one of which will be converted into
a clearance center.
For the two-month period ended April 6, 1996, the Company's net sales
increased 5.7% to approximately $68.3 million from $64.6 million in the
comparable period of fiscal 1995 as a result of an increase in comparable store
sales of 6.0% and the opening of two new stores since the end of fiscal 1995.
The Company achieved this sales increase despite the closings of 11 small stores
in fiscal 1995 consistent with its large store strategy.
4
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by the Company.................. 3,572,000 shares
Common Stock to be outstanding after the Offering.... 8,297,420 shares (1)
Use of proceeds...................................... To refinance substantially all of
the Company's existing indebtedness
and to redeem all outstanding
preferred stock of the Company.
Nasdaq National Market symbol........................ LOEH
</TABLE>
- ------------
(1) Excludes (i) 893,132 shares of Common Stock issuable as of April 1, 1996
upon the exercise of outstanding stock options at a weighted average
exercise price of approximately $3.75 per share, 432,221 of which are
exercisable within 60 days following such date and (ii) 469,237 shares of
convertible Class B common stock, convertible into 469,237 shares of Common
Stock.
THE DEBT OFFERING
Simultaneously with the offering of shares of Common Stock hereby (the
"Offering"), the Company is offering (the "Debt Offering") to sell $100.0
million aggregate principal amount of its newly issued 11 7/8% Senior Notes due
May 15, 2003 (the "Senior Notes") to be issued pursuant to an indenture (the
"Senior Note Indenture") between the Company and United States Trust Company of
New York, as trustee. In addition, the Company has reached an agreement in
principle with a major commercial bank to provide the Company with a new $35.0
million revolving credit facility (the "New Credit Facility") to be entered into
at the consummation of this Offering. The consummation of the Offering and the
Debt Offering are each conditioned upon the other.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy the Senior Notes. The Senior Notes will be registered under the
Securities Act of 1933, as amended, and such securities will be offered only by
means of a related prospectus.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (1)
(IN THOUSANDS, EXCEPT OPERATING AND PRO FORMA PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
]Net sales......................................... $389,183 $389,330 $373,443 $392,606 $386,090
Gross profit....................................... 92,310 102,691 98,452 114,208 120,201
Store contribution (2)............................. 39,384 45,948 39,180 49,192 52,159
Depreciation and amortization...................... 12,462 11,492 14,334 11,955 12,120
Charge for store closings and
impairment of assets (3).......................... -- -- -- -- 15,300
Operating income................................... 11,146 16,233 8,654 16,613 3,296
Interest expense, net.............................. 17,663 16,889 17,299 18,085 18,153
Loss before extraordinary item..................... (6,472) (783) (8,724) (1,506) (14,963)
Extraordinary item (4)............................. -- -- 3,507 -- --
Net loss (5)....................................... (6,472) (783) (12,231) (1,506) (14,963)
Stock dividends on and accretion of preferred stock
of Holdings........................................ 1,181 1,335 1,496 1,802 2,056
Pro forma net loss applicable to common stock
(5)................................................ (7,653) (2,118) (13,727) (3,308) (17,019)
Pro forma net loss per share applicable to common
stock before extraordinary item................... $ (1.78) $ (0.49) $ (2.18) $ (0.63) $ (3.12)
Pro forma net loss per share applicable to common
stock after extraordinary item.................... (1.78) (0.49) (2.93) (0.63) (3.12)
Pro forma weighted average common shares
outstanding (6).................................... 4,297 4,299 4,680 5,228 5,463
SELECTED OPERATING DATA:
Number of stores open at end of period............. 81 85 81 80 69
Average net sales per gross square foot (7)........ $ 350 $ 333 $ 320 $ 337 $ 327
Inventory turnover (8)............................. 5.4x 5.4x 5.1x 5.7x 5.4x
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------
<S> <C> <C>
1994 1995
-------- --------
SUPPLEMENTAL DATA FOR 69 STORES OPEN AS OF FEBRUARY 3, 1996 (9):
Net sales.................................................................. $373,996 $377,849
Gross profit............................................................... 109,831 117,798
Store contribution (2)..................................................... 49,380 51,853
Charge for store closings and impairment of assets (3)..................... -- 15,300
Operating income........................................................... 16,801 2,990
Average net sales per gross square foot (7)................................ $ 356 $ 343
Gross square footage added to existing stores.............................. 20,150 34,700
</TABLE>
<TABLE>
<CAPTION>
AT FEBRUARY 3, 1996
---------------------------
<S> <C> <C>
PRO AS
FORMA ADJUSTED (10)
-------- ----------------
BALANCE SHEET DATA:
Working capital......................................................... $ 12,669 $ 8,212
Total assets............................................................ 163,611 153,527
Total debt.............................................................. 131,799 102,778
Redeemable Series A preferred stock..................................... 15,279 --
Common stockholders' (deficit) equity................................... (29,080) 12,151
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
FISCAL 1995
-----------------------------------------
AS REPORTED ADJUSTMENTS AS ADJUSTED
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
AS ADJUSTED DATA (11):
Store contribution (2)....................................... $ 52,159 $-- $52,159
Depreciation and amortization................................ 12,120 (699) 11,421
Operating income............................................. 3,296 699 3,995
Interest expense, net........................................ 18,153 (5,972) 12,181
Loss before extraordinary items.............................. (14,963) 6,069 (8,894)
</TABLE>
- ------------
(1) Loehmann's will be the surviving corporation of the Holdings Merger and
each share of Holdings Common Stock and Holdings Class B Common Stock will
be converted into approximately 0.22 shares of Common Stock and Class B
Common Stock, respectively (the "Share Conversion"). See "The
Company."Accordingly, the pro forma financial information appearing herein
and elsewhere in this Prospectus and Registration Statement reflects the
retroactive application of the Holdings Merger and all share and per share
data has been restated to reflect the Share Conversion. See Note 1 of Notes
to the Consolidated Financial Statements.
(2) Computed as gross profit less store operating expenses and pre-opening
costs.
(3) In fiscal 1995, the Company recorded charges related to the closure of 11
stores in August and the impairment of certain primarily intangible assets
of $10.35 million and $4.95 million, respectively. Of the total $15.3
million charge, $10.45 million represents non-cash items. See Notes 4 and 5
of Notes to the Consolidated Financial Statements.
(4) Reflects extraordinary loss related to the repurchase of $30.0 million
principal amount 13 3/4% Senior Subordinated Notes and the payment of $12.0
million on the remaining balance of a term loan in October 1993. The loss
includes a $2.0 million premium paid on the repurchase of the 13 3/4%
Senior Subordinated Notes and a $1.5 million write-off of the deferred
financing costs attributed to the term loan.
(5) At February 3, 1996, the Company had a net operating loss carryforward of
$27.0 million which may be used to reduce taxes payable on future taxable
income. The Company can only use $8.5 million per year and the carryforward
begins to expire in fiscal 2004 if not used in full. See Note 3 of the
Notes to Consolidated Financial Statements.
(6) Excludes 464,643 shares of Common Stock issuable as of April 1, 1996 upon
the exercise of outstanding stock options at a weighted average exercise
price of approximately $1.65 per share, 429,606 of which are exercisable
within 60 days following such date as inclusion of such options in weighted
average shares would have been anti-dilutive. Includes 469,237 shares of
convertible Class B common stock, convertible into 469,237 shares of Common
Stock.
(7) Average net sales per gross square foot is determined by dividing total net
sales by the unaudited weighted average gross square footage of stores open
during the period indicated.
(8) Inventory turnover is determined by dividing cost of sales by monthly
average inventory valued at cost.
(9) Reflects historical financial data for the Company's 69 stores that were
open as of February 3, 1996. Two additional stores, located in Merrick, New
York and Houston, Texas were opened in February 1996 and March 1996,
respectively.
(10) As adjusted to reflect, among other things, the sale of the Common Stock
offered hereby, the sale of Senior Notes in the Debt Offering, and the
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."
(11) For a discussion of the "as adjusted" adjustments, see footnote (10) to the
"Selected Consolidated Financial and Operating Data."
7
<PAGE>
THE COMPANY
Loehmann's is a leading national specialty retailer of well known designer
and brand name women's fashion apparel, accessories and shoes offered at prices
that are typically 25% to 50% below department store prices. Frieda Loehmann
founded the original Loehmann's business in 1921. She acquired the overruns and
samples from designers who supplied major department stores and sold these goods
at discount prices at her store in Brooklyn, New York. With the success of the
original Brooklyn store, her son Charles began expanding the business, first in
the northeastern United States and then nationally. Loehmann's remained
privately held until 1964. After 17 years as a public company, Loehmann's was
acquired in 1981 by AEA Investors ("AEA") in a leveraged buyout transaction. AEA
then sold the Company in 1983 to Associated Dry Goods Corporation ("ADG"),
owners of the Lord & Taylor and other retail chains. Loehmann's ownership
changed again in October 1986 when the May Department Stores purchased ADG. On
September 19, 1988 Loehmann's was acquired in a leveraged buyout transaction
(the "Acquisition") led by Sefinco Ltd., an affiliate of Entrecanales y Tavora,
S.A., the Sprout Group, a venture capital affiliate of Donaldson, Lufkin &
Jenrette, Inc., Desai Capital Management, Inc. and certain of its affiliates and
members of senior management.
Prior to consummation of the Offering, Holdings, a holding company whose
only material assets consist of all of the outstanding stock of the Company and
an intercompany note with the Company, will merge with and into a new
wholly-owned Delaware subsidiary formed for the purpose of reincorporating
Holdings from Maryland to Delaware. Subsequently, but prior to consummation of
the Offering, the surviving corporation of such merger will merge with and into
the Company, with the Company being the ultimate surviving corporation of the
Holdings Merger. Each share of Holdings Common Stock, par value $0.008403361 per
share ("Holdings Common Stock") and Holdings Class B Common Stock, par value
$0.008403361 per share ("Holdings Class B Common Stock") will be converted in
the Holdings Merger into approximately 0.22 shares of Common Stock and the
Company's Class B Common Stock, par value $0.01 per share ("Class B Common
Stock"), respectively. Accordingly, the historical financial information
appearing in the Registration Statement of which this Prospectus is a part (the
"Registration Statement") reflects the retroactive application of the Holdings
Merger and all share and per share data has been restated to reflect the Share
Conversion. Existing shares of Holdings' Series A Preferred Stock, par value
$0.005602241 per share ("Series A Preferred Stock") will be redeemed in full at
the consummation of this Offering.
The Company is a Delaware corporation whose executive offices are located at
2500 Halsey Street, Bronx, New York 10461 and its telephone number is (718)
409-2000.
8
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing any of the shares of Common Stock offered
hereby.
AGGRESSIVE EXPANSION STRATEGY
The Company intends to pursue an expansion strategy involving opening many
more stores than it has in recent years, and its future operating results will
depend to a substantial extent upon its ability to open and operate new stores
successfully. The new stores are expected to be significantly larger than most
of the Company's existing stores and several of the new stores, unlike all but
one of the Company's existing stores, will be located in central business
districts. The Company may also enter certain new markets in various regions in
the United States. Operating larger format stores as well as expanding into new
markets and central business districts may present competitive and merchandising
challenges that are different than those currently encountered by the Company in
its existing markets. In addition, the Company's ability to open new stores on a
timely basis will depend upon a number of factors, including the ability to
properly identify and enter new markets, locate suitable store sites, negotiate
acceptable lease terms, construct or refurbish sites, hire, train and retain
skilled managers and personnel, and other factors, some of which may be beyond
the Company's control. There can be no assurance that the Company's new stores
will be profitable or achieve sales and profitability levels comparable to the
Company's larger stores or its existing stores generally. In addition, because
of the nature of the Company's business, the Company's new store openings will
be clustered during the Company's significant spring or fall selling seasons and
thus any delay in such openings could materially adversely affect the Company's
financial performance in the relevant fiscal year or period. See
"Business--Expansion Strategy." Furthermore, the Company believes that its
expansion within existing markets will adversely affect the financial
performance of the Company's existing stores within those markets. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
To manage its expansion, the Company continually will need to evaluate the
adequacy of its existing systems and procedures, including financial controls,
management information systems and store management, as well as its existing
distribution center which will be used to supply new stores. There can be no
assurance that the Company will anticipate all of the changing demands that its
expanding operations will impose on its existing infrastructure. The failure of
the Company's infrastructure to handle its expansion program could adversely
affect its future operating results. In addition, the Company intends to finance
its store expansion program primarily through its own operating cash flow. The
Company anticipates that its capital expenditures related to store expansion
will total approximately $10.0 million in fiscal 1996. If the Company does not
generate sufficient operating cash flow to support its store expansion program,
the Company may not be able to achieve its targets for opening new stores. See
"Business--Expansion Strategy."
ADEQUATE SOURCES OF MERCHANDISE SUPPLY
The Company's business is dependent to a significant degree upon its ability
to purchase designer and other brand name merchandise at substantially below
normal wholesale prices. The Company does not have any long-term supply
contracts with its suppliers. The loss of certain key vendors or the failure to
establish and maintain relationships with popular vendors could have a material
adverse effect on the Company's business. The Company believes it currently has
adequate sources of designer and brand name merchandise; however, there can be
no assurance, especially given the Company's expansion plans, that the Company
will be able to acquire sufficient quantities and an appropriate mix of such
merchandise at acceptable prices.
9
<PAGE>
COMPARABLE STORE SALES
The Company's comparable store sales results have experienced significant
fluctuations in the past. In addition, the Company anticipates that opening new
stores in existing markets will generally result in decreases in comparable
store sales for existing stores in such markets. The Company believes that this
negative impact on existing store sales, coupled with the maturity of the
Company's existing stores, will make it difficult to achieve increases in
comparable store sales until a significant number of new stores are included in
the comparable store base. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
SUBSTANTIAL LEVERAGE AND RESTRICTIVE COVENANTS
The Company has substantial indebtedness and, as a result, significant debt
service obligations. As of February 3, 1996, after adjusting for the effect of
the application of the net proceeds of this Offering, the Debt Offering, the New
Credit Facility and cash on hand at the closing, the Company would have had
approximately $102.8 million of outstanding indebtedness. The degree to which
the Company is leveraged could have several material adverse effects, including,
but not limited to the following: (i) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions,
general corporate purposes or other purposes may be impaired; (ii) the Company's
substantial leverage could make it more vulnerable to a downturn in general
economic conditions; (iii) the Company may be more highly leveraged than other
companies with which it competes, which may place it at a competitive
disadvantage; and (iv) a substantial portion of the Company's cash flow from
operations may be dedicated to the payment of interest on its indebtedness,
thereby reducing the funds available to the Company for its operations. The
Company's current indebtedness contains, and the Company's new indebtedness will
contain, financial and operating covenants including, but not limited to,
restrictions on the Company's ability to incur additional indebtedness and issue
preferred stock, pay dividends or make other distributions, create liens, sell
assets, enter into certain transactions with affiliates and enter into certain
mergers and consolidations. Failure by the Company to comply with such covenants
may result in an event of default, which, if not cured or waived, could have a
material adverse effect on the Company. In addition, upon the occurrence of a
Change of Control (as defined in the Senior Note Indenture), the Company will be
obligated to repurchase the Senior Notes at 101% of their principal amount. In
such event, there is no assurance that the Company will be able to obtain the
necessary financing to repurchase the Senior Notes. See "Description of Certain
Indebtedness."
HISTORY OF LOSSES
The Company has incurred net losses in each fiscal year since the
Acquisition including fiscal 1995. There can be no assurance that such losses
will not continue in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
MERCHANDISE TRENDS
The Company's success depends in part on its ability to anticipate and
respond to changing merchandise trends and consumer preferences in a timely
manner. Accordingly, any failure by the Company to anticipate, identify and
respond to changing fashion trends could adversely affect consumer acceptance of
the merchandise in the Company's stores, which in turn could adversely affect
the Company's business and its image with its customers. If the Company
miscalculates either the market for its merchandise or its customers' purchasing
habits, it may be required to sell a significant amount of unsold inventory at
below average markups over the Company's cost, or below cost, which would have
an adverse effect on the Company's financial condition and results of
operations.
10
<PAGE>
IMPACT OF ECONOMIC CONDITIONS ON INDUSTRY RESULTS
The Company's business is sensitive to customers' spending patterns, which
in turn are subject to prevailing economic conditions. There can be no assurance
that consumer spending will not be affected by economic conditions, thereby
impacting the Company's growth, net sales and profitability. A decline in
economic conditions in one or more of the markets in which the Company's stores
are concentrated could have an adverse effect on the Company's financial
condition and results of operations.
CONCENTRATION OF OPERATIONS IN CALIFORNIA AND THE NORTHEAST
As of February 3, 1996, 21 of the Company's stores were located in the
northeastern United States (New York, New Jersey, Connecticut and Massachusetts)
and generated 36% of the Company's fiscal 1995 net sales and 13 of the Company's
stores were located in California and generated 22% of the Company's fiscal 1995
net sales. Of the stores in the Northeast, 18 were located in New York, New
Jersey and Connecticut and generated 33% of the Company's fiscal 1995 net sales.
(The foregoing percentages exclude sales from the Company's 11 stores closed in
August 1995.) Although the Company has opened stores in other areas in the
United States, a significant percentage of the Company's net sales is likely to
remain concentrated in the Northeast and California for the foreseeable future.
Consequently, the Company's results of operations and financial condition are
heavily dependent upon general consumer trends and other general economic
conditions in those regions.
COMPETITION
All aspects of the women's apparel industry, including the off-price retail
segment, are highly competitive. The Company competes primarily with department
stores, other off-price retailers, specialty stores, discount stores and mass
merchandisers, many of which have substantially greater financial and marketing
resources than the Company. Finer department stores, which constitute the
Company's principal competitors, offer a broader selection of merchandise and
higher quality service. In addition, many department stores have become more
promotional and have reduced their price points, and certain finer department
stores and certain of the Company's vendors have opened outlet stores which
offer off-priced merchandise in competition with the Company. Accordingly, the
Company may face periods of intense competition in the future which could have
an adverse effect on its financial results. See "Business--Competition."
QUARTERLY RESULTS AND SEASONALITY
The Company's quarterly results of operations may fluctuate materially
depending on, among other things, the timing of new store openings and related
pre-opening expenses, net sales contributed by new stores, increases or
decreases in comparable store sales, adverse weather conditions, shifts in
timing of certain holidays and changes in the Company's merchandise mix. The
Company's business is also subject to seasonal influences with higher margins in
its first and third quarters and lower margins in its second and fourth
quarters. Because of fluctuations in net sales and net income, the results of
operations for any quarter are not necessarily indicative of the results that
may be achieved for a full fiscal year or any future quarter. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Results and Seasonality."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent upon the performance
of its senior management team, particularly Robert N. Friedman, Chairman and
Chief Executive Officer, and Philip Kaplan, President and Chief Operating
Officer. The loss of services of any of the Company's executive officers could
have a material adverse impact on the Company. The Company maintains key man
life insurance on the life of Mr. Kaplan in the amount of $5.0 million and Mr.
Friedman in the
11
<PAGE>
amount of $3.0 million. The Company's success will depend on its ability to
motivate and retain its key employees and to attract and retain qualified
personnel in the future. See "Management."
PAYMENTS TO AFFILIATES
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and certain of
its affiliates, beneficially own 32.7% (or 12,261,794 shares) of the outstanding
shares of the Series A Preferred Stock, all of which is expected to be redeemed
following the consummation of the Offering with a portion of the proceeds
thereof. DLJ and certain of its affiliates are expected to sell 104,653 shares
of Common Stock if the Underwriters' over-allotment option is exercised in full
and then will own 14.0% of the Common Stock following the consummation of the
Offering (or 15.0% of the Common Stock if the Underwriters' do not exercise
their over-allotment option in full). DLJ is also serving as an underwriter in
connection with the Debt Offering. See "Security Ownership of Certain Beneficial
Owners," "Certain Relationships and Related Transactions" and Note 1 of Notes to
Consolidated Financial Statements.
LACK OF PRIOR PUBLIC MARKET AND VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Common Stock
and there can be no assurance that an active trading market in the Common Stock
will develop or be sustained in the future or that the market price of the
Common Stock will not decline below the initial public offering price. The
initial public offering price of the Common Stock was determined by negotiations
between the Company and the Representatives of the Underwriters and may bear no
relationship to the price at which the Common Stock will trade after completion
of the Offering. See "Underwriting" for a discussion of the factors considered
in determining the initial public offering price of the Common Stock. Upon
commencement of the Offering, the Company expects that the Common Stock will be
quoted on the Nasdaq National Market System, which has experienced and is likely
to experience in the future significant price and volume fluctuations which
could adversely affect the market price of the Common Stock without regard to
the operating performance of the Company. In addition, the Company believes that
factors such as quarterly fluctuations in the financial results of the Company,
the Company's comparable store sales results, announcements by other apparel
retailers, the overall economy and the condition of the financial markets could
cause the price of the Common Stock to fluctuate substantially.
SHARES ELIGIBLE FOR FUTURE SALE
Assuming the Underwriters do not exercise the over-allotment option,
following this Offering the Company will have outstanding 8,297,420 shares of
Common Stock. Of such shares, the 3,572,000 shares of Common Stock offered
hereby will be freely tradable. Of the 4,725,420 remaining shares, 4,527,026
shares are held by executive officers, directors and certain shareholders who,
together with the Company, have agreed not to sell, contract to sell, or
otherwise dispose of, any shares of Common Stock without the consent of
Montgomery Securities for a period of 180 days after the date of this
Prospectus. Upon expiration of such agreements, 4,246,293 of such shares will be
eligible for sale in the public markets in accordance with Rule 144 ("Rule 144")
promulgated under the Securities Act of 1933, as amended (the "Securities Act").
The remainder will become eligible for public sale at various times after such
date in accordance with the provisions of Rule 144. Of the 198,394 shares not
subject to such agreements, 146,435 will be eligible for sale in the public
markets in accordance with Rule 144 immediately following this Offering and the
remainder will become eligible for public sale at various times after this
Offering in accordance with the provisions of Rule 144. In addition, the Company
currently has outstanding options to purchase a total of 893,132 shares of
Common Stock and may issue additional options to purchase a total of 190,860
shares of Common Stock. Of the shares underlying these outstanding options,
671,213 are subject to the agreements described above. Following this
12
<PAGE>
Offering, the Company intends to file a registration statement under the
Securities Act to register shares of Common Stock issuable upon the exercise of
stock options granted under the Company's Stock Option Plans. Except as limited
by the agreements described above and by Rule 144 volume limitations applicable
to affiliates, shares issued upon the exercise of stock options after the
effective date of such registration statement generally will be available for
sale in the open market. The Company also has issued and outstanding 469,237
shares of Class B Common Stock which may, 180 days following the completion of
the Offering, be converted into shares of Common Stock on a one-to-one basis.
Future sales of substantial amounts of Common Stock in the open market, or the
availability of such shares for sale following this Offering, could adversely
affect the prevailing market price of the Common Stock. See "Description of
Capital Stock," "Shares Eligible for Future Sale," "Security Ownership of
Certain Beneficial Owners," "Management" and "Underwriting." After giving effect
to the Offering, 4,725,353 shares or 57% of the outstanding shares of Common
Stock will be entitled to demand registration rights. See "Security Ownership of
Certain Beneficial Owners" and "Management."
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and By-laws contain certain
provisions that may discourage other persons from attempting to acquire control
of the Company. These provisions include, without limitation, (i) classification
of the Company's Board of Directors, (ii) prohibitions on stockholder action by
written consent and (iii) procedural requirements in connection with stockholder
proposals or director nominations. In addition, the Board of Directors, without
further action of the stockholders, has the authority to issue preferred stock
in one or more series. In certain circumstances, the fact that provisions are in
place which inhibit or discourage takeover attempts could reduce the market
value of the Common Stock. See "Description of Capital Stock."
DILUTION
Purchasers of the shares of Common Stock offered hereby will experience
immediate and substantial dilution in the net tangible book value per share of
the Common Stock from the initial public offering price. See "Dilution."
13
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
3,572,000 shares of Common Stock offered hereby are estimated to be
approximately $55.7 million (after deducting underwriting discounts and
estimated offering expenses). The Company will apply these net proceeds plus the
net proceeds of the Debt Offering (estimated to be approximately $96.3 million
after deducting underwriting discounts and offering expenses), and the proceeds
of borrowings under the New Credit Facility (to the extent necessary) and cash
on hand in an aggregate amount of approximately $6.0 million as follows:
. Approximately $55.4 million will be used to redeem in full the
Company's 10 1/2% Senior Secured Notes due 1997 (the "10 1/2% Senior Secured
Notes"), at 103.5% of the face amount of such notes, plus accrued and unpaid
interest on such notes;
. Approximately $81.7 million will be used to redeem in full the
Company's 13 3/4% Senior Subordinated Notes due 1999 (the "13 3/4% Senior
Subordinated Notes"; referred to herein with the 10 1/2% Senior Secured
Notes and Series A Preferred Stock as the "Existing Obligations") at 101.0%
of the face amount of such notes, plus accrued and unpaid interest on such
notes; and
. Approximately $20.9 million will be used to redeem all issued and
outstanding shares of the Series A Preferred Stock at its liquidation price
of $0.56 per share.
A substantial portion (17,751,982 shares or 47.5%) of the outstanding shares
of Series A Preferred Stock is owned by the two largest owners of shares of
Common Stock, including affiliates of DLJ, an underwriter for the Debt Offering.
See "Certain Relationships and Related Party Transactions" and "Security
Ownership of Certain Beneficial Owners."
The Company will not receive any of the proceeds from the sale of the Common
Stock offered by certain stockholders of the Company (the "Selling
Stockholders") if the Underwriters' over-allotment option is exercised. Amounts
required to redeem the 10 1/2% Senior Secured Notes and the 13 3/4% Senior
Subordinated Notes will be deposited at the closing of the Offering into trust
accounts for the exclusive benefit of the holders of such securities. The 10
1/2% Senior Secured Notes and the 13 3/4% Senior Subordinated Notes will then be
redeemed approximately 30 days from the date of deposit of such amounts in
accordance with the governing instrument for such securities. The Series A
Preferred Stock also will be redeemed approximately 30 days after the closing of
the Offering in accordance with the terms of such securities. Deposit of the
requisite funds into a trust account will defease substantially all of the
covenants contained in the indentures for the 10 1/2% Senior Secured Notes and
the 13 3/4% Senior Subordinated Notes and redemption of the Series A Preferred
Stock will render such stock to be no longer outstanding.
DIVIDEND POLICY
The Company intends to retain its earnings, if any, to finance the growth
and development of its business including its store expansion program and does
not anticipate paying cash dividends on its Common Stock in the foreseeable
future. The payment of any future dividends will be at the discretion of the
Company's Board of Directors and will depend upon, among other things, the
future earnings, operations, capital requirements and financial condition of the
Company. In addition, the Company's New Credit Facility and the Senior Note
Indenture contain various covenants which may restrict the Company's ability to
pay dividends. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and "Description of
Certain Indebtedness."
14
<PAGE>
DILUTION
The negative net tangible book value of the Company at February 3, 1996 was
$73.6 million, or approximately $15.57 per share of Common Stock. Negative net
tangible book value per share is determined by dividing the negative tangible
net worth of the Company (tangible assets less all liabilities) by the total
number of outstanding shares of Common Stock. After giving effect to the sale of
3,572,000 shares of Common Stock offered by the Company hereby and the Debt
Offering and the application of the estimated net proceeds thereof (after
deducting underwriting discounts and estimated expenses of such offerings), as
described in "Use of Proceeds," the pro forma-as adjusted negative net tangible
book value of the Company at February 3, 1996 would have been $33.6 million, or
$4.05 per share of Common Stock. This represents an immediate decrease in
negative net tangible book value of $11.52 per share to existing stockholders
and an immediate dilution in net tangible book value of $21.05 per share to
purchasers of Common Stock in this Offering. The following table illustrates
this dilution on a per share basis as of February 3, 1996:
<TABLE>
<CAPTION>
<S> <C> <C>
Initial public offering price per share................................ $ 17.00
Net tangible book value per share before the Offering.............. $(15.57)
Increase per share attributable to new investors................... 11.52
-------
Pro forma-as adjusted net tangible book value per share after the
Offering............................................................... (4.05)
-----------
Dilution per share to new investors.................................... $ 21.05
-----------
-----------
</TABLE>
The following table summarizes, on a pro forma-as adjusted basis as of
February 3, 1996, the number of shares of Common Stock purchased from the
Company, the total consideration paid to the Company and the average price paid
per share by the existing stockholders and the new investors:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1)................ 4,725,420 57.0% 20,085,464 24.9% $ 4.25
New investors............................ 3,572,000 43.0 60,724,000 75.1 17.00
--------- ------- ----------- -------
Total................................ 8,297,420 100.0% 80,809,464 100.0%
--------- ------- ----------- -------
--------- ------- ----------- -------
</TABLE>
- ------------
(1) If the Underwriters' over-allotment option is exercised, sales by the
Selling Stockholders in this Offering will reduce the number of shares held
by existing stockholders. If such option is exercised in full, the number of
shares held by existing stockholders will be reduced to 4,189,620, or 50.5%
of the total number of shares of Common Stock to be outstanding after this
Offering, and will increase the number of shares of Common Stock held by new
investors to 4,107,800, or 49.5% of the total number of shares of Common
Stock to be outstanding after this Offering. See "Security Ownership of
Certain Beneficial Owners."
As of April 1, 1996, there were 893,132 shares of Common Stock issuable upon
the exercise of outstanding stock options at a weighted average exercise price
of approximately $3.75 per share, of which 432,221 are exercisable within 60
days following such date. If any of such options were exercised, there would be
additional dilution to new investors. See "Management--Stock Option Plan." In
addition, 469,237 shares of Class B Common Stock convertible into 469,237 shares
of Common Stock were outstanding. See "Description of Capital Stock--Class B
Common Stock."
15
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
February 3, 1996, on a pro forma basis after giving effect to the Holdings
Merger, and as adjusted to reflect (i) the sale of 3,572,000 shares of Common
Stock offered by the Company hereby, (ii) the sale of $100.0 million aggregate
principal amount of Senior Notes pursuant to the Debt Offering, and (iii) the
application of the net proceeds from such offerings as described under "Use of
Proceeds."
<TABLE>
<CAPTION>
FEBRUARY 3, 1996
------------------------------------------
AS REPORTED PRO FORMA AS ADJUSTED(1)
----------- --------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt:
New 11 7/8% Senior Notes............................... $ -- $ -- $100,000
10 1/2% Senior Secured Notes (2)....................... 51,471 51,471 --
13 3/4% Senior Subordinated Notes (3).................. 77,550 77,550 --
Revenue bonds and notes................................ 2,712 2,712 2,712
----------- --------- --------------
Total long-term debt............................... 131,733 131,733 102,712
Series A Preferred Stock, subject to mandatory
redemption, 0 shares authorized (41,500,000 shares pro
forma; 0 shares as adjusted), 0 shares issued and
outstanding (37,405,739 shares pro forma; 0 shares as
adjusted)................................................ -- 15,279 --
Common stockholders' (deficit) equity
Common stock, 1,000 shares authorized (25,000,000
shares pro forma and as adjusted), 1,000 shares
issued and outstanding (4,725,420 shares pro forma;
8,297,420 shares as adjusted) (4).................... -- 47 83
Class B convertible common stock, 0 shares authorized,
issued and outstanding (469,237 shares pro forma and
as adjusted)............................................. -- 2,352 2,352
Additional paid-in-capital............................. 41,535 23,857 79,544
Accumulated deficit.................................... (55,336) (55,336) (69,828)(5)
----------- --------- --------------
Total common stockholders' (deficit) equity........ (13,801) (29,080) 12,151
----------- --------- --------------
Total capitalization................. $ 117,932 $ 117,932 $114,863
----------- --------- --------------
----------- --------- --------------
</TABLE>
- ------------
(1) Total availability under the New Credit Facility will be $35.0 million. To
the extent cash on hand approximately 30 days after the closing date is
less than the amount available at February 3, 1996 as adjusted, the Company
may borrow under the New Credit Facility.
(2) At the closing date, the funds needed to repurchase the 10 1/2% Senior
Secured Notes are estimated to be $55.4 million (see "Use of Proceeds")
compared to $58.0 million, which is the amount needed to redeem the 10 1/2%
Senior Secured Notes in the above capitalization table. The difference
principally reflects a repurchase of $1.6 million face amount of the Senior
Secured Notes on March 6, 1996 and a payment of accrued interest on April
1, 1996.
(3) At the closing date, the funds needed to repurchase the 13 3/4% Senior
Subordinated Notes are estimated to be $81.7 million (see "Use of
Proceeds") compared to $84.5 million, which is the amount needed to redeem
the 13 3/4% Senior Subordinated Notes in the above capitalization table.
The difference principally reflects the February 15, 1996 reduction in
early redemption penalty from 102.5% to 101.0% and payment of accrued
interest.
(4) Excludes 893,132 shares of Common Stock issuable as of April 1, 1996 upon
the exercise of outstanding stock options at a weighted average exercise
price of approximately $3.75 per share, 432,221 of which are exercisable
within 60 days following such date.
(5) Reflects (i) the non-recurring charges of approximately $6.5 million
relating to losses on the early extinguishment of $52.5 million face amount
of 10 1/2% Senior Secured Notes and $77.6 million face amount of 13 3/4%
Senior Subordinated Notes, (ii) a non-recurring charge of $2.4 million
related to the acceleration of unamortized deferred financing costs
associated the repayment of such indebtedness and (iii) a non-recurring
charge of $5.7 million to accumulated deficit for the accelerated accretion
of the Series A Preferred Stock to its liquidation preference of $0.56 per
share.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (1)
(IN THOUSANDS, EXCEPT OPERATING AND PRO FORMA PER SHARE DATA)
The following statement of operations and balance sheet data are derived
from the audited consolidated financial statements of the Company. The data
should be read in conjunction with the consolidated financial statements,
related notes thereto, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this Prospectus. All
fiscal years for which financial information is set forth below had 52 weeks
except fiscal 1995, which had 53 weeks.
The following unaudited pro forma-as adjusted balance sheet information
gives effect to the completion of the various transactions contemplated by the
Offering and the Debt Offering as if the same had occurred as of February 3,
1996. The following unaudited pro forma-as adjusted operating statement data for
fiscal 1995 give effect to the completion of the various transactions
contemplated by the Offering and the Debt Offering as if the same had occurred
as of January 28, 1995. The pro forma-as adjusted financial information and
notes thereto do not purport to represent what the Company's results of
operations would actually have been if such transactions had in fact occurred on
such date or project the results of operations for any future period.
17
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------------------------------------
1991 1992 1993 1994 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................... $389,183 $389,330 $373,443 $392,606 $386,090
Cost of sales................................ 296,873 286,639 274,991 278,398 265,889
-------- -------- -------- -------- --------
Gross profit................................. 92,310 102,691 98,452 114,208 120,201
Operating Expenses:
Store operating expenses.................... 51,888 56,108 59,059 64,869 68,042
Pre-opening costs........................... 1,038 635 213 147 --
General and administrative expenses......... 15,776 18,223 16,192 20,624 21,443
Depreciation and amortization............... 12,462 11,492 14,334 11,955 12,120
Charge for store closings and
impairment of assets (2).................. -- -- -- -- 15,300
-------- -------- -------- -------- --------
Operating income............................. 11,146 16,233 8,654 16,613 3,296
Interest expense, net........................ 17,663 16,889 17,299 18,085 18,153
-------- -------- -------- -------- --------
Loss before income taxes..................... (6,517) (656) (8,645) (1,472) (14,857)
(Benefit) provision for income taxes......... (45) 127 79 34 106
-------- -------- -------- -------- --------
Loss before extraordinary item............... (6,472) (783) (8,724) (1,506) (14,963)
Extraordinary item (3)....................... -- -- 3,507 -- --
-------- -------- -------- -------- --------
Net loss (4)................................. (6,472) (783) (12,231) (1,506) (14,963)
Stock dividends on and accretion of preferred
stock of Holdings........................... 1,181 1,335 1,496 1,802 2,056
-------- -------- -------- -------- --------
Pro forma net loss applicable to common stock
(4).......................................... $ (7,653) $ (2,118) $(13,727) $ (3,308) $(17,019)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Pro forma net loss per share applicable to
common stock before extraordinary item...... $ (1.78) $ (0.49) $ (2.18) $ (0.63) $ (3.12)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Pro forma net loss per share applicable to
common stock after extraordinary item....... $ (1.78) $ (0.49) $ (2.93) $ (0.63) $ (3.12)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Pro forma weighted average common shares
outstanding (5).............................. 4,297 4,299 4,680 5,228 5,463
SELECTED OPERATING DATA:
Number of stores open at end of period....... 81 85 81 80 69
Average net sales per gross square foot
(6)......................................... $ 350 $ 333 $ 320 $ 337 $ 327
Inventory turnover (7)....................... 5.4x 5.4x 5.1x 5.7x 5.4x
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------
1994 1995
-------- --------
<S> <C> <C>
SUPPLEMENTAL DATA FOR 69 STORES OPEN AS OF FEBRUARY 3, 1996 (8):
Net sales.................................................................. $373,996 $377,849
Gross profit............................................................... 109,831 117,798
Charge for store closings and impairment of assets (2)..................... -- 15,300
Operating income........................................................... 16,801 2,990
Average net sales per gross square foot (6)................................ $ 356 $ 343
Gross square footage added to existing stores.............................. 20,150 34,700
</TABLE>
<TABLE>
<CAPTION>
AT FEBRUARY 3, 1996
------------------------
FEB. 1, JAN. 30, JAN. 29, JAN. 28, FEB. 3, AS
1992 1993 1994 1995 1996 PRO FORMA ADJUSTED (9)
------- -------- -------- -------- ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................... $ 2,743 $ 16 $ 8,288 $ 14,049 $12,669 $12,669 $ 8,212
Total assets....................... 186,466 184,189 177,666 178,612 163,611 163,611 153,527
Total debt......................... 134,088 127,931 130,886 132,029 131,799 131,799 102,778
Redeemable Series A preferred
stock.............................. -- -- -- -- -- 15,279 --
Common stockholders' equity
(deficit).......................... 11,776 11,532 1,946 941 (13,801) (29,080) 12,151
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
FISCAL 1995
------------------------------------------
AS REPORTED ADJUSTMENTS AS ADJUSTED
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
AS ADJUSTED DATA (10):
Store contribution (11)...................................... $ 52,159 $ -- $ 52,159
Depreciation and amortization................................ 12,120 (699) 11,421
Operating income............................................. 3,296 699 3,995
Interest expense, net........................................ 18,153 (5,972) 12,181
Loss before extraordinary items.............................. (14,963) 6,069 (8,894)
</TABLE>
- ------------
(1) Loehmann's will be the surviving corporation of the Holdings Merger and
each share of Holdings Common Stock and Holdings Class B Common Stock will
be converted into approximately 0.22 shares of Common Stock and Class B
Common Stock, respectively. See "The Company." Accordingly, the pro forma
financial information appearing herein and elsewhere in this Prospectus and
Registration Statement reflects the retroactive application of the Holdings
Merger and all share and per share data has been restated to reflect the
Share Conversion. See Note 1 of Notes to the Consolidated Financial
Statements.
(2) In fiscal 1995, the Company recorded charges related to the closings of 11
stores in August and the impairment of certain primarily intangible assets
of $10.35 million and $4.95 million, respectively. Of the total $15.3
million charge, $10.45 million represents non-cash items. See Notes 4 and 5
of Notes to the Consolidated Financial Statements.
(3) Reflects extraordinary loss related to the repurchase of $30.0 million
principal amount 13 3/4% Senior Subordinated Notes and the payment of $12.0
million on the remaining balance of a term loan in October 1993. The loss
includes a $2.0 million premium paid on the repurchase of the 13 3/4%
Senior Subordinated Notes and a $1.5 million write-off of the deferred
financing costs attributed to the term loan.
(4) At February 3, 1996, the Company had a net operating loss carryforward of
$27.0 million which may be used to reduce taxes payable on future taxable
income. The Company can only use $8.5 million per year and the carryforward
begins to expire in fiscal 2004 if not used in full. See Note 3 of the
Notes to Consolidated Financial Statements.
(5) Excludes 464,643 shares of Common Stock issuable as of April 1, 1996 upon
the exercise of outstanding stock options at a weighted average exercise
price of approximately $1.65 per share, 429,606 of which are exercisable
within 60 days following such date as inclusion of such options in weighted
average shares would have been anti-dilutive. Includes 469,237 shares of
Class B Common Stock, convertible into 469,237 shares of Common Stock.
(6) Average net sales per gross square foot is determined by dividing total net
sales by the weighted average gross square footage of stores open during
the period indicated.
(7) Inventory turnover is determined by dividing cost of sales by the monthly
average inventory valued at cost.
(8) Reflects historical data for the Company's 69 stores that were open as of
February 3, 1996. Two additional stores, located in Merrick, New York and
Houston, Texas, were opened in February 1996 and March 1996, respectively.
(9) As adjusted to reflect, among other things, the sale of the Common Stock
offered hereby, the sale of Senior Notes in the Debt Offering, and the
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."
(10) The "as adjusted" data has not been adjusted to eliminate the closing of 11
stores in August 1995.
The "as adjusted" adjustments to operations are as follows:
(i) A decrease in interest expense and amortization of deferred
financing costs to reflect the repayment of certain indebtedness as
described above net of interest expense and amortization of deferred
financing costs related to $100.0 million of Senior Notes issued as part of
the Debt Offering. See "Use of Proceeds."
(ii) Loss before extraordinary items reflects the net decreases in
interest expense and deferred financing costs, net of taxes, described in
(i) above.
In addition, in connection with the Offering and the Debt Offering and the
application of the proceeds therefrom, dividends on and accretion of
preferred stock due to the redemption of Series A Preferred Stock will be
eliminated. See "Use of Proceeds."
(11) Computed as gross profit less store operating expenses and pre-opening
costs.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains certain forward-looking statements within the
meaning of the federal securities laws. Actual results could differ materially
from those projected in the forward-looking statements due to a number of
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus.
OVERVIEW
Loehmann's, founded in 1921, currently operates 71 stores in major
metropolitan markets located in 23 states. The Company was acquired in a
leveraged buyout transaction in September 1988. As a result of the financing of
that transaction and certain subsequent refinancings, the Company currently has
$77.6 million principal amount of 13 3/4% Senior Subordinated Notes, $52.5
million principal amount of 10 1/2% Senior Secured Notes and $20.9 million
liquidation value of Series A Preferred Stock, all of which will be redeemed and
repaid in full with, among other funds, the proceeds of the Offering and the
Debt Offering. See "Use of Proceeds."
The Company continues to refine its store format and has sought to broaden
its appeal and increase margins through the addition of new product categories
such as shoes and a broader range of accessories and intimate apparel. Since the
introduction or expansion of these categories starting in fiscal 1992, gross
margins have increased from 26.4% for fiscal 1992 to 31.1% for fiscal 1995. In
addition, the Company has found that its larger stores, those in excess of
23,000 square feet, typically experience enhanced operating performance with
increased inventory turns, lower markdowns and thus higher profitability on a
higher sales basis. Accordingly, the Company's new prototype store is 25,000 to
35,000 square feet as opposed to an average of approximately 16,000 square feet
for the Company's existing stores. The Company has embarked on a store expansion
program focused on opening large stores both in existing markets where the
Loehmann's franchise is well established and in central business districts which
have appealing demographics. As part of its expansion program, the Company
intends to open seven such stores in fiscal 1996 and seven to ten stores in each
of the next two fiscal years. Two of the seven stores planned for fiscal 1996
already have been opened. The Company also will continue to expand the selling
space of existing stores where possible. In fiscal 1995, the Company added an
aggregate of approximately 35,000 square feet to eight existing stores. There
can be no assurance that future stores will achieve sales or profitability
levels comparable to the Company's current larger stores. See
"Business--Expansion Strategy."
In anticipation of its expansion program, the Company has expanded or
replaced selected stores and closed certain of its underperforming stores,
including 11 stores in August 1995, which represented approximately 4.7% and
2.1% of net sales in fiscal 1994 and fiscal 1995, respectively, and did not
significantly contribute to the Company's operating income. The Company believes
that closure of these stores will allow it to improve overall profitability and
achieve a more competitive cost structure, although on a short-term basis, these
closings may result in reduced net sales. In connection with such closings, the
Company incurred a charge of $10.35 million during fiscal 1995. The Company also
recorded an unrelated charge of $4.95 million reflecting the write-down of
certain primarily intangible assets deemed to have been impaired. As a result of
this $15.3 million charge (of which $10.45 million is non-cash), future
depreciation and amortization relating to the Company's existing asset base will
be reduced. The amount of such reduction in fiscal 1996 is expected to be
approximately $800,000.
The Company estimates that its average net cash requirement to open a
typical new store will be approximately $1.7 million, consisting of $1.0 million
of capital expenditures for store fixtures and equipment and leasehold
improvements, $0.5 million for net working capital and $0.2 million for pre-
opening expenses. Actual costs will vary from store to store based upon, among
other things, geographic location, the size of the store and the extent of the
build-out required at the selected site. The Company
20
<PAGE>
anticipates that the cost of its expansion program, approximately $10.0 million
in fiscal 1996, will be principally funded from operating cash flow. Based on
its historical experience, the Company believes that its new stores will
generate a positive store contribution in the first full year of operation and
are generally expected to recoup their investment within two years. Expenses
incurred in connection with the opening of new stores are expensed in the fiscal
quarter in which the stores open. The Company anticipates opening five stores in
the third quarter of fiscal 1996 and thus expects to incur significant
pre-opening expenses in that quarter. The aggregate charge for pre-opening
expense may vary substantially from quarter to quarter depending upon the timing
of the opening of new stores.
The Company selects new locations in existing markets based on anticipated
profitable incremental sales volume for that market. Opening new stores in
existing markets generally results in decreases in the comparable sales for
existing stores in such markets. The Company believes that this negative impact
on existing store sales coupled with the maturity of the Company's existing
stores will make it more difficult to achieve increases in comparable store
sales until a significant number of new stores are included in the comparable
store base.
Inherent in the Company's expansion strategy is an ongoing increase in
occupancy costs as the Company opens larger stores in more desirable locations.
This will have a negative impact on store expenses as a percentage of net sales.
This negative impact should be at least partially offset by leveraging general
and administrative expenses as net sales from new stores are added to the net
sales base.
As currently contemplated, the Company plans to utilize the net proceeds
from the Offering, the Debt Offering, a portion of the New Credit Facility and
cash on hand at the closing to refinance and redeem the Existing Obligations.
See "Use of Proceeds." This refinancing will allow the Company to reduce its
leverage, net interest costs and other fixed charges. The Company will incur a
one-time extraordinary charge of $8.8 million, as a result of certain prepayment
penalties on the refinanced debt and a write-off of certain deferred financing
costs. The Company will also incur a one-time charge to accumulated deficit of
$5.7 million as a result of accelerated accretion on its outstanding redeemable
preferred stock in connection with the redemption of such stock.
The Company's sale of shares of Common Stock in the Offering will result in
a more than 50% ownership change within the meaning of Section 382 of the
Internal Revenue Code. Accordingly, the Company's ability to utilize its net
operating loss carryforwards (approximately $27.0 million at February 3, 1996)
to reduce taxes payable on future taxable income may be limited in any given
fiscal year. The annual limitation is estimated to be approximately $8.5 million
(at February 3, 1996, assuming an initial public offering price of $17.00).
21
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, statement of
operations data expressed as a percentage of net sales.
<TABLE>
<CAPTION>
FISCAL YEAR (1)
-----------------------
1993 1994 1995
----- ----- -----
<S> <C> <C> <C>
Net sales (2)......................................................... 100.0% 100.0% 100.0%
Cost of sales......................................................... 73.6 70.9 68.9
----- ----- -----
Gross margin.......................................................... 26.4 29.1 31.1
Operating expenses:
Store operating expenses............................................ 15.8 16.5 17.6
Pre-opening costs................................................... 0.1 -- --
General and administrative expenses................................. 4.3 5.3 5.6
Depreciation and amortization....................................... 3.8 3.0 3.1
Charge for store closings and impairment of assets.................. -- -- 4.0
----- ----- -----
Operating income...................................................... 2.3 4.2 0.9
Interest expense, net................................................. 4.6 4.6 4.7
----- ----- -----
Loss before income taxes.............................................. (2.3)% (0.4)% (3.8)%
----- ----- -----
----- ----- -----
</TABLE>
- ------------
(1) Fiscal 1993 and 1994 had 52 weeks, and fiscal 1995 had 53 weeks.
(2) Numbers may not total due to rounding.
Fiscal 1995 Compared to Fiscal 1994
Net sales decreased by approximately $6.5 million, or 1.7%, to $386.1
million during fiscal 1995 as compared to $392.6 million during fiscal 1994.
Comparable store sales decreased by 0.4% during fiscal 1995 as compared to
fiscal 1994 due to a relatively weak retail environment. The remaining decrease
in total sales was attributable to the closure of 11 stores in August 1995 which
represented approximately 4.7% and 2.1% of net sales in fiscal 1994 and fiscal
1995, respectively. Sportswear, dresses and suits represented an aggregate of
$284.2 million of net sales in fiscal 1995, as compared to $295.6 million in
fiscal 1994, while accessories, intimate apparel and shoes represented an
aggregate of $77.2 million of net sales in fiscal 1995 as compared to $64.4
million in fiscal 1994. These changes reflect the Company's efforts in recent
years to expand its merchandise mix to include shoes and a broader range of
accessories and intimate apparel, which typically have higher gross margins than
the Company's traditional apparel offerings.
Gross profit increased by approximately $6.0 million to $120.2 million
during fiscal 1995 as compared to $114.2 million for fiscal 1994. Gross margin
increased to 31.1% for fiscal 1995 from 29.1% in the prior fiscal year. The
increase in margin was primarily a result of a continuing shift in the Company's
sales mix towards merchandise with a higher average gross margin coupled with a
reduction of markdowns and shrinkage.
Store operating expenses increased by approximately $3.1 million to $68.0
million during fiscal 1995 as compared to $64.9 million during fiscal 1994. As a
percentage of net sales, store operating expenses increased to 17.6% for fiscal
1995 from 16.5% in the prior fiscal year. Direct mail and advertising
expenditures increased by $2.8 million to $13.0 million in fiscal 1995 from
$10.2 million in fiscal 1994, primarily as a result of the growth of the
Company's Insider Club membership list for direct mail sale announcements. The
remaining increase was attributable to higher occupancy costs due to the
addition of square footage at eight of the Company's existing stores partially
offset by the closing of 11 stores in August 1995.
General and administrative expenses increased by approximately $0.8 million
to $21.4 million during fiscal 1995 as compared to $20.6 million for fiscal
1994. As a percentage of net sales, general and administrative expenses
increased to 5.5% for fiscal 1995 from 5.2% in the prior fiscal year. The
increase
22
<PAGE>
in general and administrative expenses was primarily due to the Company's
continued investment in corporate infrastructure to support the Company's
planned new store expansion program.
Depreciation and amortization for fiscal 1995 remained essentially unchanged
as compared to the prior fiscal year. The reduction in depreciation and
amortization attributable to the closing of 11 stores in fiscal 1995 was offset
by additional depreciation associated with capital expenditures in fiscal 1995.
Charge for store closings for fiscal 1995 includes a $10.35 million charge
related to the closure of 11 underperforming stores in August 1995. Reserved
amounts at February 3, 1996 related to long-term lease commitments were not
material. The Company believes the store closings will improve overall
profitability and enable the Company to achieve a more competitive cost
structure. See Note 4 to the Consolidated Financial Statements.
Charge for impairment of assets for fiscal 1995 includes a $4.95 million
write-down to fair value of certain assets, primarily intangible favorable
leasehold rights, that were determined to be impaired. As discussed in Note 5 to
the Consolidated Financial Statements, the Company completed certain market
analyses as part of an overall strategic plan in the second quarter of fiscal
1995. As an outcome of these analyses, the Company shortened the period of time
in which it intended to occupy certain stores and as a consequence, the
undiscounted cash flows estimated to be generated from the revised intended use
were not sufficient to recover the assets' carrying amount. Fair value was based
on appraisal value.
Operating income decreased by $13.3 million to $3.3 million for fiscal 1995
as compared to $16.6 million for fiscal 1994. Before the charges for store
closings and impairment of assets, operating income increased by approximately
$2.0 million to $18.6 million for fiscal 1995 from $16.6 million for fiscal
1994. As a percentage of net sales, operating income before the charges for
store closings and impairment of assets increased to 4.8% from 4.2%.
Interest expense, net for fiscal 1995 was essentially unchanged as compared
to fiscal 1994.
Fiscal 1994 Compared to Fiscal 1993
Net sales increased by approximately $19.2 million to $392.6 million, or
5.1%, during fiscal 1994 as compared to $373.4 million during fiscal 1993.
Comparable store sales increased by 4.9% during fiscal 1994 as compared to
fiscal 1993. Management believes that the principal factors contributing to this
increase in net sales were the introduction of shoes, expansion of accessories
and intimate apparel and the general upgrading of store interiors and
merchandise presentation. Sportswear, dresses and suits represented an aggregate
of $295.6 million of net sales in fiscal 1994, as compared to $292.0 million in
fiscal 1993, while accessories, intimate apparel and shoes represented an
aggregate of $64.4 of net sales in fiscal 1994 as compared to $50.0 million in
fiscal 1993.
Gross profit increased by approximately $15.7 million to $114.2 million
during fiscal 1994 as compared to $98.5 million during fiscal 1993. Gross margin
increased to 29.1% for fiscal 1994 from 26.4% in the prior fiscal year. The
improvement in margin was the result of a reduction in markdowns of 2.7% coupled
with an improvement in initial markup of 0.4% of net sales partially offset by
an increase in shrinkage.
Store operating expenses increased by approximately $5.8 million to $64.9
million during fiscal 1994 as compared to $59.1 million during fiscal 1993. As a
percentage of net sales, store operating expenses increased to 16.5% for fiscal
1994 from 15.8% in the prior fiscal year. Direct mail and advertising expenses
increased to $10.2 million in fiscal 1994 from $7.7 million in fiscal 1993. This
increase of $2.5 million was primarily due to the growth of the Company's
Insider Club membership list for direct mail sale announcements. Store operating
expenses also increased $1.0 million as a result of the opening of a new larger
store during fiscal year 1994 partially offset by the closing of two smaller
stores, increases resulting from bonus and profit sharing costs for store-level
employees associated with the earnings increase in fiscal 1994 over fiscal 1993
and certain increased variable expenses.
23
<PAGE>
General and administrative expenses increased by approximately $4.4 million
to $20.6 million during fiscal 1994 as compared to $16.2 million during fiscal
1993. As a percentage of net sales, general and administrative expenses
increased to 5.3% for fiscal 1994 from 4.3% in the prior fiscal year. This
increase resulted from an increase in bonus and profit sharing costs for
corporate-level employees, one-time fees associated with the development of a
corporate long-range plan and real estate expansion strategy and costs
associated with the Company's investment in corporate infrastructure. In
addition, fiscal 1993 general and administrative expenses were partially offset
by approximately $2.0 million of income from one-time landlord settlements and
an insurance claim related to the Reseda, California location which was damaged
in an earthquake which reduced general and administrative expenses for that
fiscal year.
Depreciation and amortization decreased by $2.3 million to $12.0 million
during fiscal 1994 as compared to $14.3 million during fiscal 1993. The decrease
was primarily due to the absence of prior year write-offs of assets associated
with closed and relocated stores and the decrease in amortization of stock
option compensation.
Operating income increased by $7.9 million to $16.6 million during fiscal
1994 as compared to $8.7 million during fiscal 1993. As a percentage of net
sales, operating income increased to 4.2% for fiscal 1994 from 2.3% in the prior
fiscal year.
Interest expense, net increased by $0.8 million in fiscal 1994 from the
prior fiscal year. This increase was primarily due to a full year of non-cash
accretion expense associated with the 10 1/2% Senior Secured Notes which were
issued in October 1993, at a discount.
QUARTERLY RESULTS AND SEASONALITY
While the Company's net sales do not show significant seasonal variation,
the Company's operating income has traditionally been significantly higher in
its first and third fiscal quarters. The Company believes that its merchandise
is purchased primarily by women who are buying for their own wardrobes rather
than as gifts. As a result, unlike many other retailers, the Company does not
experience increases in net sales during the Christmas shopping season. In
addition, the Company's quarterly results of operations may fluctuate materially
depending on, among other things, the timing of new store openings and related
pre-opening expenses, net sales contributed by new stores, increases or
decreases in comparable store sales, adverse weather conditions, shifts in
timing of certain holidays and changes in the Company's merchandise mix. Results
of operations during the second and fourth quarters are traditionally impacted
by end of season clearance events. In addition, fourth quarter operations can be
affected by employee performance bonuses.
The following table sets forth certain unaudited operating data for the
Company's eight fiscal quarters ended February 3, 1996. The unaudited quarterly
information includes all normal recurring adjustments which management considers
necessary for a fair presentation of the information shown.
<TABLE>
<CAPTION>
FISCAL 1994 FISCAL 1995
----------------------------------------- -------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER(1) QUARTER QUARTER QUARTER(2) QUARTER(1)
------- ------- -------- ---------- ------- ------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales....................... $96,170 $90,798 $105,762 $ 99,876 $97,506 $89,426 $ 99,362 $ 99,796
Gross profit.................... 28,248 26,419 32,322 27,219 30,823 26,882 32,694 29,802
Store contribution (3).......... 12,968 11,669 15,053 9,502 13,906 11,334 15,433 11,486
Charge for store closings and
impairment of assets........... -- -- -- -- -- 15,300 -- --
Operating income (loss)......... 5,448 3,334 6,776 1,055 5,818 (11,934) 7,364 2,048
AS A PERCENTAGE OF NET SALES:
Gross margin.................... 29.4% 29.1% 30.6% 27.3% 31.6% 30.1% 32.9% 29.9%
Store contribution (3).......... 13.5% 12.9% 14.2% 9.5% 14.3% 12.7% 15.5% 11.5%
Charge for store closings and
impairment of assets........... -- -- -- -- -- 17.1% -- --
Operating income (loss)......... 5.7% 3.7% 6.4% 1.1% 6.0% (13.3)% 7.4% 2.1%
</TABLE>
- ------------
(1) For the 14 weeks ended February 3, 1996 and the 13 weeks ended January 28,
1995.
(2) The Company closed 11 stores in August 1995.
(3) Reflects total gross profit less store operating expenses and pre-opening
costs.
24
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1995, the Company's primary uses of cash were to service its
debt and fund capital expenditures. The Company has satisfied its cash
requirements principally from cash flow from operations. During fiscal 1995, net
cash provided by operations was $9.5 million.
Net cash used in investing activities, principally related to capital
expenditures for leasehold improvements and fixtures primarily associated with
the upgrading of existing stores and to a lesser extent improving corporate
infrastructure, was $8.1 million for fiscal 1995. Additionally, fiscal 1995
capital expenditures include purchases related to stores scheduled to open in
fiscal 1996.
Net cash used in financing activities, principally related to the repurchase
of $1.6 million face amount of the 10 1/2% Senior Secured Notes, during fiscal
1995.
The Company currently has a revolving credit agreement which provides for a
credit facility totaling $20.0 million and bears interest at a base rate
(equivalent to the bank's reference rate) plus 1.5% (the "Existing Credit
Facility"). In connection with the Existing Credit Facility, the Company has
agreed to deposit all cash receipts from the normal course of business into a
depositary account which is used to repay borrowings, if any, under the
facility. During fiscal 1995, the Existing Credit Facility was not utilized. At
February 3, 1996, the Company had no outstanding borrowings under the Existing
Credit Facility. The Existing Credit Facility is subject to certain borrowing
base limitations, subjects the Company to certain covenants, requires the
Company to maintain certain financial ratios, requires the Company to prepay the
facility in full once each year and maintain a zero principal balance for at
least 30 days during such period, and is secured by substantially all of the
Company's assets including accounts receivable, inventory, and fixtures and
equipment. The Company has entered into an agreement with a financial
institution to provide a four-year $35.0 million revolving credit facility (the
"New Credit Facility"). The Company may draw down under the New Credit Facility
to redeem and repay a portion of the Existing Obligations. See "Use of
Proceeds." The New Credit Facility will contain certain customary covenants and
events of default described herein, will be secured by substantially all of the
Company's assets and will not be subject to scheduled annual repayments, except
upon maturity. See "Description of Certain Indebtedness."
During fiscal 1995, the Company's capital expenditures for leasehold
improvements, fixtures and equipment and investments in infrastructure were
approximately $3.5 million. In addition, approximately $2.8 million was expended
principally to expand and renovate certain of its stores and approximately $1.8
million related to stores scheduled to open in fiscal 1996. The Company
anticipates its capital expenditures for fiscal 1996 will be approximately $14.0
million, consisting of $10.0 million to open seven new stores and $4.0 million
for other general capital expenditures.
The Company believes that cash generated from operations, funds available
under the New Credit Facility and funds from both the Offering and the Debt
Offering will be sufficient to satisfy its cash requirements through fiscal
1996.
25
<PAGE>
BUSINESS
Loehmann's, founded in 1921 as the "Original Designer Outlet," is a leading
national specialty retailer of well known designer and brand name women's
fashion apparel, accessories and shoes offered at prices that are typically 25%
to 50% below department store prices. The Company believes it has developed a
unique franchise as the largest national upscale off-price speciality retailer
in the industry. The Company's strong brand name, loyal customer base and
long-standing relationships with leading designers and vendors of quality
merchandise has enabled it to maintain its franchise. The Company's target
customers are relatively affluent women between the ages of 30 and 55 who are
attracted to designer and other high quality merchandise offered at exceptional
values. The Company currently operates 71 stores in major metropolitan markets
located in 23 states. Management believes it has successfully positioned the
Company to build on its franchise through an expansion program initially
focusing on its core suburban markets and certain central business districts.
INDUSTRY OVERVIEW
According to published reports, total retail sales of women's apparel and
accessories in the United States were approximately $71.8 billion in 1995. The
womenswear industry is served by a variety of distribution channels including
department stores, specialty stores and off-price retailers.
The women's apparel industry is categorized into five product
classifications: designer, bridge, better, moderate and budget. Designer
merchandise is the most expensive product classification and is characterized by
high fashion styling. Designer brands include Donna Karan, Calvin Klein, Ralph
Lauren and Anne Klein. Bridge products are typically brand name merchandise
which may carry designer labels but are less expensive than the designer
classification and allow customers to purchase designer-like merchandise at
below designer prices. Bridge brands include DKNY, Anne Klein II, Adrienne
Vittadini, CK/Calvin Klein, Emanuel Ungaro and Tahari. Apparel in the better
classification carries brand name labels but is less expensive than bridge
apparel. Better brands include Jones New York, Harve Bernard and Kenar.
Merchandise in the moderate classification is also generally brand name but is a
less expensive product category. Moderate brands include Oleg Cassini and Leslie
Fay. Budget merchandise is the least expensive product classification.
Designer and bridge merchandise is generally sold in finer department stores
such as Bloomingdale's, Lord & Taylor, Nordstrom and Saks Fifth Avenue. Because
manufacturers of designer and bridge merchandise are very concerned about
maintaining the upscale image of their trademarks, they are typically very
selective about which retailers carry their products. As a result, the Company
believes that most other off-price retailers have limited access to designer and
bridge merchandise.
BUSINESS STRATEGY
The Company's strategy is to deliver value to its customers by offering at
substantial discounts a wide selection of high quality in-season merchandise,
including designer and bridge apparel, accessories and shoes. The Company
believes that it has created a unique niche market as the largest national
upscale off-price specialty retail store--one that differentiates itself from
finer department stores by offering similar merchandise at significantly lower
prices and from other off-price apparel retailers by offering a broad range of
designer and bridge merchandise. The principal elements of the Company's
business strategy are as follows:
Emphasis on In-Season Designer and High Quality Merchandise
The Company offers a wide selection of in-season apparel, accessories and
shoes, approximately one-third of which is designer and bridge merchandise. The
Company, like finer department stores, is known for carrying designer and bridge
labels, including Donna Karan, Calvin Klein, Anne Klein, Adrienne Vittadini,
Tahari, Dana Buchman, Andrea Jovine and Emanuel Ungaro.
26
<PAGE>
Value Pricing
The Company provides its customers with exceptional value by offering its
merchandise at prices that are typically 25% to 50% below prices charged by
department stores for the same items and that are comparable to or lower than
prices charged by other off-price retailers.
Capitalize on Long-Standing Vendor Relationships
Loehmann's is uniquely positioned among off-price retailers as a principal
choice for well known designers who believe that their prestige will be
preserved by having their merchandise offered by Loehmann's because of its high
quality image and affluent customer base. Loehmann's long-standing vendor
relationships and its ability to sell large quantities of goods have provided
the Company with ready access to a wide selection of merchandise, often on a
preferential basis.
Broaden Merchandise Categories
The Company continually seeks to broaden its appeal and has over the past
several years expanded its merchandise mix to include shoes and a broader range
of accessories and intimate apparel. These items, which typically generate
higher gross margins than the Company's traditional apparel categories,
accounted for more than 20% of the Company's net sales in fiscal 1995, an
increase from 8% in fiscal 1992.
Flexible Purchasing Strategy
The Company relies on a flexible purchasing strategy under which it enters
any given month with a substantial portion of its purchasing requirements
unfulfilled. This strategy enables the Company to react to sales trends, fashion
trends and changing customer preferences while enhancing the Company's ability
to negotiate with its vendors and take advantage of market inefficiencies and
opportunities as they may arise.
Efficient Inventory Management
The Company ships new high quality merchandise to its stores on a daily
basis. The Company believes it is able to constantly replenish its stores
because of its efficient allocation and distribution system, which enables the
Company to distribute merchandise to its stores typically within 48 to 72 hours
after delivery to its distribution center. In addition, the Company utilizes a
cyclical markdown strategy which automatically reduces prices as goods age. As a
result of this efficient inventory management, the Company is able to enhance
its gross margin, maintain a comparatively low investment in inventory, increase
its inventory turn and react more effectively to changing fashion trends and
customer preferences.
Low-Cost Structure
In order to provide its customers with exceptional value while maximizing
profitability and cash flow, the Company is focused on maintaining an efficient,
low-cost operating structure. Key elements of this focus include the Company's
no-frills store format, lean corporate overhead and disciplined real estate
strategy.
EXPANSION STRATEGY
The Company is embarking on a store expansion program designed to capitalize
on its unique franchise by opening new stores both in existing suburban markets
where the Loehmann's franchise is well established and in central business
districts which have appealing demographics. The Company intends to open seven
stores during fiscal 1996, two of which already have been opened in Merrick, New
York and Houston, Texas. Based on the success of its downtown San Francisco
store and market research performed by the Company, Loehmann's believes that it
can successfully expand its franchise by opening stores in other central
business districts in such cities as New York, Boston and Seattle. The
27
<PAGE>
Company intends to open a 60,000 square foot flagship store in downtown
Manhattan at the site which recently housed Barneys' Seventh Avenue Men's Store.
To date, the Company has entered into leases for the five remaining stores
expected to be opened in fiscal 1996 including the Manhattan site. The Company
expects to close two stores in fiscal 1996 in connection with new store
openings, one of which will be converted into a clearance center. In addition,
the Company intends to continue its expansion strategy by opening seven to ten
stores in each of fiscal 1997 and fiscal 1998.
Larger Store Format
Based on its historical operating experience, the Company believes that its
larger stores are more profitable. The Company's eight largest stores in excess
of 23,000 square feet (excluding a test market store in an outlet mall) that
were open for the entire year in fiscal 1995 averaged $11.7 million in net
sales, as compared to $4.7 million for the balance of the Company's stores
(which average approximately 16,000 square feet). These eight largest stores
generated store contribution as a percentage of related net sales of 15.1% as
compared to 13.3% for the balance of the Company's stores. A comparison of the
Company's larger store base to the balance of its store base supports the
Company's determination that larger stores generally permit the Company to
better display and offer a broader selection of merchandise, enhance turnover of
inventory and require fewer markdowns, thus enabling such stores to achieve
greater sales, higher margins and increased profits. Accordingly, the Company's
new stores are planned to be substantially larger at 25,000 to 35,000 square
feet than most of its existing stores. As part of its strategy, the Company will
continue to expand the selling area of existing stores where possible.
Store Opening Costs
The Company does not believe its expansion program will entail significant
capital expenditures on a per store basis. Based on its historical experience,
the Company believes that its new stores will generate a positive store
contribution in the first full year in which such stores are open and are
expected to recoup their investment within two years. Furthermore, the Company
believes it has a sufficient corporate, purchasing and distribution
infrastructure in place ready to handle its current and anticipated expansion
program. The Company estimates that its average net cash requirement to open a
typical new store will be approximately $1.7 million, consisting of $1.0 million
of capital expenditures for store fixtures and equipment and leasehold
improvements, $0.5 million for net working capital and $0.2 million for
pre-opening expenses. Actual costs will vary from store to store.
Site Selection
Based on its historical operating results, the Company believes that in
addition to store size, key elements in determining the success of an individual
store are the density of the store area's female population over age 18, the
affluence of the population frequenting the store's area and the retail strength
of the store's area, particularly the upscale nature of the surrounding retail
establishments. The Company believes Loehmann's is a destination store which,
together with its reputation as a desirable tenant, affords it greater
flexibility in selecting store sites. This enables the Company to adhere to its
policy of not entering into leases under which the occupancy costs exceed
certain acceptable percentages of anticipated net sales. The Company has
retained the services of a retail consulting firm that has conducted an
extensive analysis of the relevant demographics to advise the Company with
respect to its expansion strategy. All decisions as to store openings are
decided on a case by case basis by the Company's Board of Directors based on the
recommendations of management.
MERCHANDISING
Selection
The Company offers a wide selection of women's sportswear, dresses, suits,
outerwear, coats, accessories, intimate apparel and shoes. Approximately
one-third of the Company's sales are generated
28
<PAGE>
by designer and bridge merchandise with the remainder in the brand name better
and moderate classifications. The Company does not offer budget merchandise in
its stores. Most of the Company's merchandise is in-season and is therefore
generally available at Loehmann's during the same selling season as it is
available in department stores.
The following is a list of many of the key brands offered at the Company's
stores:
<TABLE>
<CAPTION>
<S> <C> <C>
Adrienne Vittadini CK/Calvin Klein Harve Bernard
Andrea Jovine Dana Buchman Jones NY
Anne Klein Depeche Mode Kenar
Anne Klein II DKNY Leslie Fay
Augustus Donna Karan Richard Neal
Calvin Klein Emanuel Ungaro Tahari
</TABLE>
The Company continually seeks to broaden its appeal and has over the past
several years expanded its merchandise mix to include shoes and a broader range
of accessories and intimate apparel. These items, which typically generate
higher gross margins than the Company's traditional apparel categories,
accounted for approximately 20% of the Company's net sales in fiscal 1995, an
increase from 8% in fiscal 1992. The following table shows the percentages of
the Company's net sales attributable to its various product categories for
fiscal 1992 through fiscal 1995:
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------
1992 1993 1994 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sportswear............................... 50.4% 49.6% 48.8% 47.6%
Dresses & Suits.......................... 31.5 28.6 26.5 26.0
Coats & Outerwear........................ 7.2 5.9 5.2 5.1
Accessories/Intimate Apparel............. 8.0 11.3 13.0 14.5
Shoes.................................... -- 2.1 3.4 5.5
Other.................................... 2.9 2.5 3.1 1.3
------ ------ ------ ------
Total.................................. 100.0% 100.0% 100.0% 100.0%
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
All Loehmann's stores carry items from each of its merchandise categories.
However, the allocation of merchandise among the stores varies based upon
factors relating to the demographics and geographic location of each store as
well as the size of the store and its ability to adequately display the
merchandise. In a continuing effort to broaden its appeal, beginning in March
1996, the Company began offering infantwear in 12 of its stores and women's
large sizes apparel in 15 of its stores.
Pricing
The Company seeks to provide its customers with exceptional value by
offering its merchandise at prices that are typically 25% to 50% below prices
charged by department stores for the same items and that are comparable to or
lower than prices charged by other off-price retailers. The Company's central
buying staff adheres to a disciplined approach to acquiring merchandise that
enables the Company to consistently offer its merchandise at favorable prices.
The Company's buyers will only acquire merchandise at prices which permit the
Company to offer its merchandise for sale initially at a significant discount to
the first marked down price that a department store would charge for the same
item. Each item of merchandise offered by the Company carries a price tag
displaying the Company's price as well as the typical department store's initial
price for the same item.
The Company uses a cyclical markdown policy to reduce prices automatically
as goods age. The purpose of this policy is to improve inventory turnover and
minimize the amount of unsold merchandise at the end of the season, while
reinforcing the customer's perception of value and enabling the Company to
provide the stores with fresh merchandise on a regular basis. In addition, the
Company closely
29
<PAGE>
monitors prices charged by competitors in each of its markets and adjusts its
prices to preserve its pricing advantage.
VENDOR RELATIONSHIPS AND PURCHASING
Loehmann's is uniquely positioned among off-price retailers as a principal
choice for well known designers who believe that their prestige will be
preserved by having their merchandise offered by Loehmann's because of its high
quality image and affluent customer base. Approximately 75% of the Company's 50
most active suppliers have been selling merchandise to the Company for at least
10 years. Because of these long-standing vendor relationships and its ability to
sell large quantities of goods, the Company has ready access to a wide selection
of merchandise, often on a preferential basis.
The Company does not engage in significant forward purchasing and a large
portion of its purchasing requirements in any given month intentionally remains
unfulfilled at the beginning of the month. This strategy enables the Company to
react to fashion trends and changing customer preferences while enhancing the
Company's ability to negotiate with its vendors and take advantage of market
inefficiencies and opportunities as they may arise.
The Company purchases a majority of its inventory during the manufacturer's
selling season enabling the Company to offer merchandise during the same selling
season as it is available in department stores. The Company also purchases a
portion of its inventory at the end of the season, when the Company is prepared
to purchase a manufacturer's remaining items at an even steeper discount.
Vendors who sell to the Company do not need to build into their price structure
any anticipation of returns, markdown allowances or advertising allowances, all
of which are typical in the department store industry. In addition, the Company
pays for goods within an average of approximately 25 to 30 days and often picks
up the merchandise directly from the vendors.
The Company purchases its inventory from over 400 suppliers, which in many
cases include separate divisions of a single manufacturer or designer. These
suppliers include a substantial majority of the designer and brand name apparel
manufacturers in the United States. Some purchases are also made in the European
market, primarily Italy. The Company's 20 largest suppliers accounted for
approximately 36% of purchases made by the Company in fiscal 1995. During fiscal
1995, no supplier or group of related suppliers accounted for more than 4% of
the Company's total purchases. The Company does not have any long-term supply
contracts with its suppliers.
The Company maintains its own central buying staff, comprised of 13
experienced off-price buyers, many of whom also have extensive experience with
traditional department stores. Historically, the Company has had very low
turnover within its buying group, enabling Loehmann's to capitalize on an
experienced, respected group of buyers capable of enhancing the Company's
already strong vendor relationships.
STORE LAYOUT
Loehmann's store format and merchandise presentation are designed to project
the image of deep discount and exceptional value, as well as to emphasize
Loehmann's niche as the off-price equivalent of an upscale specialty store.
Loehmann's stores are divided into two shopping areas: a large, open selling
area with wall-to-wall merchandise and a smaller, separate, and more intimate
area called "The Back Room." The Company presents moderate and better
sportswear, dresses and suits, as well as all outerwear, accessories, intimate
apparel and shoes on the main selling floor. Designer and bridge merchandise,
including gowns, dresses, suits and sportswear, are displayed in The Back Room.
The Back Room provides a key point of differentiation to the consumer, as it
projects the image of designer goods sold in a no-frills environment and,
therefore, at exceptional values. Although the Company estimates that The Back
Room generally accounts for only approximately 10% to 15% of a
30
<PAGE>
typical Loehmann's store's selling space, The Back Room has generated
approximately one-third of the Company's net sales over the last several years.
All stores are low maintenance, simple, and functional facilities designed
to maximize selling space and contain overhead costs. Store layouts are flexible
in that product groupings can be easily moved or expanded. All stores have two
or more communal fitting rooms. However, in response to customer preferences,
private fitting rooms have been added in most stores. Because the Company is
committed to maintaining virtually all of its in-store inventory on the selling
floor, its stores do not require significant space devoted to inventory storage.
INVENTORY MANAGEMENT AND CONTROL
The Company continually strives to improve its merchandising, distribution,
planning and allocation methods to manage its inventory efficiently. The Company
believes that a key to its success is the efficient distribution of merchandise
to its stores and an appropriate allocation of merchandise based on individual
store sales data and geographic and demographic factors. The Company's
successful inventory management is demonstrated by its rapid inventory turnover;
in each of the last five years, inventory turned in excess of five times (on a
cost basis).
Loehmann's has recently invested in its Merchandise Control, Planning and
Allocation Department. The department's goal is to maximize inventory potential
rather than just allocate the merchandise. The allocation by this department of
merchandise among Company's stores varies based upon factors relating to the
demographics and geographic location of each store as well as the size of the
store and its ability to adequately display the merchandise. In addition to
ensuring a proper allocation of merchandise, the department works closely with
senior merchants to develop seasonal sales, inventory, markdown and purchase
plans. As each selling season progresses, the department updates the plans for
opportunities and focuses the Company's buyers on the most profitable
merchandise. Information from the Company's point-of-sale computer system is
regularly reviewed and analyzed to assist in making merchandise allocation
decisions. In order to facilitate further the planning and allocation process,
the Company is currently implementing a new state-of-the-art planning and
allocation software package.
The Company operates a 126,000 square foot centralized distribution center
located at the Company's headquarters as well as a newly-opened 32,000 square
foot satellite warehouse for processing shoes located near the main distribution
center. As merchandise arrives at the distribution center, it is priced,
ticketed, assigned to individual stores by the Company's merchandising systems,
packaged for delivery and transported to the stores. The Company generally
transports merchandise from vendors to its distribution center by means of
common carrier or its own truck fleet. After the merchandise has been processed,
ticketed, sorted and allocated, it is distributed to stores in company-owned or
commercial trucks or by air. The time from receipt of goods at the distribution
center to placement of merchandise in the stores typically ranges from 48 to 72
hours. The Company believes that its current facilities are capable of servicing
up to approximately 100 stores.
ADVERTISING AND PROMOTION
Loehmann's has built its reputation over the years through "word-of-mouth"
advertising. In the last two fiscal years, the Company has significantly
increased its advertising expenditures. The Company advertises predominantly
through direct mail and to a lesser extent through newspaper advertising.
In August 1992, the Company began a free membership program called "The
Insider Club" which entitles members to notice of special events throughout the
year and to a 15% discount on their birthdays. The list of members now includes
approximately one million active customers, defined as customers who have made a
purchase within the last 12 months. The Company spends a significant portion of
its advertising and promotional budget on directed mail to Insider Club members.
For
31
<PAGE>
example, during fiscal 1995, the Company sent to each Insider Club member
approximately 20 to 25 mailings. Such mailings typically include two full-color
catalogs featuring the Company's merchandise and containing special discount
incentives, announcements of the arrival of new designer merchandise and
occasional special sales. In addition all Insider Club members are invited to
The Back Room events and fashion promotions via direct mail throughout the year.
During these events, special distributions of designer and bridge merchandise
are allocated to the participating stores. Management believes that these events
generate higher than average traffic and maintain a sense of shopping
enthusiasm. In order to enhance the productivity of these and other advertising
expenditures, the Company has recently engaged the services of a direct mail
target marketing firm to assist the Company in analyzing its database to better
target its direct mail program.
STORE OPERATIONS
The Company operates its stores to enhance the customer's shopping
experience by creating a friendly shopping environment within a self-service
operation. The Company's stores are organized into seven separate geographic
districts each with a district manager. District managers monitor the financial
performance of the stores in their respective geographic districts and
frequently visit stores to ensure adherence to the Company's merchandising,
operations and personnel standards. The typical staff for a Loehmann's store
consists of a store manager, and a number of associate store and department
managers, sales specialists and additional full and part-time hourly associates
depending upon the store's needs.
The Company is committed to maintaining consistency throughout its stores.
To ensure consistency, district managers visit their stores frequently to
evaluate the stores against predetermined company standards. Senior management
meets with the district managers on a periodic basis to maintain a clear line of
communication. In addition, "mystery shoppers" shop the stores to help ensure
that sales associates are friendly and helpful and maintain all of the Company's
merchandising, customer service and loss prevention standards.
Store management personnel currently complete a training program at a
designated training store before assuming management responsibility. Sales
specialists receive product and customer service training at the store level.
All store and district managers participate in a bonus plan that ties
compensation awards to the achievement of specified store profits goals and
overall Company profits and also are eligible to participate in the Company's
stock option plan. All employees participate in a company profit sharing plan.
Loehmann's stores are generally open seven days per week, 12 hours per day
from Monday through Saturday and eight hours on Sunday unless prohibited by
local statute. The Company accepts cash, personal checks and major credit cards.
MANAGEMENT INFORMATION SYSTEMS
Each Loehmann's store is linked to the Company's headquarters through a
point-of-sale system that interfaces with an IBM RS6000 computer equipped with
integrated merchandising, distribution and accounting software packages. The
Company's point-of-sale computer system has features that include merchandise
scanning, the capture of customer sales information and on-line credit card
approval. These features improve transaction accuracy, speed and checkout time
as well as increase overall store efficiency.
The Company's management information and control systems enable the
Company's corporate headquarters to promptly identify sales trends, identify
merchandise to be marked down and monitor merchandise mix and inventory levels
at individual stores. Management believes that these systems provide a number of
benefits, including improved store inventory management, better in-stock
availability and higher operating efficiency. The Company believes that the
current management information and control systems are capable of supporting the
Company's planned expansion for the foreseeable future.
32
<PAGE>
PROPERTIES
Store Locations
The Company currently operates 71 stores in 23 states including its two
newly-opened stores in Merrick, New York and Houston, Texas. The states and
regions in which the Company operates its stores are as follows:
[MAP]
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF FISCAL
STATES OR REGION STORES 1995 SALES(1)
- ---------------- --------- -----------------
<S> <C> <C>
California..................................... 13 22.2%
New York....................................... 9 19.6
Florida........................................ 6 10.5
Other Mid-Atlantic............................. 8 9.9
New Jersey..................................... 7 9.1
New England.................................... 6 6.9
Midwest........................................ 7 6.8
Other Southeast................................ 7 6.5
Texas.......................................... 5 4.6
Other West..................................... 3 3.9
--
-----
Total...................................... 71 100.0%
-- -----
-- -----
</TABLE>
- ------------
(1) These percentages exclude sales from the Company's 11 stores closed in
August 1995 and the two stores opened in fiscal 1996.
33
<PAGE>
Leases
The leases for the Company's stores typically provide for a 15 to 20-year
term with three five-year renewals that are automatic unless the Company elects
to terminate the lease. The rental rate in every case is a fixed amount rather
than a contingent payment based on a store's gross sales. The leases typically
contain tax escalation clauses and require the Company to pay insurance,
utilities, repair and maintenance expenses. Increases in the fixed rent payable
during the renewal terms are generally less than 10% to 15% of the base rent
(although this percentage may increase for new stores). The leases have initial
or renewal terms expiring as follows: 1996-1997 (12 stores); 1998-2000 (31
stores); 2001-2003 (14 stores); and 2004 and later (22 stores).
Three of the four leases that expire by year-end fiscal 1996 have renewal
options. The Company has generally been successful in renewing its store leases
as they expire.
The Company leases the land for a 153,000 square foot facility located in an
industrial park in the Bronx, New York, which serves as its corporate
headquarters and as the site of its central warehousing and distribution
operations. This facility contains 27,000 square feet of office space and
126,000 square feet of warehouse space. The ground lease with respect to the
land on which the facility is situated provides for aggregate annual base rental
payments of $37,500. The lease expires in 2010, but is renewable at certain
increased rates until 2050. The facility is subject to two mortgages which
relate to New York City Industrial Development Agency Revenue Bonds. See
"Description of Certain Indebtedness." In addition, the Company leases a 32,000
square foot warehouse in the Bronx, New York, which serves as additional
warehouse space. The lease expires on December 31, 1998 and provides for annual
rental payments of $198,000.
COMPETITION
All aspects of the off-price fashion apparel business are highly
competitive, and the Company expects competitive pressures to increase in the
future as more factory outlet centers open and department stores continue price
discounting. The Company believes that the principal elements of competition are
the price, quality, selection and presentation of merchandise, store location
and customer service. Management believes that the Company is well positioned to
compete on the basis of each of these factors. The competitive environment may
also be affected by factors beyond a particular retailer's control, such as
shifts in consumer preferences, change in population demographics and traffic
patterns, and fluctuating economic conditions.
The Company competes primarily with finer department stores. The Company
believes it competes successfully with such department stores by offering a wide
selection of comparable quality merchandise at significantly lower prices.
Recently, many department stores have become more promotional, although such
promotions are typically focused on moderate merchandise. Although the Company's
gross margins have not been materially affected to date by department stores'
pricing strategies, there can be no assurances that, if finer department stores
continue to price more aggressively, the Company's margins will not be adversely
affected. Most of the department stores and some of the off-price and discount
retailers with which the Company competes have access to substantially greater
financial and marketing resources than those available to the Company.
The Company also faces competition from factory outlet malls and a variety
of off-price and discount retailers, some of which are relatively new companies,
but many of which are established retail chains or divisions thereof. Such
competitors include Burlington Coat Factory, Filene's Basement, Marshall's, Saks
Off 5th, Syms, and T.J. Maxx. The Company believes it competes successfully with
other off-price and discount retailers by reason of the quality, selection and
price of the designer and other better quality merchandise available in the
Company's stores.
34
<PAGE>
In recent years, some designer and other better quality women's apparel has
been offered through mail order catalogs. While not significant at the present
time, the Company cannot predict the impact of this and other in-home shopping
competition.
EMPLOYEES
At February 1, 1996, the Company had 2,349 employees, of whom 1,584 were
store sales and clerical employees, 189 performed store managerial functions,
and 576 were corporate and warehouse personnel. Approximately half of the
Company's store and warehouse personnel were employed on a part-time basis at
that date. Except for managerial employees, professional support staff and the
Company's buyers, all employees are paid on an hourly basis. None of the
Company's employees are represented by a labor union. The Company believes that
its employee relations are good.
TRADEMARK AND SERVICE MARK
"Loehmann's" has been registered as a trademark and a service mark with the
United States Patent and Trademark Office. The registration of the trademark and
the service mark may be renewed to extend the original 20-year registration
period indefinitely, provided the marks are still in use. The Company intends to
continue to use its trademark and service mark and maintain their registrations.
The Company believes its trademark and service mark have received broad
recognition and their continued existence is important to the Company's
business.
LEGAL MATTERS
Management is not aware of any litigation or regulatory proceedings against
the Company which would materially impact its business or financial condition.
35
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following persons are the executive officers and directors of the
Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Norman S. Matthews(1)(3)... 63 Chairman of the Board and Director
Robert N. Friedman(1)...... 54 Chairman, Chief Executive Officer and Director
Philip Kaplan(1)........... 65 President, Chief Operating Officer and Director
Bonnie Dexter.............. 45 Senior Vice President, Merchandising
Robert Glass............... 49 Senior Vice President, Chief Financial Officer and
Assistant Secretary
Jan Heppe.................. 44 Senior Vice President and Director of Stores
Janet A. Hickey(1)(2)...... 51 Director
Richard E. Kroon(3)........ 53 Director
Christina A. Mohr(2)....... 40 Director
Cynthia Cohen Turk(2)(3)... 43 Director
</TABLE>
- ------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
NORMAN S. MATTHEWS has been Chairman of the Board and a Director of
Loehmann's since September 1995. Mr. Matthews has served as Chairman of the
Board of Holdings since December 1993 and as a Director of Holdings since
October 1988. Mr. Matthews currently serves as a consultant to various
retailers. He was President of Federated Department Stores from March 1987 until
April 1988 and served in other executive capacities with Federated Department
Stores prior to that date. He is a Director of Progressive Corp., an insurance
holding company, Lechters, Inc., a housewares chain, Finlay Fine Jewelry, a
jewelry lessee in major department stores, Toys "R" Us, a childrens' specialty
retailer, and Eye Care Centers of America, Inc.
ROBERT N. FRIEDMAN has been Chairman, Chief Executive Officer and a Director
of Loehmann's since November 1995 and was President, Chief Executive Officer and
a Director of Loehmann's from September to November 1995. Mr. Friedman has been
President and Chief Executive Officer of Holdings since April 1992. Prior to
joining Loehmann's, Mr. Friedman was employed by R.H. Macy Co., Inc. for 28
years in various capacities, including President and Vice Chairman,
Merchandising, at Macy's East from 1990-1992, Chairman and C.E.O. of Macy's
Bamberger Division and Chairman and C.E.O. of Macy's South/Bullocks. He serves
on the Board of Trustees of The Fashion Institute of Technology.
PHILIP KAPLAN has been President, Chief Operating Officer and a Director of
Loehmann's since November 1995, was Chairman, Chief Operating Officer and a
Director of Loehmann's from September to November 1995 and was Chairman, Chief
Operating Officer, Secretary and Treasurer of Loehmann's from September 1988 to
September 1995. Mr. Kaplan has been Vice Chairman, Treasurer and a Director of
Holdings since February 1987. Mr. Kaplan was president of Verdi International, a
manufacturer of luggage, from 1983 to 1987, Senior Vice President of Abraham and
Strauss, a division of Federated Department Stores, Inc., from 1979 until 1983
and Executive Vice President--Chief Financial Officer of E.J. Korvette's from
1971 until 1979.
BONNIE DEXTER has been Senior Vice President, Merchandising of Loehmann's
since May 1994. Ms. Dexter joined the Company as Vice President, Merchandising
in May 1993. Prior to that time, she held a number of merchandising and store
management positions at various retail chains, including the May Company of Los
Angeles, Filene's and Accessory Place.
36
<PAGE>
ROBERT GLASS has been Senior Vice President, Chief Financial Officer and
Assistant Secretary of Loehmann's since September 1994. From 1992 to 1994, Mr.
Glass served as a retail consultant. Prior to that time, he held a number of
senior retail management positions, including Chief Financial Officer and later
President of Gold Circle Stores, a division of Federated Department Stores,
Inc., and Executive Vice President of Thrifty Drug from 1990 to 1992.
JAN HEPPE has been Senior Vice President and Director of Stores since
September 1995. Prior to that time, she held a number of senior retail
management positions including Senior Vice President/General Manager of the John
Wanamaker Department Store in Philadelphia, Pennsylvania from 1992 through 1995,
Divisional Vice President/General Manager of the John Wanamaker Department Store
in Moorestown, New Jersey from 1991 to 1992 and a senior management retail
position at Henri Bendel in 1991. Prior to 1991, Ms. Heppe was General Manager
of On Course, a catalog and wholesale operation and also held various executive
positions at Gimbels, New York.
JANET A. HICKEY has been a Director of Loehmann's since September 1995 and
has been a Director of Holdings since 1988. Ms. Hickey has been Senior Vice
President and General Partner of the Sprout Group, a shareholder of the Company,
and the venture capital affiliate of Donaldson Lufkin & Jenrette, Inc. ("DLJ,
Inc.") and a Senior Vice President and Director of DLJ Capital Corporation, a
subsidiary of DLJ, since June 1985. Ms. Hickey is a director of Corporate
Express, Inc., and Champion Healthcare, Inc.
RICHARD E. KROON has been a Director of Loehmann's since September 1995 and
has been a Director of Holdings since 1988. Mr. Kroon has been President and
Managing Partner of the Sprout Group, the venture capital affiliate of DLJ,
since 1981. Mr. Kroon is President, Director and Chief Executive Officer of DLJ
Capital Corporation, a subsidiary of DLJ, Inc. He is a Director of E&B Marine,
Inc., a retailer of boating supplies, and a Director of County Seat Stores,
Inc., an apparel retailer, and other private companies.
CHRISTINA A. MOHR has been a Director of Loehmann's since September 1995 and
has been a director of Holdings since January 1994. Ms. Mohr has been Managing
Director, Banking Group of Lazard Freres & Co. LLC, an investment banking firm,
since 1990. She was a Vice President, Banking Group, from 1984 to 1990. She is a
Director of United Retail Group, Inc., a retail chain.
CYNTHIA COHEN TURK has been a Director of Loehmann's since September 1995
and has been a Director of Holdings since January 1994. Ms. Turk has been
President of MARKETPLACE 2000, a retail marketing and strategy consulting firm,
which she founded in 1990. Prior to that, Ms. Turk was a partner of Touche Ross
(a predecessor of Deloitte & Touche LLP) from 1987 to 1990. Ms. Turk is a
Director of L. Luria & Son, Inc., a discount retailer, One Price Clothing, Inc.,
an apparel retail chain, Specs Music Stores, Inc., a music and video retailer,
Office Depot, an office products retailer and the Mark Group.
Directors of the Company are elected by holders of Common Stock for a
three-year term, but are divided into three classes with staggered terms that
currently have expiration dates as follows: (a) Class A Directors--1996, (b)
Class B Directors--1997, and (c) Class C Directors--1998. As of the date hereof,
Mr. Matthews, Mr. Kaplan and Mr. Friedman serve as Class A Directors, Mr. Kroon
and Ms. Mohr serve as Class B directors and Ms. Hickey and Ms. Turk serve as
Class C Directors. The executive officers of the Company are appointed by the
Board of Directors and serve at the pleasure of the Board.
37
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the compensation awarded to, earned by or
paid to the named executive officers for services rendered to Holdings and its
subsidiary during the fiscal years ended February 3, 1996, January 28, 1995 and
January 29, 1994.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
---------------------------------------- ------------
OTHER SECURITIES
NAME AND FISCAL ANNUAL UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) OPTIONS(#) COMPENSATION($)(1)
------------------ ------ --------- -------- --------------- ------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Robert N. Friedman............. 1995 475,000 135,000 (2) 187,638 (3)
Chairman and Chief 1994 450,000 301,000 (2) -- 3,129
Executive Officer 1993 450,000 150,000 (2) -- --
Philip Kaplan.................. 1995 356,250 105,000 (2) 14,657 (3)
President and Chief Operating 1994 350,000 234,000 (2) 10,261 3,129
Officer 1993 343,750 -- 57,208 -- --
Robert Glass (4)............... 1995 211,250 17,500 (2) -- 574(3)
Senior Vice President and 1994 74,546 12,947 -- 11,172 4,552
Chief Financial Officer 1993 -- -- -- -- --
Henry Mittleman (5)............ 1995 200,929 -- (2) -- --
Former Senior Vice President, 1994 178,196 18,937 (2) -- 3,129
Store Operations 1993 184,139 1,087 (2) 2,234 --
Bonnie Dexter (6).............. 1995 165,000 20,000 (2) -- (3)
Senior Vice President, 1994 139,054 26,985 -- 3,910 1,442
Merchandising 1993 -- -- -- -- --
</TABLE>
- ------------
(1) Consists of Company contributions under the Loehmann's, Inc. Deferred Profit
Sharing Plan of $3,129 for each of Messrs. Friedman, Kaplan and Mittleman
and $1,442 for Ms. Dexter in fiscal 1994, and reimbursement of $4,552 and
$574 in moving expenses for Mr. Glass during fiscal 1994 and fiscal 1995,
respectively.
(2) For each named executive officer, the aggregate amount of other annual
compensation is less than the lesser of 10% of such officer's total salary
and bonus for such year or $50,000.
(3) Amounts to be contributed under the Loehmann's, Inc. Deferred Profit Sharing
Plan have not yet been determined.
(4) Mr. Glass became an executive officer of Loehmann's in September 1994.
(5) Mr. Mittleman resigned as Senior Vice President for Store Operations
effective September 14, 1995.
(6) Although Ms. Dexter was employed by the Company during a portion of fiscal
1993, she did not serve as an executive officer of the Company. Accordingly,
in accordance with the rules of the Securities and Exchange Commission,
information for Ms. Dexter for fiscal 1993 has been omitted.
The following table provides certain summary information concerning
individual grants of stock options made to each of the executives named in the
Summary Compensation Table above during the fiscal year ended February 3, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED
SECURITIES ANNUAL RATES OF
UNDERLYING % OF TOTAL STOCK PRICE
--------- OPTIONS GRANTED EXERCISE OR APPRECIATION
OPTIONS TO EMPLOYEES IN BASE PRICE EXPIRATION --------------------
NAME GRANTED(#) FISCAL YEAR ($/SHARE) DATE 5% 10%
---- --------- ---------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Robert N. Friedman........ 187,638 71.1% 5.01 (1) $383,407 $897,535
Philip Kaplan............. 14,657 5.6% 5.01 (1) 29,950 70,113
Robert Glass.............. -- -- -- -- -- --
Henry Mittleman........... -- -- -- -- -- --
Bonnie Dexter............. -- -- -- -- -- --
</TABLE>
- ------------
(1) One-third of these options vest in each of the next three fiscal years and
expire five years from the date of vesting, with certain exceptions.
38
<PAGE>
The following table sets forth information concerning the value of
unexercised options as of February 3, 1996 held by the executives named in the
Summary Compensation Table above.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
SHARES UNDERLYING VALUE OF UNEXERCISED
ACQUIRED VALUE UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ON EXERCISE REALIZED AT FISCAL YEAR END(#) AT FISCAL YEAR END ($)
NAME (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(1)
---- ----------- -------- ------------------------- ----------------------------
<S> <C> <C> <C> <C>
Robert N. Friedman......... -- -- 140,303/187,638 980,786/571,029
Philip Kaplan.............. -- -- 204,230/14,657 1,427,671/44,604
Robert Glass............... -- -- 2,234/8,938 15,616/62,477
Henry Mittleman............ 5,669 38,927 --/ -- --/ --
Bonnie Dexter.............. -- -- 1,788/3,799 12,498/26,555
</TABLE>
- ------------
(1) Based on an estimated stock price at February 3, 1996 of $8.06.
EMPLOYMENT AND SEVERANCE AGREEMENTS
The Company is a party to an employment agreement with each of Messrs.
Friedman, Kaplan and Glass (the "Employment Agreements").
MR. FRIEDMAN
Mr. Friedman's employment agreement, as amended (the "Friedman Agreement"),
provides that he will serve as Chairman and Chief Executive Officer of Holdings
and the Company from November 1, 1995 through January 31, 1999, for an annual
base salary of not less than $550,000 for fiscal 1996, $575,000 for fiscal 1997
and $600,000 for fiscal 1998. Mr. Friedman also is eligible to receive an annual
bonus equal to 100% of his base salary in effect for each of fiscal 1996 and
fiscal 1997 and 60% of his base salary in effect for fiscal 1998 if, for each
such fiscal year, the Company attains its targeted EBITDA (as defined in the
Friedman Agreement). In addition, if the Company or Holdings or any successor to
the Company or Holdings has not consummated an initial public offering of its
equity securities on or before the last day of any fiscal year during the term
of Mr. Friedman's employment, then Mr. Friedman will be entitled to receive an
additional bonus calculated as follows: 10% of his base salary in such fiscal
year for each $1 million by which the Company's EBITDA exceeds the Company's
EBITDA target for such fiscal year, provided, however, that such additional
bonus may not exceed his base salary. The Friedman Agreement also provides for
certain insurance and other benefits to be maintained and paid by the Company.
The Friedman Agreement provides for a grant to Mr. Friedman on November 1,
1995, of options to purchase up to 187,638 shares of Common Stock at an exercise
price of $5.01 per share. One-third of such options vest automatically at the
end of each of the current and next two succeeding fiscal years commencing after
fiscal 1996. In addition, on February 23, 1996, the Company granted Mr. Friedman
options to purchase up to 35,718 shares of Common Stock at an exercise price of
$8.06. One-half of such options vest automatically at the end of each of the
current and the next fiscal year. All such options are exerciseable until five
years from the date of vesting or 180 days after the date of termination of
employment. As of April 1, 1996, 186,222 of Mr. Friedman's options had vested
and, of these vested options, 45,919 had been exercised.
The Friedman Agreement provides that if Mr. Friedman's employment is
terminated by the Company without Cause or by Mr. Friedman with Good Reason (as
such terms are defined in the Friedman Agreement), the Company will be required
to pay his base salary then in effect for the greater
39
<PAGE>
of 12 months following his termination or the remainder of his term of
employment. Mr. Friedman also will be entitled to receive any bonus earned with
respect to any previously completed fiscal year which remains unpaid as of the
date of termination. If Mr. Friedman's employment is terminated, either by the
Company or by Mr. Friedman for Good Reason, coincident with or within one year
after a Change of Control (as defined in the Friedman Agreement), the Company
will be required to pay Mr. Friedman a lump sum, in cash, equal to two times his
base salary then in effect and all unvested options will vest in full. If Mr.
Friedman's employment is terminated by the Company without Cause, by Mr.
Friedman for Good Reason or as a result of a Change of Control, the Company
also, with certain exceptions, will be required to continue to maintain life
insurance for Mr. Friedman for the remainder of his life or until he attains the
age of 70 with a death benefit equal to his base salary at the date of
termination and medical insurance for Mr. Friedman and his spouse until their
respective deaths.
The Friedman Agreement provides that the Company has certain rights to
purchase shares of the Common Stock and/or vested options held by Mr. Friedman
upon termination of his employment. Finally, the Friedman Agreement provides
that Mr. Friedman will not, with certain exceptions, "engage or be engaged in a
competing business" (as defined in the Friedman Agreement) for a period of two
years following termination of his employment (unless he is terminated without
Cause or he resigns with Good Reason).
MR. KAPLAN
Mr. Kaplan's employment agreement, as amended (the "Kaplan Agreement"),
provides that he will serve as President and Chief Operating Officer of Holdings
and the Company from November 1, 1995 through January 31, 1998, for an annual
base salary of $375,000. Mr. Kaplan also is eligible to receive an annual bonus
equal to 64% of his base salary in effect for each fiscal year during the term
of the Kaplan Agreement if, for such fiscal year, the Company attains its
targeted EBITDA (as defined in the Kaplan Agreement). In addition, if the
Company or any successor to the Company or Holdings has not consummated an
initial public offering of its equity securities on or before the last day of
any fiscal year during the term of Mr. Kaplan's employment, then Mr. Kaplan will
be entitled to receive an additional bonus calculated as follows: 10% of his
base salary in such fiscal year for each $1 million by which the Company's
EBITDA exceeds the Company's EBITDA target for such fiscal year, provided,
however, that such additional bonus may not exceed his base salary. The Kaplan
Agreement also provides for certain insurance and other benefits to be
maintained and paid by the Company.
The Kaplan Agreement provides for a grant on November 1, 1995 of options to
purchase 14,657 shares of Common Stock at an exercise price of $5.01 per share.
Such options vest automatically during the term of Mr. Kaplan's employment. In
addition, on February 23, 1996, the Company granted Mr. Kaplan options to
purchase up to 6,840 shares of Common Stock at an exercise price of $8.06. One-
half of such options vest automatically at the end of each of the current and
the next fiscal year. As of April 1, 1996, 260,092 of Mr. Kaplan's options had
vested and, of these vested options, 55,862 had been exercised.
The Kaplan Agreement provides that if Mr. Kaplan's employment is terminated
by the Company without Cause or by Mr. Kaplan for Good Reason (as such terms are
defined in the Kaplan Agreement), the Company will be required to pay his base
salary, annual bonus and life and medical insurance through the remainder of his
term of employment, and certain of Mr. Kaplan's unvested options will vest. In
addition, if such termination is subsequent to a Change of Control of the
Company (as defined in the Kaplan Agreement), the Company will be required to
pay Mr. Kaplan's base salary and bonus in one lump sum promptly following such
termination and all of Mr. Kaplan's unvested options will vest.
The Kaplan Agreement provides that the Company has certain rights to
purchase shares of the Common Stock held by Mr. Kaplan upon termination of his
employment, and that Mr. Kaplan has
40
<PAGE>
certain rights to require the Company to purchase shares and/or vested options
held by him upon termination. Upon the expiration of the term of Mr. Kaplan's
Employment Agreement, Mr. Kaplan has agreed to act as a consultant to the
Company and to serve on the Boards of Directors of the Company and Holdings
(unless such Boards request his resignation therefrom) in exchange for which the
Company will pay him 20% of his base salary and will provide him with an
automobile. Finally, the Kaplan Agreement provides that Mr. Kaplan will not,
with certain exceptions, "engage or be engaged in a competing business" (as
defined in the Kaplan Agreement) for a period of two years following termination
of his employment (unless he is terminated without Cause or he resigns with Good
Reason).
ROBERT GLASS
Mr. Glass' employment agreement (the "Glass Agreement") contains no term of
employment but provides that Mr. Glass will serve as Senior Vice President-Chief
Financial Officer of Holdings and the Company for an annual base salary of
$215,000, with salary review by the Company based on individual performance, and
incentive compensation of up to 30% of his annual base salary based in part on
the performance of the Company and in part on individual performance. The Glass
Agreement also requires the Company to provide Mr. Glass with certain insurance
and other benefits. In addition, the Glass Agreement provides that if Mr. Glass'
employment is terminated before September 1, 1996 for any reason other than
cause, then Mr. Glass will receive a termination payment equal to one year's
annual base salary. The Company granted Mr. Glass options to purchase 11,172
shares of Common Stock, effective November 1, 1994. Mr. Glass' options vest over
a five-year period and have an exercise price of $1.07 per share.
COMPENSATION OF MEMBERS OF THE BOARD OF DIRECTORS
Except as described below, the members of the Company's Board of Directors
are not paid an annual retainer or meeting fee.
In connection with Ms. Mohr's and Ms. Turk's service as directors of the
Company, Entrecanales Inc., ("Entrecanales"), an affiliate of Sefinco Ltd.
("Sefinco"), entered into agreements with each of Ms. Mohr and Ms. Turk
providing for (a) compensation for Ms. Mohr and Ms. Turk of $25,000 and $40,000
per annum, respectively, payable by Entrecanales, and (b) the grant by
Entrecanales to each of Ms. Mohr and Ms. Turk of 67,020 stock appreciation
rights ("SARs"), on terms described below, 44,680 of which are designated "Class
A SARs" and 22,340 of which are designated "Class B SARs". The SARs were not
granted by and are not obligations of the Company.
All Class A SARs have vested in accordance with their terms. The Class B
SARs vest in certain circumstances including upon a public offering in which 20%
or more of Sefinco's holdings of Holdings Common Stock are included. Upon
redemption of any vested SAR, the holder is entitled to receive the amount by
which the market value per share of Common Stock exceeds either (i) $5.59 per
SAR, in the case of the Class A SARs, or (ii) $8.95 per SAR, in the case of the
Class B SARs. Ms. Mohr's and Ms. Turk's unvested SARs lapse on June 1, 1996 and
June 1, 1997, respectively. All vested and unredeemed SARs lapse on June 1,
1998.
COMPENSATION OF CHAIRMAN OF THE BOARD
The Company has an open-ended consulting agreement with Mr. Matthews,
pursuant to which he is currently paid $75,000 per annum. In addition, in
connection with Mr. Matthews' agreement to serve as Chairman of the Board, Mr.
Matthews was granted options pursuant to the 1988 Stock Plan to purchase up to
91,232 shares of the Common Stock, 24,197 exercisable at $1.07 per share, 22,345
exercisable at $4.48 per share, 22,345 exercisable at $2.24 per share and 22,345
exercisable at $8.95 per share. All such options have vested. Mr. Matthews has
exercised options on 24,197 shares at $1.07 per share and 7,448 shares at $2.24
per share.
41
<PAGE>
In addition, on July 1, 1995 Mr. Matthews was granted options pursuant to
the 1988 Stock Plan to purchase 44,689 shares of the Common Stock at $5.01 per
share. The options will vest in two equal annual installments beginning on July
1, 1996. Unvested options vest upon certain changes in control of the Company.
Within 180 days upon termination, depending on the cause of termination, the
Company has the right to purchase Mr. Matthews' shares and unexercised vested
options. The Company also has a right of first refusal upon notice of proposed
sale of shares by Mr. Matthews.
STOCK INCENTIVE PLANS
1988 Stock Plan. On September 30, 1988, the Board of Directors of Holdings
adopted the Loehmann's Holdings, Inc. 1988 Stock Option Plan (the "1988 Stock
Plan"). The purpose of the 1988 Stock Plan is to promote the success of Holdings
by providing a method whereby key employees and directors of Holdings and its
subsidiaries may be encouraged to invest in Holdings Common Stock and thereby
increase their proprietary interest in its business, encourage them to remain in
the employ of, or as directors of, Holdings and increase their personal interest
in the continued success and progress of Holdings. The 1988 Stock Plan provides
that a committee appointed by the Board of Holdings, consisting of at least two
directors, is authorized to grant options to purchase shares of Holdings Common
Stock thereunder. In connection with the Holdings Merger, each such outstanding
option will become an option to purchase approximately 0.22 shares of the
Company's Common Stock on the same terms and conditions.
A maximum of 1,077,010 shares of Common Stock (subject to adjustment as
described below) may be delivered by the Company pursuant to options granted
under the 1988 Stock Plan, all of which have been granted and of which 443,393
are currently exercisable. The number and kind of options granted is subject to
adjustment, in the sole discretion of the committee, upon the occurrence of
certain corporate events (such as a stock dividend, reorganization or offer to
sell shares at below fair market value) in order to preserve the benefits
intended to be made available to grantees under the 1988 Stock Plan. Certain of
the options vest in installments over a period of time from the date of the
grant and certain of the options vest depending on the attainment by the Company
of certain performance criteria. As amended, nonemployee directors are no longer
eligible to receive awards under the 1988 Stock Plan. The committee does not
intend to grant any additional awards under the 1988 Stock Plan.
Options granted under the 1988 Stock Plan may be exercised only during the
optionee's continued employment with, or service as a director of, the Company,
except that the committee may, in its sole discretion, include in the applicable
option agreement that such options may be exercised prior to the expiration of
180 days after the date of such termination.
The Company's Board of Directors may amend, suspend or discontinue the 1988
Stock Plan at any time except that, without the prior approval of the
stockholders of the Company, no such amendment may (i) abolish the committee,
change the qualifications of committee members or withdraw the 1988 Stock Plan
administration from its supervision, (ii) materially change the requirements as
to eligibility for participation in the 1988 Stock Plan, (iii) increase the
maximum number of shares as to which options may be granted under the 1988 Stock
Plan, except for adjustments to reflect stock dividends or other
recapitalizations affecting the number or kind of outstanding shares, (iv)
extend the maximum option period or the period during which options may be
granted under the 1988 Stock Plan or (v) decrease the minimum option price.
New Stock Plan. Prior to the consummation of the Offerings, the Company
adopted the Loehmann's, Inc. New Stock Incentive Plan (the "New Stock Plan" and,
together with the 1988 Stock Plan the "Stock Plans"). A maximum of 446,892
shares of Common Stock (subject to adjustment as described below) may be
delivered by the Company pursuant to options, stock appreciation rights
("SARs"), restricted stock, unrestricted stock and performance awards
(collectively, "awards") granted under the New Stock Plan, subject to specified
aggregate limits on certain types of awards and
42
<PAGE>
annual individual limits on certain types of awards. Only officers, directors
and executive, managerial and professional employees of the Company and its
affiliates are eligible for awards under the New Stock Plan.
The New Stock Plan will be administered by a committee appointed by the
Company's Board of Directors consisting of at least two directors. During the
ten-year term of the plan, the committee will have authority, subject to the
terms of the New Stock Plan, to determine when and to whom to make grants under
the plan, the number of shares to be covered by the grants, the types and terms
of options, SARs, restricted stock, unrestricted stock and performance awards
granted and the exercise price of options and SARs and to prescribe, amend and
rescind rules and regulations relating to the New Stock Plan. The committee may,
in its discretion, with the grantee's consent, cancel any award under the plan
and issue a new award in substitution therefor or accelerate the exercisability
of any award granted under the plan or extend the scheduled expiration date of
an award.
The Company's Board of Directors may amend, suspend or discontinue the New
Stock Plan at any time except that, without stockholder approval no such
amendment may (i) materially increase the benefits accruing to New Stock Plan
grantees, (ii) materially increase the maximum number of shares as to which
awards or specific types of awards may be granted under the New Stock Plan,
except for adjustments to reflect stock dividends or other recapitalizations
affecting the number or kind of outstanding shares, (iii) materially change the
requirements as to eligibility for participation in the New Stock Plan, (iv)
permit a stock option to have an option exercise price, or a SAR to have an
appreciation base, of less than 100% of the fair market value of a share of
Common Stock on the date the stock option or SAR is granted, (v) permit an
option or unrelated SAR to be exercisable, a restricted stock award to vest, or
shares of Common Stock to become deliverable pursuant to a performance award,
more than ten years after the date of grant or (vi) extend the term of the New
Stock Plan beyond the initial ten-year period.
Under the terms of the New Stock Plan, "incentive stock options" ("ISOs")
within the meaning of Section 422 of the Code, "nonqualified stock options"
("NSOs"), SARs, restricted stock, unrestricted stock and performance awards may
be granted to key employees (including officers and directors who are employees)
of the Company and any of its affiliates (as defined in the New Stock Plan),
except that ISOs may be granted only to employees of the Company, its parent
company and subsidiaries of the Company. The New Stock Plan limits the number of
shares with respect to which options and SARs may be granted to any individual
to 223,446 in any year. Shares subject to issuance under the New Stock Plan may
be authorized and unissued or treasury shares of Common Stock.
Initially, each ISO will be exercisable over a period, determined by the
committee in its discretion, but not to exceed ten years from the date of grant,
as required by the Code. In addition, in the case of an ISO granted to an
individual who, at the time such ISO is granted, owns shares possessing ten
percent (10%) or more of the total combined voting power of all classes of stock
of the Company or its parent or subsidiary corporations (a "10% Stockholder"),
the exercise period for an ISO may not exceed five years from the date of grant.
In the case of NSOs, the exercise period, generally not to exceed ten years from
the date of grant, shall in all cases be determined by the committee.
The exercise price of an ISO (collectively with the exercise price of a NSO,
the "Option Price") and the appreciation base of a SAR may not be less than the
fair market value of the shares of the Common Stock on the date of grant, except
that, in the case of an ISO granted to a 10% Stockholder, the Option Price may
not be less than 110% of such fair market value on the date of grant. The Option
Price of a NSO shall not be less than the par value of the shares of the Common
Stock on the date of grant.
The committee may grant SARs either alone ("unrelated SARs) or in connection
with all or part of an option. Upon the exercise of a SAR, a holder generally is
entitled, without payment to the Company, to receive cash, shares of Common
Stock or any combination thereof, as determined by the committee, in an amount
equal to the excess of the fair market value of one share of Common Stock on
43
<PAGE>
the exercise date over (i) the Option Price of the related option (in the case a
SAR granted in connection with an option) or (ii) the appreciation base of the
SAR (in the case of an unrelated SAR), multiplied by the number of shares in
respect of which the SAR is exercised.
The committee may grant restricted stock awards alone or in tandem with
other awards under the New Stock Plan. Vesting of restricted stock awards may be
conditioned upon the completion of a specified period of service, the attainment
of specified performance goals or such other factors as the committee may
determine. The committee may, in its discretion, require a grantee to pay an
amount to acquire any restricted or unrestricted stock, which amount may be
refunded to such grantee upon such events as the committee may determine. During
the restricted period, the grantee may not assign, transfer or otherwise
encumber or dispose of the restricted stock, except as permitted in the
applicable award agreement. During the restricted period, the grantee will have
the right to vote the restricted stock and to receive any dividends if and to
the extent so provided in the applicable award agreement.
The committee may grant performance awards relating to a specified number of
shares to be delivered based upon attainment over a specified performance cycle
of specified measures of the performance of the Company, one or more of its
subsidiaries or affiliates or the grantee as may be established by the
committee. The committee may provide for full or partial credit, prior to
completion of such performance cycle or achievement of the degree of attainment
of the measures of performance specified in connection with such performance
award, in the event of the grantee's death, retirement or disability, or in
other circumstances.
The committee may grant performance awards intended to constitute
performance-based compensation within the meaning of Section 162(m) of the Code.
The following rules will apply to such performance awards: (i) payments under
the performance award shall be made solely on account of the attainment of one
or more objective performance goals established in writing by the committee not
later than 90 days after the commencement of the period of service to which the
performance award relates (or, if less, 25% of such period of service); (ii) the
performance goals to which the performance award relates shall be based on one
or more of the following business criteria applied to the grantee, a business
unit or the Company and/or an affiliate of the Company: stock price, market
share, sales, earnings per share, return on equity or costs; (iii) in any year,
a grantee may not be granted performance awards covering a total of more than
223,446 shares of Common Stock; and (iv) once granted, the committee may not
increase the amount payable under such performance award.
Except as otherwise provided in the applicable award agreement, the
following will apply upon the grantee's termination of employment with the
Company and its affiliates: If the employment of the grantee terminates for any
reason other than by reason of death or termination for cause or if the grantee
quits, the grantee may, within the 60-day period (or other period specified by
the committee in certain events) following such termination, exercise such
awards to the extent the grantee was entitled to exercise at the date of
termination. If the grantee dies while employed (or within 60 days or such other
period after termination of employment in accordance with the preceding
sentence), all outstanding awards, to the extent then vested, may be exercised
within one year after the grantee's death by the person or persons to whom the
grantee's rights pass. If the employment of the grantee is terminated for cause
(including if the grantee terminates employment in breach of written employment
contract) or if the grantee quits, all awards granted to such grantee shall
terminate on the day the grantee's employment terminates. In no case may awards
be exercised later than the expiration date specified in the grant. Awards may
be transferred by a grantee only by will or by the laws of descent and
distribution, and during his or her lifetime may be exercised only by the
grantee. The continued exercisability or vesting of any award following a
grantee's termination of employment is generally subject to the grantee's
continued compliance with noncompetition and confidentiality requirements.
In the event that the Company is to be merged or consolidated with another
corporation or reorganized or liquidated, then the committee may, in its
discretion, provide that awards granted to a grantee will terminate unless
exercised within the period determined by the committee (not less than 30
44
<PAGE>
days), in which case the committee may, in its discretion, accelerate the
exercisability of such awards and/or provide that restrictions on restricted
stock awards may lapse.
The shares of Common Stock purchased pursuant to an award are to be paid for
by check or, if and to the extent provided in the applicable award agreement, by
broker's advance or by delivery of previously acquired shares of Common Stock
with a value equal to the total purchase price, or in a combination of such
methods.
The committee made grants under the New Stock Plan of stock options having a
terms of three or five years to purchase shares of Common Stock at exercise
prices equal to between $5.01 and $8.06. All initial grants will vest equally
over a three or five year period beginning on the first anniversary of the date
of grant and will become 100% vested on the third or fifth anniversary of the
date of grant.
The following table sets forth specific grants of stock option awards made
under the New Stock Plan. Additional awards may be made under the plan upon such
terms and conditions as determined by the committee in its discretion as
described above.
NEW PLAN BENEFITS
(NEW STOCK PLAN)
<TABLE>
<CAPTION>
NUMBER OF
SHARES
UNDERLYING OPTION EXERCISE
NAME AND POSITION OPTIONS PRICE
- ----------------- --------------- ---------------
<S> <C> <C>
Robert N. Friedman............................................ 134,068 $5.01
Chairman and Chief Executive Officer 27,908 8.06
Philip Kaplan................................................. 3,673 8.06
President and Chief Operating Officer
Robert Glass.................................................. 11,172 8.06
Senior Vice President and Chief Financial Officer
Henry Mittleman............................................... -- --
Former Senior Vice President--Store Operations
Bonnie Dexter................................................. 11,172 8.06
Senior Vice President, Merchandising
All Executive Officers as a Group............................. 134,068 5.01
53,925 8.06
All Directors who are not Executive Officers as a Group....... -- --
All Employees who are not Executive Officers as a Group....... 68,039 8.06
</TABLE>
Federal Income Tax Consequences. The following sets forth a summary of
federal income tax consequences of participation in the 1988 Stock Plan and the
1996 Stock Plan (collectively, the "Stock Plans").
A holder of an ISO will generally realize taxable income only upon
disposition of shares acquired upon exercise of the ISO rather than upon the
grant of timely exercise of the ISO. Tax consequences of an untimely exercise of
an ISO are determined in accordance with the rules applicable to NSOs. The
amount by which the fair market value of the Common Stock on the exercise date
of an ISO exceeds the exercise price generally will increase the option holder's
"alternative minimum taxable income."
A holder of a NSO generally will not be subject to tax at the time of the
grant of the NSO. Rather, upon exercise of a NSO, the optionee generally will
include in ordinary income the excess, if any, of the fair market value of the
Common Stock purchased over the exercise price. The Company generally will be
entitled to a deduction at the time and in the amount that the holder recognizes
ordinary income.
45
<PAGE>
The grant of SARs has no federal income tax consequences at the time of
grant. Upon the exercise of SARs, the amount received is generally taxable as
ordinary income, and the Company is entitled to a corresponding deduction.
Generally, the grant of restricted stock or performance awards has no
federal income tax consequences at the time of grant. Rather, at the time the
shares are no longer subject to a substantial risk of forfeiture (as defined in
the Code) the holder will recognize ordinary income in an amount equal to the
fair market value of such shares. A holder may, however, elect to be taxed at
the time of the grant in accordance with Section 83(b) of the Code. The Company
generally will be entitled to a deduction at the time and in the amount that the
holder recognizes ordinary income.
If any payments and the value of benefits are "contingent on a change of
control" within the meaning of Code section 280G (which could include, for
example and without limitation, the accelerated vesting of stock options upon a
change of control), then the Company may be denied an income tax deduction for
all or a portion of such payments, and the recipient thereof may be subject to a
20% excise tax in addition to income tax otherwise imposed.
Code section 162(m) generally precludes a public corporation from taking a
deduction for compensation for certain officers in excess of $1 million per year
for each officer, subject to certain transition rules. Assuming compliance with
the transition rules, compensation pursuant to agreements in effect prior to the
IPO, and stock option awards which may be made during the 3-year period
following the IPO pursuant to plans in effect prior to the IPO, may be exempt
from the deduction limit. Under rules which exempt certain performance-based
compensation from the deduction limit if certain conditions are met, stock
options and performance-based awards, but not other awards, which may be made
under the New Plan after the 3-year transition period ends may be exempt from
the deduction limit. Compensation for which an exemption might otherwise apply
could lose its exemption, for example, if an agreement or plan is modified to
increase benefits or under other circumstances, and there can be no assurance at
this time that any compensation will be exempt from the deduction limit.
The foregoing constitutes a brief summary of the principal federal income
tax consequences of the transactions based on current federal income tax laws.
This summary is not intended to be exhaustive and does not describe state, local
or foreign tax consequences. Grantees in the Stock Plans are urged to consult
their own tax advisors with respect to the consequences of their participation
in the Stock Plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1995, Messrs. Kroon and Matthews and Ms. Cohen Turk served as
members of the Compensation Committee of the Board of Directors.
46
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information as of April 1, 1996 with
respect to beneficial ownership of shares of the Common Stock by (i) all
stockholders known by the Company to be beneficial owners of more than 5% of
such class, (ii) each director, (iii) each executive officer and (iv) all
directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF CLASS
----------------------
NUMBER OF BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OFFERING OFFERING(1)
- --------------------------------------------------------------- --------- -------- ----------
<S> <C> <C> <C>
Sefinco Ltd.................................................... 1,353,878 28.7% 16.3%
c/o Entrecanales Inc.
767 Fifth Avenue, 5th Floor
New York, New York 10153
Sprout Capital V(2)............................................ 431,429 9.1% 5.2%
Sprout Growth, L.P.(2)......................................... 521,656 11.0% 6.3%
Sprout Growth, Ltd.(2)......................................... 58,077 1.2% *
DLJ Venture Capital Fund II, L.P.(2)........................... 25,927 * *
Donaldson, Lufkin & Jenrette, Inc.(2).......................... 271,092 5.7% 3.3%
Equity-Linked Investors, L.P.(3)............................... 309,932 6.6% 3.7%
Equity-Linked Investors-II(3).................................. 309,932 6.6% 3.7%
Putnam Investors(4)............................................ 487,212 10.3% 5.9%
c/o Putnam Investment Management, Inc.,
The Putnam Advisory Company, Inc., and
Putnam Fiduciary Trust Company,
One Post Office Square,
Boston, Massachusetts 02109
Allan Bogner................................................... 259,757 5.5% 3.1%
7 Palliser Road
Irvington, New York 10533
Philip Kaplan(5)............................................... 286,174 5.8% 3.4%
Robert Friedman(6)............................................. 186,222 3.8% 2.2%
Norman S. Matthews(7).......................................... 123,139 2.6% 1.5%
Janet A. Hickey(2)............................................. -- -- --
Richard E. Kroon(2)............................................ -- -- --
Christina A. Mohr.............................................. -- -- --
Cynthia Cohen Turk............................................. -- -- --
Bonnie Dexter(8)............................................... 1,788 * *
Robert Glass(9)................................................ 2,234 * *
Henry Mittleman................................................ 7,134 * *
All directors and executive officers as a group (10 11.8% 7.1%
persons)(10)................................................... 606,690
</TABLE>
- ------------
* Less than 1%
(1) Without giving effect to the Underwriters' over-allotment option. Certain
of the Company's stockholders have granted an option to the Underwriters,
exercisable during the 30-day period after the date of this Prospectus, to
purchase up to an aggregate of 535,800 shares of Common Stock, solely to
cover over-allotments, if any, as follows: Sefinco Ltd., 108,371 shares;
Sprout Capital V, 34,514 shares; Sprout Growth, L.P., 41,732 shares; Sprout
Growth, Ltd., 4,646 shares; DLJ Venture Capital Fund II, L.P., 2,074
shares; Donaldson, Lufkin & Jenrette, Inc., 21,687 shares; Equity-Linked
Investors, L.P., 35,977 shares; Equity-Linked Investors-II, 35,977 shares;
Putnam Investors (see note 4 below), 113,625 shares; Merrill Lynch Kecalp
L.P. 1987, 13,488 shares; Merrill Lynch Kecalp L.P. 1989, 13,488 shares;
Allan Bogner, 60,579 shares; Norman Matthews, 5,084 shares, Antoine
Treuille, 6,114 shares; President and Fellows of Harvard College, 12,085
shares; T. Rowe Price High Yield Fund, Inc., 24,806 shares; Ellis Jacobson,
1,396 shares; and Joel Freedman, 157 shares.
(2) Sprout Capital V, Sprout Growth, L.P., Sprout Growth, Ltd., DLJ Venture
Capital Fund II, L.P. and Donaldson Lufkin & Jenrette, Inc. are all
affiliates of DLJ. Ms. Hickey, who is a Director, and Mr. Kroon, who is a
Director, are general partners of, or executive officers in (1) certain of
the affiliates of DLJ that own shares of Common Stock or (2) entities that
control such affiliates. The business address of all such entities is 277
Park Avenue, New York, New York 10172. Ms. Hickey and Mr. Kroon disclaim
beneficial ownership of such shares.
(3) Equity-Linked Investors, L.P. and Equity-Linked Investors-II are New York
limited partnerships whose business address is c/o Desai Capital Management
Incorporated, 540 Madison Avenue, New York, New York 10022. Pursuant to an
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investment and advisory agreement, Desai Capital Management Incorporated
("DCMI") may vote or dispose of the shares owned by Equity-Linked
Investors, L.P. and Equity-Linked Investors-II. Rohit M. Desai is the
managing general partner of the general partner of each of Equity-Linked,
L.P. and Equity-Linked Investors-II. Mr. Desai is also the sole
stockholder, Chairman of the Board and President of DCMI. DCMI and Mr.
Desai each disclaims beneficial ownership of the shares owned by
Equity-Linked Investors, L.P. and Equity-Linked Investors-II.
(4) Putnam Investors includes Putnam Diversified Income Trust, Putnam Master
Intermediate Income Trust, Putnam Managed High Yield Trust, Putnam Master
Income Trust, Putnam Capital Manager Trust--PCM High Yield Fund, Putnam
High Income Convertible and Bond Fund, Putnam High Yield Managed Trust,
Putnam Premier Income Trust and the Ameritech Corp. Pension Trust.
(5) Includes 204,230 options to purchase shares of Common Stock issued pursuant
to the Option Plan which are immediately exercisable.
(6) Includes 140,303 options to purchase shares of Common Stock issued pursuant
to the Option Plan which are immediately exercisable.
(7) Includes 59,586 options to purchase shares of Common Stock issued pursuant
to the Option Plan which are immediately exercisable.
(8) Consists of 1,788 options to purchase shares of Common Stock issued
pursuant to the Option Plan which are immediately exercisable.
(9) Consists of 2,234 options to purchase shares of Common Stock issued
pursuant to the Option Plan which are immediately exercisable.
(10) Includes 408,141 options to purchase shares of Common Stock issued pursuant
to the Option Plan which are immediately exercisable.
SHAREHOLDERS' AGREEMENTS
Most of the above stockholders are parties to a shareholders' agreement
dated September 19, 1988, as amended and supplemented (the "Shareholders'
Agreement"). The Shareholders' Agreement terminates (i) when 40% of the shares
of Common Stock then outstanding have been sold pursuant to one or more public
offerings, or (ii) upon a vote in favor of terminating the agreement by holders
of 66 2/3% or more of the shares of Common Stock subject to the Shareholders'
Agreement. The Stockholders' Agreement provides that Sefinco and Sprout each is
entitled to nominate two directors to the Board of Directors, unless they each
respectively own less than 10% of fully-diluted shares of Common Stock in which
case they are entitled to nominate one director (the "Nomination Rights"). Mr.
Philip Kaplan, as long as he is employed by the Company, is required to nominate
himself. The holders are required to vote all of their shares so that the
Sefinco nominees and the Sprout nominees are elected as Class B directors, and
Mr. Kaplan and other nominees are elected as Class A directors.
The Shareholders' Agreement restricts the parties thereto from transferring
shares of Common Stock held by them subject to certain exceptions including
transfers to related persons and sales pursuant to a public offering. If one or
more holders propose to sell shares of Common Stock (x) representing more than
25% of the fully diluted shares of Common Stock owned by the holder, if the
holder is a "Significant Holder" (generally, a holder of 8% or more of the
fully-diluted shares of Common Stock), or (y) representing more than 10% of the
outstanding fully-diluted shares of Common Stock, then each other party has
certain "tag-along rights." In addition, if holders of 51% or more of the Common
Stock subject to the Shareholders' Agreement propose to sell all their shares to
a third party, such holders have a "drag-along right" to compel all other
holders of Common Stock, which are parties to the Shareholders' Agreement, to
sell their shares to such third party for the same consideration per share and
on the same terms and conditions. A Common Stock Rights Agreement (the "Rights
Agreement") dated October 14, 1993, among the Company, the principal parties to
the Shareholders' Agreement and certain other holders of the Common Stock which
purchased shares of the Company on the date of such agreement, provides the
parties to such agreement with certain demand and "piggy-back" registration
rights under the Securities Act of 1933 and certain other provisions for
"tag-along" and "drag-along" rights comparable to those contained in the
Shareholders' Agreement.
Upon the consummation of the Offering, the Shareholders' Agreement will
terminate except that pursuant to an amendment to the Shareholders' Agreement,
dated as of April 1, 1996, the Nomination Rights will continue in effect until
the earlier of (i) the date on which 60% of the shares of Common
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Stock then outstanding have been sold pursuant to one or more public offerings
(including the Offering contemplated hereby) and (ii) the Company's 1998 annual
meeting of stockholders.
REGISTRATION RIGHTS
If the Company proposes, prior to October 14, 2003, to register any of its
equity securities under the Act (other than a registration on Form S-8 or S-4,
relating to shares issuable upon exercise of employee stock options or in
connection with any employee benefit or similar plan or in connection with a
direct or indirect acquisition by Holdings of another company), the parties to
the Shareholders' Agreement have the right to include their shares in the
registration statement. Stockholders who choose to sell shares pursuant to the
registration rights described in this paragraph must agree to, among other
things, become a party to the underwriting agreement and execute a "lock-up"
letter pursuant to which they will agree not to sell or otherwise transfer any
shares held after the Offering for a period of 180 days after the date of the
final prospectus. The rights described in this paragraph terminate at any time
subsequent to the third anniversary of the Rights Agreement if at such time the
shares are eligible for sale in reliance on Rule 144(k) under the Act.
Holders representing 50% of the Registrable Securities (as defined in the
Rights Agreement) may request that the Company register 25% or more of the
Registrable Securities. Upon such request, the Company will notify the other
parties to the Rights Agreement of the request and will use its best efforts to
effect the registration of such shares requested by the holders who originally
requested the registration or who requested the registration after receiving the
notification mentioned in the previous sentence. However, the Company shall not
be required to file a registration statement in connection with such a request
(i) within a period of six months following the filing of a registration
statement, (ii) if the registration would be significantly disadvantageous to
the Company or its stockholders, (iii) if the Company has already completed two
registration statements pursuant to such requests, (iv) prior to 180 days after
the consummation of this Offering or (v) if the shares are eligible for sale
under Rule 144(k) of the Act. After giving effect to the Offering, 4,725,353
shares or 56% of the outstanding shares will be Registrable Securities.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DLJ and its affiliates are principal stockholders of the Company and DLJ is
acting as an underwriter of the Senior Notes of the Company being offered in the
Debt Offering. In addition, (i) DLJ is selling certain of its shares of Common
Stock in this Offering (if the Underwriters' over-allotment option is
exercised), (ii) a portion of the proceeds from the Offering and the Debt
Offering will be used to redeem all of the outstanding Series A Preferred Stock,
certain of which shares are owned by DLJ and other significant holders of the
Company's Common Stock and (iii) DLJ was paid $50,000 for financial advisory
services rendered to the Company during fiscal 1995. See "Security Ownership of
Certain Beneficial Owners" and "Prospectus Summary--Debt Offering."
Entrecanales Inc., a principal stockholder, was paid $50,000 for financial
advisory services rendered to the Company during fiscal 1995. See "Security
Ownership of Certain Beneficial Owners."
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company is authorized to issue up to 66,969,237 shares of stock, which
shares consist of 25,000,000 shares of Common Stock, 469,237 shares of Class B
Common Stock, and 41,500,000 shares of preferred stock, par value $.01 per share
(the "Preferred Stock"). As of the date hereof, prior to giving effect to the
Holdings Merger (i) 1,000 shares of Loehmann's, Inc. Common Stock are
outstanding, all of which are owned by Holdings and (ii) Holdings is authorized
to issue 33,600,000 shares of Holdings Common Stock, 2,100,000 shares of
Holdings Class B Common Stock and 41,500,000 shares of Series A Preferred Stock,
of which 21,147,929 shares of Holdings Common Stock, 2,100,000 shares of
Holdings Class B Common Stock and 37,405,739 shares of Series A Preferred Stock
are issued and outstanding, which shares are held by 59, 12 and 30 stockholders
of record, respectively. Upon consummation of the Holdings Merger, each share of
Holdings Common Stock and Holdings Class B Common Stock will be converted
pursuant to the Share Conversion into 0.223446 shares of Common Stock and Class
B Common Stock, respectively. Upon consummation of the Offering, all of the
issued and outstanding shares of Series A Preferred Stock will be redeemed at
their liquidation preference of $0.56 per share.
COMMON STOCK
General. The shares of Common Stock are entitled to share ratably with the
shares of Class B Common Stock in such dividends (other than dividends on Common
Stock payable in shares of the capital stock of the Company) as may be declared
by the Board of Directors and paid by the Company out of funds legally available
therefor. The payment of cash dividends by the Company is prohibited by the
terms of the Company's existing credit facility and will be restricted by the
terms of the New Credit Facility and by the Senior Note Indenture, and the
Company does not anticipate paying cash dividends in the foreseeable future. See
"Dividend Policy" and "Description of Certain Indebtedness."
In the event of any liquidation, dissolution or winding up of the Company,
holders of the Common Stock and Class B Common Stock are entitled to share
ratably in the balance, if any, remaining after payment of all debts and other
liabilities of the Company. Except as described below and in "Security Ownership
of Certain Beneficial Owners-- Shareholders' Agreements," holders of the Common
Stock have no redemption, preemptive or subscription rights.
Holders of Common Stock are entitled to one vote per share for the election
of directors and for all other matters to be submitted to a vote of the
Company's stockholders. Except as provided below, the exclusive voting power for
all purposes is vested in the holders of the Common Stock. Holders of shares of
Common Stock have no cumulative voting rights. Shares of Common Stock are not
convertible into shares of any other class.
CLASS B COMMON STOCK
General. The shares of Class B Common Stock are entitled to share ratably
with the shares of Common Stock in such dividends (other than dividends on
Common Stock payable in shares of the capital stock of the Company) as may be
declared by the Board of Directors and paid by the Company out of funds legally
available therefor. Although the holders of Class B Common Stock will not share
in any dividends on the Common Stock payable in shares of capital stock of the
Company, the number of shares of Common Stock issuable upon the conversion of a
share of Class B Common Stock will be subject to adjustment in such event. See
"Adjustments." The payment of cash dividends by the Company will be restricted
by the terms of the New Credit Facility and restricted by the Senior Note
Indenture, and the Company does not anticipate paying cash dividends in the
foreseeable future. See "Dividend Policy" and "Description of Certain
Indebtedness."
In the event of any liquidation, dissolution or winding up of the Company,
holders of the Common Stock and Class B Common Stock are entitled to share
ratably in the balance, if any, remaining after
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payment of all debts and other liabilities of the Company. Except as described
below, holders of the Class B Common Stock have no redemption, preemptive or
subscription rights.
Except as required by Delaware's General Corporation Law (the "Delaware
GCL"), holders of Class B Common Stock have no right to vote for the election of
directors or for any other matters that may be submitted to a vote of the
Company's stockholders, except for an increase in the number of authorized
shares of the Class B Common Stock, which must be approved by two-thirds of each
of the shares of Common Stock and the shares of Class B Common Stock. Holders of
shares of Class B Common Stock have no cumulative voting rights.
Shares of Class B Common Stock are convertible, at any time after 180 days
after the closing of the Offering, at the option of the holder, on a one-for-one
basis (subject to adjustment), into shares of Common Stock. Shares of Class B
Common Stock may be converted by surrendering to the Transfer Agent for the
Class B Common Stock a stock certificate signed by the registered holder
indicating such holder's election to convert all or a portion of the shares of
the Class B Common Stock evidenced by such certificate. As used herein, the term
"Underlying Common Stock" means the shares of Common Stock issued or issuable
upon conversion of the Class B Common Stock.
Mergers and Other Business Combinations. In the event of a Non-Surviving
Combination (as defined below), each share of Class B Common Stock will be
exchanged for the same consideration as it would have received if it had been
converted into Common Stock immediately prior to such event. As used herein, a
"Non-Surviving Combination" means any merger, consolidation or other business
combination by the Company with one or more persons (other than a wholly owned
subsidiary of the Company) in which the other person is the survivor, or a sale
of all or substantially all of the assets of the Company to one or more such
other persons, if, in connection with any of the foregoing, consideration (other
than common equity securities of the Company) is distributed to holders of
Common Stock in exchange for all or substantially all of their equity interest
in the Company.
Adjustments. The number of shares of Common Stock issuable upon the
conversion of each share of Class B Common Stock (as well as the number of votes
allocable to each such share of Class B Common Stock, the amount payable in
respect of each such share on account of the liquidation, dissolution or winding
up of the Company and the dividends payable on each such share) are subject to
adjustment in certain events, including (i) a distribution on the Common Stock
in shares of its capital stock or a combination, subdivision or reclassification
of Common Stock or (ii) the issuance or sale of rights, warrants or options or
convertible or exchangeable securities to holders of Common Stock or other
persons entitling such holders to purchase shares of Common Stock for a
consideration per share less than the then current market value (as defined) per
share of Common Stock (not including certain sales or issuances to the
management of the Company, if approved by the Board of Directors). In the case
of distributions described in clause (i) above and sales or issuances to holders
of Common Stock described in clause (ii) above, no adjustment in the number of
shares of Common Stock issuable upon conversion of the Class B Common Stock will
be required until cumulative adjustments require an adjustment of at least 1%
thereof. The Company will notify the holders of the Class B Common Stock in the
event of any adjustments.
The Company has authorized and reserved for issuance such number of shares
of Common Stock as shall be issuable upon the conversion of all outstanding
shares of Class B Common Stock. Such shares of Common Stock, when issued, will
be duly and validly issued and fully paid and nonassessable.
No fractional shares will be issued upon conversion of shares of Class B
Common Stock, but the Company will pay the cash value of any fractional shares
otherwise issuable.
PREFERRED STOCK
Authorized but Unissued Preferred Stock. The Board of Directors of the
Company is authorized, without further action of the shareholders of the
Company, to issue any unissued stock and to classify or
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reclassify, or set or change the preferences, dividend, conversion or other
rights, voting powers, restrictions, limitations as to dividends, qualifications
or terms or conditions of redemption of such stock.
CERTAIN PROVISIONS OF CERTIFICATE OF INCORPORATION AND BY-LAWS
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation and By-laws of the Company summarized in the following paragraphs
will become operative as a result of the Holdings Merger. These provisions may
be deemed to have an anti-takeover effect and may delay or prevent a tender
offer or takeover attempt that a stockholder might consider in its best
interest, including those attempts that might result in a premium over the
market price for the shares held by stockholders.
Stockholder Meetings. The Amended and Restated Certificate of Incorporation
provides that any action required or permitted to be taken by the stockholders
of the Company may be effected only at an annual or special meeting of
stockholders and prohibits stockholder action by written consent in lieu of a
meeting in all other circumstances. The Company's By-laws provide that special
meetings of stockholders may be called only by the President, Chairman of the
Board or the Board of Directors. This provision will make it more difficult for
stockholders to take actions opposed by the Board of Directors.
Advance Notice Provisions. The Company's By-laws establish an advance notice
procedure for stockholders to make nominations of candidates for election as
directors, or to bring other business before an annual meeting of stockholders
of the Company. The By-laws provide that only persons who are nominated by, or
at the direction of, the Board of Directors, or by a stockholder who has given
timely written notice to the Secretary of the Company prior to the meeting at
which directors are to be elected, will be eligible for election as directors of
the Company. Under the By-laws, for notice of stockholder nominations to be made
at an annual meeting to be timely, such notice must be received by the Company
not less than 30 days nor more than 60 days prior to the meeting, or in the
event that less than 40 days' notice or prior public disclosure of the date of
the annual meeting is given or made to stockholders, notice by the stockholder
to be timely must be received not later than the close of business on the tenth
day following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure was made. Under the By-laws, a stockholder's
notice must also contain certain information specified in the By-laws.
Indemnification. The Certificate provides that directors and officers of the
Company will be indemnified by the Company against all expenses and liabilities
reasonably incurred in connection with or resulting from any claim, action, suit
or proceeding in which he or she may become involved by reason of his service
for or on behalf of the Company, provided he or she acted in good faith in what
he or she reasonably believed to be the best interests of the Company. The
Certificate also provides that this right of directors and officers to
indemnification is not exclusive of any other right now possessed or hereafter
acquired under any statute, agreement or otherwise.
Classified Board of Directors. The By-laws provide that the Board of
Directors shall be divided into three classes of directors serving staggered
three year terms, with each class to consist as nearly as practicable of
one-third of the members of the Board of Directors.
The overall effect of the provisions of the Certificate of Incorporation and
By-laws described above may be to render more difficult or to discourage a
merger, tender offer, proxy context, the assumption of control of the Company by
a holder of a large block of the Company's capital stock or other person, or the
removal of incumbent management, even if such actions may be beneficial to the
Company's stockholders generally.
PERSONAL LIABILITY OF DIRECTORS
The Delaware GCL authorizes a Delaware corporation to eliminate or limit the
personal liability of a director to the corporation and its stockholders for
monetary damages for breach of certain fiduciary
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duties as a director and, accordingly, the Company's Amended and Restated
Certificate of Incorporation includes a provision eliminating liability for
monetary damages for any breach of fiduciary duty as a director, except (i) for
any breach of the duty of loyalty to the Company or its stockholders; (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) for any transaction from which the director
derived an improper personal benefit; or (iv) for willful or negligent payment
of dividends, or approval of stock repurchases or redemptions that are unlawful
under Delaware law. Pursuant to the Delaware GCL, directors of the Company are
not insulated from liability for breach of their duty of loyalty (requiring
that, in making a business decision, directors act in good faith and in the
honest belief that the action taken was in the best interest of the
corporation), or for claims arising under the Federal securities laws. The
foregoing provision of the Amended and Restated Certificate of Incorporation may
reduce the likelihood of derivative litigation against directors and may
discourage or deter stockholders or management from bringing a lawsuit against
directors for breaches of their fiduciary duties, even though such an action, if
successful, otherwise might have benefitted the Company and its stockholders.
CERTAIN STATUTORY PROVISIONS
Section 203 of the Delaware GCL contains certain provisions that may make
more difficult the acquisition of control of the Company by means of a tender
offer, open market purchase, proxy fight or otherwise. These provisions are
designed to encourage persons seeking to acquire control of the Company to
negotiate with the Board of Directors. However, these provisions could have the
effect of discouraging a prospective acquiror from making a tender offer or
otherwise attempting to obtain control of the Company. To the extent that these
provisions discourage takeover attempts, they could deprive stockholders of
opportunities to realize takeover premiums for their shares or could depress the
market price of shares. Set forth below is a description of the relevant
provisions of Section 203 of the Delaware GCL. The description is intended as
summary only and is qualified in its entirety by reference to Section 203 of the
Delaware GCL.
Section 203 of the Delaware GCL prohibits certain "business combination"
transactions between a publicly held Delaware corporation, such as the Company
after the Offering, and any "interested stockholder" for a period of three years
after the date on which such stockholder became an interested stockholder,
unless (i) the board of directors approves, prior to such date, either the
proposed business combination or the proposed acquisition of stock which
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction in which the stockholder becoming an interested
stockholder, the interested stockholder acquires at least 85% of those shares of
the voting stock of the corporation which are not held by the directors, offers
or certain employee stock plans or (iii) on or subsequent to the consummation
date, the business combination with the interested stockholder is approved by
the board of directors and also approved at a stockholders' meeting by the
affirmative vote of the holders of at least two-thirds of the outstanding shares
of the corporation's voting stock other than shares held by the interested
stockholder. For purposes of Section 203, a "business combination" includes a
merger, asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years, did own)
15% or more of the corporation's voting stock. A corporation, at its option, may
exclude itself from the coverage of Section 203 by amending its charter or
by-laws by action of its stockholders to exempt itself from coverage, provided
that such by-law or charter amendment shall not become effective until 12 months
after the date it is adopted. To date, the Company has not elected to opt out of
Section 203 of the Delaware GCL pursuant to its terms.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company. The Transfer Agent and Registrar for the Company's
Class B Common Stock and Series A Preferred Stock is Chemical Trust Company of
California, San Francisco, California.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
SENIOR NOTES
Concurrently with this Offering, the Company is offering to sell pursuant to
the Debt Offering $100.0 million aggregate principal amount of the Senior Notes.
This Offering and the Debt Offering will occur concurrently and are conditioned
upon each other. The Senior Notes are being offered pursuant to a separate
prospectus and the following description is qualified in its entirety by the
information set forth in such prospectus. The Senior Notes will mature on May
15, 2003, will be limited to $100.0 million aggregate principal amount, and will
be unsecured senior obligations of the Company, senior in right of payment to
any subordinated indebtedness of the Company. Each Senior Note will bear
interest at a rate of 11 7/8% from May 10, 1996 or from the most recent interest
payment date to which interest has been paid, payable semiannually on May 15 and
November 15, in each year, commencing November 15, 1996.
The Senior Notes will be subject to redemption at any time on or after May
15, 2000 at the option of the Company, in whole or in part, on not less than 30
nor more than 60 days' prior notice in amounts of $1,000 or integral multiples
thereof at the following redemption prices (expressed as percentages of the
principal amount), if redeemed during the 12-month period beginning May 15th of
the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ---- ----------
<S> <C>
2000................................................... 105.938%
2001................................................... 102.969%
2002 and thereafter.................................... 100.000%
</TABLE>
in each case, together with accrued and unpaid interest, if any, to the
redemption date (subject to the rights of holders of record on relevant record
dates to receive interest due on an interest payment date).
The Senior Notes will not be entitled to the benefit of any sinking fund.
In the event of a Change of Control (as defined in the Senior Note
Indenture), the Company will be obligated to make an offer to purchase all
outstanding Senior Notes at a purchase price of 101% of the principal amount
thereof, plus accrued and unpaid interest to the date of repurchase.
The Senior Note Indenture will contain certain covenants that, among other
things, will limit the ability of the Company or any of its subsidiaries to
incur additional indebtedness, transfer or sell assets, pay dividends or make
certain other restricted payments, incur liens, enter into certain transactions
with affiliates or consummate certain mergers, consolidations or sales of all or
substantially all of its assets. In addition, subject to certain conditions, the
Company is obligated to make offers to repurchase the Senior Notes with the net
proceeds of certain asset sales. These covenants are subject to certain
exceptions and qualifications.
NEW CREDIT AGREEMENT
The Company has entered into an agreement with a financial institution (the
"Bank") to provide the Company with the New Credit Facility. The New Credit
Facility will provide for a $35.0 million revolving line of credit. In
connection with the redemption of the Series A Preferred Stock, see "Use of
Proceeds," approximately 30 days after the closing of the Offering, the Company
may borrow (to the extent necessary) under the New Credit Facility to be used,
along with the proceeds of the Offering and the Debt Offering and the remainder
out of cash on hand on such date to redeem and repay the Existing Obligations.
The New Credit Facility will have the terms and conditions described below. At
the Company's option, interest rates per annum applicable to amounts drawn under
the facility will equal either (i) the higher of (A) the Bank's published
reference rate and (B) .50% per annum above the latest federal funds rate, in
either case, plus .75% or (ii) LIBOR plus 2.2%. The Company also will be
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required to pay a per annum fee equal to 0.375% on the undrawn portion of the
commitment in respect of the New Credit Facility. The New Credit Facility will
be subject to certain borrowing base limitations, subject the Company to certain
covenants, impose limitations upon investments, dividends and other restricted
payments and capital expenditures and require the Company to maintain certain
financial ratios. The New Credit Facility will be secured by substantially all
of the Company's assets, including accounts receivable, inventory, fixtures and
equipment and will not be subject to scheduled annual repayments, except upon
maturity. The New Credit Facility will have a term of four years.
INDUSTRIAL REVENUE BONDS
In connection with the development of the Company's warehousing, office and
distribution facility located in the borough of Bronx, City of New York (the
"Facility"), Industrial Development Revenue and Refunding Bonds, due December
31, 2004, in the aggregate principal amount of approximately $2.3 million (the
"IRBs"), were issued pursuant to an Indenture of Mortgage and Trust, dated as of
December 1, 1983 (the "IRB Indenture"), by and between the New York City
Industrial Development Agency (the "Agency") and IBJ Schroder Bank & Trust
Company (as successor to J. Henry Schroder Bank & Trust Company), as Trustee
(the "Trustee"). The proceeds of the IRBs were used to refinance certain
Industrial Development Revenue Bonds previously issued in connection with the
acquisition, construction and installation of the Facility and the acquisition
and installation of machinery and equipment in connection therewith. The IRBs
are secured by (i) rental payments and other obligations made by the Company, as
lessee, under a Lease Agreement, dated as of December 1, 1983, by and between
the Agency and the Company (the "Lease"); (ii) the Agency's rights under the
Lease; and (iii) a lien on and security interest in the Facility under the IRB
Indenture. In connection with the development of the Facility, the Company also
issued a promissory note, due January 1, 2004, in the aggregate principal amount
of $1.5 million, pursuant to a Loan Agreement between the Company and the City
of New York. The promissory note is secured by a mortgage made by the Agency of
its leasehold interest in the Facility.
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SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Upon completion of this offering, the Company will have outstanding
8,297,420 shares of Common Stock. Of these shares, the 3,572,000 shares sold in
this offering plus any additional shares sold upon exercise of the Underwriters'
over-allotment option will be freely tradable without restriction or further
registration under the Securities Act except for any of such shares held by
"affiliates" of the Company.
The remaining 4,725,420 shares of Common Stock held by the existing
stockholders are "restricted securities" under the Securities Act. Of these
restricted securities, 4,527,026 shares are held by executive officers,
directors and certain shareholders who, together with the Company, have agreed
not to sell, contract to sell, or otherwise dispose of, any shares of Common
Stock without the consent of Montgomery Securities for a period of 180 days
after the date of this Prospectus. Upon expiration of such agreements, 4,246,293
of such shares will be eligible for sale in the public markets in accordance
with Rule 144. The remainder will become eligible for public sale at various
times after such date in accordance with the provisions of Rule 144. Of the
198,394 shares not subject to such agreements, 146,435 will be eligible for sale
in the public markets in accordance with Rule 144 immediately following this
Offering and the remainder will become eligible for public sale at various times
after this Offering in accordance with the provisions of Rule 144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the conclusion of this offering, a person (or persons whose shares are
aggregated) who has beneficially owned restricted shares for at least two years,
including persons who may be deemed "affiliates" of the Company, will be
entitled to sell in any three-month period a number of shares that does not
exceed the greater of (i) 1% of the then outstanding shares of Common Stock or
(ii) the average weekly trading volume of the Common Stock during the four
calendar weeks immediately preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission. Sales pursuant to Rule 144
are also subject to certain other requirements relating to manner of sale,
notice and availability of current public information about the Company. A
person (or persons whose shares are aggregated) who is not deemed to have been
an affiliate of the Company at any time during the three months immediately
preceding the sale is entitled to sell restricted shares pursuant to Rule 144(k)
without regard to the limitations described above, provided that three years
have expired since the later of the date on which such restricted shares were
first acquired from the Company or from an affiliate of the Company. Certain of
the Company's current stockholders have demand and incidential registration
rights. See "Security Ownership of Certain Beneficial Owners."
The Company has granted options to purchase 1,333,199 shares of Common Stock
to certain officers and key employees of the Company pursuant to the Stock Plans
and an additional 190,860 shares are available for the grant of future options
under the New Stock Plan. Of the shares underlying these outstanding options,
671,213 are subject to the agreements described above restricting the sale of
such shares for a period of 180 days after the date of this Prospectus.
Following this Offering, the Company intends to file a registration statement
under the Securities Act to register shares of Common Stock issuable upon the
exercise of stock options granted under the Company's Stock Option Plans. Except
as limited by the agreements described above and by Rule 144 volume limitations
applicable to affiliates, shares issued upon the exercise of stock options after
the effective date of such registration statement generally will be available
for sale in the open market. In addition, 469,237 shares of Class B Common Stock
that were convertible into Common Stock prior to this Offering may be converted
into shares of Common Stock beginning 180 days after the closing date of this
Offering and such shares of Common Stock may be freely sold by such holders who
are not deemed affiliates of the Company.
Because there has been no public market for shares of Common Stock of the
Company, the Company is unable to predict the effect that sales made under Rule
144, pursuant to future registration statements, or otherwise, may have on any
then prevailing market price for shares of the Common Stock. Nevertheless, sales
of a substantial amount of Common Stock in the public market, or the perception
that such sales could occur, could adversely affect market prices.
56
<PAGE>
UNDERWRITING
The Underwriters named below, represented by Montgomery Securities, Salomon
Brothers Inc and Robertson, Stephens & Company LLC (the "Representatives"), have
severally agreed, subject to the terms and conditions set forth in the
Underwriting Agreement, to purchase from the Company the number of shares of
Common Stock indicated below opposite their respective names at the initial
public offering price less the underwriting discount set forth on the cover page
of this Prospectus. The Underwriting Agreement provides that the obligations of
the Underwriters are subject to certain conditions precedent and that the
Underwriters are committed to purchase all of the shares if they purchase any.
<TABLE>
<CAPTION>
NUMBER
NAME OF UNDERWRITER OF SHARES
------------------- ---------
<S> <C>
Montgomery Securities........................................... 890,668
Salomon Brothers Inc ........................................... 890,666
Robertson, Stephens & Company LLC............................... 890,666
William Blair & Company......................................... 90,000
Alex. Brown & Sons Incorporated................................. 90,000
CS First Boston Corporation..................................... 90,000
Lazard Freres & Co. LLC......................................... 90,000
Adams, Harkness & Hill, Inc. ................................... 60,000
Janney Montgomery Scott Inc. ................................... 60,000
Legg Mason Wood Walker, Incorporated............................ 60,000
McDonald & Company Securities, Inc. ............................ 60,000
Ragen MacKenzie Incorporated.................................... 60,000
Raymond James & Associates, Inc. ............................... 60,000
Rodman & Renshaw, Inc........................................... 60,000
Brean Murray, Foster Securities, Inc. .......................... 30,000
Doft & Co., Inc. ............................................... 30,000
Buckingham Research............................................. 30,000
Sands Brothers & Co., Ltd. ..................................... 30,000
---------
Total....................................................... 3,572,000
</TABLE>
The Representatives have advised the Company that the Underwriters propose
initially to offer the Common Stock to the public on the terms set forth on the
cover page of this Prospectus. The Underwriters may allow to selected dealers a
concession of not more than $0.66 per share; and the Underwriters may allow, and
such dealers may reallow, a concession of not more than $0.10 per share to
certain other dealers. After the initial public offering, the offering price and
other selling terms may be changed by the Representatives. The Common Stock is
offered subject to receipt and acceptance by the Underwriters, and to certain
other conditions, including the right to reject orders in whole or in part. The
Representatives have advised the Company that they intend to make a market in
the Common Stock after the effective date of this offering.
Certain of the Company's stockholders have granted an option to the
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to a maximum of an aggregate of 535,800 additional
shares of Common Stock to cover over-allotments, if any, at the same price per
share as the shares initially to be purchased by the Underwriters. See "Security
Ownership of Certain Beneficial Owners." To the extent that the Underwriters
exercise this option, the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the above table. The Underwriters may purchase such
shares only to cover over-allotments made in connection with this Offering.
57
<PAGE>
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the Underwriters may be required to make in respect thereof.
The Company's officers, directors and certain other existing stockholders,
and the Selling Stockholders have agreed that, subject to certain limited
exceptions, for a period of 180 days after the date of this Prospectus, they
will not offer, sell or dispose of any shares of their Common Stock without the
prior written consent of Montgomery Securities.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority in excess of 5% of the number of shares of Common Stock offered
hereby.
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price of the Common Stock was
determined by negotiations among the Company, the Representatives and the
Selling Stockholders. Among the factors considered in such negotiations were the
history of, and the prospects for, the Company and the industry in which it
competes, an assessment of the Company's management, the Company's past and
present operations, its past and present earnings and the trend of such
earnings, the general conditions of the securities markets at the time of the
offering and the market prices of publicly traded common stocks of comparable
companies in recent periods.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock offered hereby
will be passed upon for the Company by Paul, Weiss, Rifkind, Wharton & Garrison,
New York, New York and for the Underwriters by Fried, Frank, Harris, Shriver &
Jacobson (a partnership including professional corporations), Los Angeles,
California.
EXPERTS
The consolidated financial statements of Loehmann's, Inc. at February 3,
1996 and January 28, 1995, and for the fiscal years ended February 3, 1996,
January 28, 1995 and January 29, 1994 appearing in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such report given upon
the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
Holdings is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy statements and other information
filed by the Company with the Commission can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Avenue, N.W., Washington, D.C. 20549 or at its Regional Offices located at Room
1400, 500 West Madison Street, Chicago, Illinois 60661 and 7 World Trade Center,
13th Floor, New York, New York 10048, and copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates.
The Company has filed with the Securities and Exchange Commission a
Registration Statement on Form S-1 under the Securities Act with respect to the
Common Stock offered hereby. This Prospectus
58
<PAGE>
does not contain all of the information set forth in the Registration Statement
and the exhibits and schedules filed therewith. For further information with
respect to the Company and the Common Stock offered hereby, reference is hereby
made to such Registration Statement and to the financial statements, and
exhibits filed therewith. Except as provided below, statements contained in this
Prospectus regarding the contents of any contract or other documents referred to
are not necessarily complete and, in each instance, reference is made to the
copy of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. This Prospectus contains a description of all provisions of the
documents filed as exhibits to the Registration Statement that are material to
investors.
The Company intends to furnish its shareholders with annual reports
containing audited financial statements.
59
<PAGE>
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
LOEHMANN'S, INC.
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................ F-2
Consolidated Balance Sheets at January 28, 1995, February 3, 1996 and Pro Forma
February 3, 1996...................................................................... F-3
Consolidated Statements of Operations for the fiscal years ended
January 29, 1994, January 28, 1995 and February 3, 1996............................. F-4
Consolidated Statements of Changes in Common Stockholders' Equity
(Deficit) for the fiscal years ended January 29, 1994, January 28, 1995
and February 3, 1996................................................................ F-5
Consolidated Statements of Cash Flows for the fiscal years ended
January 29, 1994, January 28, 1995 and February 3, 1996............................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Loehmann's, Inc.
We have audited the accompanying consolidated balance sheets of Loehmann's,
Inc. as of February 3, 1996 and January 28, 1995, and the related consolidated
statements of operations, changes in common stockholders' equity (deficit) and
cash flows for the fiscal years ended February 3, 1996, January 28, 1995 and
January 29, 1994. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Loehmann's, Inc. at February 3, 1996 and January 28, 1995, and the consolidated
results of its operations and cash flows for the fiscal years ended February 3,
1996, January 28, 1995 and January 29, 1994 in conformity with generally
accepted accounting principles.
As discussed in Note 5 to the consolidated financial statements, in fiscal
1995 Loehmann's, Inc. adopted FASB Statement No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
/s/ ERNST & YOUNG LLP
New York, New York
April 8, 1996
F-2
<PAGE>
LOEHMANN'S, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
JANUARY 28, FEBRUARY 3, FEBRUARY 3,
1995 1996 1996
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 12,822 $ 12,512 $ 12,512
Accounts receivable...................................... 1,477 804 804
Merchandise inventory.................................... 44,138 43,721 43,721
Prepaid expenses......................................... 923 918 918
----------- ----------- -----------
Total current assets....................................... 59,360 57,955 57,955
Property, equipment and leaseholds, net.................... 71,909 60,245 60,245
Deferred debt issuance costs and other assets, net......... 3,908 3,296 3,296
Purchase price in excess of net assets acquired, net....... 43,435 42,115 42,115
----------- ----------- -----------
Total assets............................................... $ 178,612 $ 163,611 $ 163,611
----------- ----------- -----------
----------- ----------- -----------
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................................... $ 21,750 $ 21,474 $ 21,474
Accrued expenses......................................... 16,712 16,709 16,709
Accrued interest......................................... 6,787 7,037 7,037
Current portion of long-term debt........................ 62 66 66
----------- ----------- -----------
Total current liabilities.................................. 45,311 45,286 45,286
Long-term debt:
13 3/4% senior subordinated notes........................ 77,550 77,550 77,550
10 1/2% senior secured notes............................. 51,639 51,471 51,471
Revenue bonds and notes.................................. 2,778 2,712 2,712
----------- ----------- -----------
Total long-term debt....................................... 131,967 131,733 131,733
Other noncurrent liabilities............................... 393 393 393
Series A preferred stock, subject to mandatory redemption,
0 shares authorized (41,500,000 shares pro forma), 0
shares issued and outstanding (37,405,739 shares pro
forma)..................................................... -- -- 15,279
Common stockholders' deficit:
Common stock, 1,000 shares authorized (25,000,000 shares
pro forma) 1,000 shares issued and outstanding
(4,725,420 shares pro forma)........................... -- -- 47
Class B convertible common stock, 0 shares authorized,
issued and outstanding (469,237 shares pro forma).......... -- -- 2,352
Additional paid-in capital............................... 39,258 41,535 23,857
Accumulated deficit...................................... (38,317) (55,336) (55,336)
----------- ----------- -----------
Total common stockholders' equity (deficit)................ 941 (13,801) (29,080)
----------- ----------- -----------
Total liabilities and common stockholders' equity
(deficit).................................................. $ 178,612 $ 163,611 $ 163,611
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
LOEHMANN'S, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------
JANUARY 29, JANUARY 28, FEBRUARY 3,
1994 1995 1996
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PRO FORMA PER SHARE
DATA)
<S> <C> <C> <C>
Net sales......................................... $ 373,443 $ 392,606 $ 386,090
Cost of sales..................................... 274,991 278,398 265,889
----------- ----------- -----------
Gross profit...................................... 98,452 114,208 120,201
Store operating expenses.......................... 59,059 64,869 68,042
Pre-opening costs................................. 213 147 --
General and administrative expenses............... 16,192 20,624 21,443
Depreciation and amortization..................... 14,334 11,955 12,120
Charge for store closings and impairment of
assets............................................ -- -- 15,300
----------- ----------- -----------
Operating income.................................. 8,654 16,613 3,296
Interest expense, net............................. 17,299 18,085 18,153
----------- ----------- -----------
Loss before income taxes.......................... (8,645) (1,472) (14,857)
Provision for income taxes........................ 79 34 106
----------- ----------- -----------
Loss before extraordinary item.................... (8,724) (1,506) (14,963)
Extraordinary loss on early extinguishment of
debt.............................................. 3,507 -- --
----------- ----------- -----------
Net loss.......................................... (12,231) (1,506) (14,963)
Stock dividends on and accretion of preferred
stock of Holdings............................... 1,496 1,802 2,056
----------- ----------- -----------
Pro forma net loss applicable to common stock..... $ (13,727) $ (3,308) $ (17,019)
----------- ----------- -----------
----------- ----------- -----------
Pro forma net loss per share applicable to common
stock before extraordinary item................... $ (2.18) $ (0.63) $ (3.12)
----------- ----------- -----------
----------- ----------- -----------
Pro forma net loss per share applicable to common
stock after extraordinary item.................... $ (2.93) $ (0.63) $ (3.12)
----------- ----------- -----------
----------- ----------- -----------
Pro forma weighted average number of common shares
outstanding....................................... 4,680 5,228 5,463
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
LOEHMANN'S, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON
STOCK
---------- ADDITIONAL
NUMBER PAID-IN ACCUMULATED
OF SHARES CAPITAL DEFICIT TOTAL
---------- ---------- ----------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balances as of January 30, 1993........................ 1,000 $ 32,814 $ (21,282) $ 11,532
Stock options earned of Holdings...................... -- 728 -- 728
Exercise of stock options of Holdings................. -- 117 -- 117
Sale of common stock of Holdings...................... -- 1,800 -- 1,800
Net loss for the fiscal year ended January 29, 1994... -- -- (12,231) (12,231)
Dividend on and accretion of preferred stock of
Holdings............................................... -- 1,496 (1,496) --
---------- ---------- ----------- --------
Balances as of January 29, 1994........................ 1,000 36,955 (35,009) 1,946
Stock options earned of Holdings...................... -- 195 -- 195
Exercise of stock options of Holdings................. -- 306 -- 306
Net loss for the fiscal year ended January 28, 1995... -- -- (1,506) (1,506)
Dividend on and accretion of preferred stock of
Holdings............................................... -- 1,802 (1,802) --
---------- ---------- ----------- --------
Balances as of January 28, 1995........................ 1,000 39,258 (38,317) 941
Stock options earned of Holdings...................... 199 199
Exercise of stock options of Holdings................. -- 22 22
Net loss for the fiscal year ended February 3, 1996... (14,963) (14,963)
Dividend on and accretion of preferred stock of
Holdings............................................... 2,056 (2,056) --
---------- ---------- ----------- --------
Balances as of February 3, 1996........................ 1,000 $ 41,535 $ (55,336) $(13,801)
---------- ---------- ----------- --------
---------- ---------- ----------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
LOEHMANN'S, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 29, JANUARY 28, FEBRUARY 3,
1994 1995 1996
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................. $ (12,231) $ (1,506) $ (14,963)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization........................... 14,334 11,955 12,120
Accretion of 10 1/2% senior secured notes............... 349 1,202 1,328
Charges for store closings, impairment of assets and
other..................................................... 1,474 -- 10,538
Changes in assets and liabilities:
Accounts receivable................................... (579) 1,279 673
Merchandise inventory................................. (700) 2,623 417
Prepaid expenses...................................... (1,602) 915 5
Accounts payable...................................... (5,637) 5,836 (276)
Accrued expenses...................................... 1,064 (207) (3)
Accrued interest...................................... (389) 170 250
Net change in other noncurrent assets and liabilities..... (2,714) (193) (627)
----------- ----------- -----------
Total adjustments......................................... 5,600 23,580 24,425
----------- ----------- -----------
Net cash (used in) provided by operations................. (6,631) 22,074 9,462
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures...................................... (5,882) (5,853) (8,130)
----------- ----------- -----------
Net cash used in investing activities..................... (5,882) (5,853) (8,130)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on revolving credit facility..................... (213,032) (55,870) --
Borrowings on revolving credit facility................... 218,055 50,847 --
Payments on term loan..................................... (17,500) -- --
Sale of 10 1/2% senior secured notes...................... 50,087 -- --
Purchase of 10 1/2% senior secured notes.................. -- -- (1,584)
Purchase of 13 3/4% senior subordinated notes............. (29,950) -- --
Sale of common stock...................................... 1,800 -- --
Other financing activities, net........................... 85 159 (58)
----------- ----------- -----------
Net cash provided by (used in) financing activities....... 9,545 (4,864) (1,642)
----------- ----------- -----------
Net (decrease) increase in cash and cash equivalents...... (2,968) 11,357 (310)
Cash and cash equivalents at beginning of period.......... 4,433 1,465 12,822
----------- ----------- -----------
Cash and cash equivalents at end of period................ $ 1,465 $ 12,822 $ 12,512
----------- ----------- -----------
----------- ----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the fiscal year for interest............. $ 17,409 $ 16,738 $ 16,845
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
LOEHMANN'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND ORGANIZATION
The Company has announced its intention to sell 3,572,000 shares of Common
Stock and $100 million principal amount of Senior Notes, due 2003 (the
"Offerings"). Prior to consummation of the Company's sale of Common Stock, the
Company's parent, Loehmann's Holdings, Inc. ("Holdings"), whose only material
assets consist of all of the outstanding stock of and an intercompany note with
the Company, will merge with and into a new wholly-owned Delaware subsidiary
formed for the purpose of reincorporating Holdings from Maryland to Delaware.
Subsequently, but prior to consummation of the Company's sale of Common Stock,
the surviving corporation of such merger will merge with and into the Company,
with the Company being the ultimate surviving corporation (together with the
reincorporation from Maryland to Delaware, the "Holdings Merger"). Each share of
Holdings' Common Stock, par value $0.008403361 per share, and Class B Common
Stock, par value $0.008403361 per share, will be converted into approximately
0.22 shares of Loehmann's, Inc. Common Stock, par value $0.01 per share and
Class B Common Stock, par value $0.01 per share, respectively (the
"Conversion"). Additionally, the number of common shares authorized will be
increased to 25,000,000. Accordingly, the financial information appearing herein
reflects the retroactive application of the Holdings Merger and all share and
per share data (including footnote information) has been restated to reflect the
Conversion on a pro forma basis. Additionally, all issued and outstanding shares
of the Series A Preferred Stock of Holdings will be redeemed at its liquidation
price of $0.56 per share. Also, the sale of additional shares of Common Stock by
Loehmann's, Inc., as contemplated in the Offerings, will result in a more than
50% ownership change of the merged corporation within the meaning of Section 382
of the Internal Revenue Code. Accordingly, Loehmann's, Inc., as the surviving
corporation, may be limited on an annual basis in using net operating loss
carryforwards to offset taxes payable on future taxable income.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany items have been
eliminated. Certain amounts in the consolidated financial statements have been
reclassified to conform to the fiscal 1995 presentation.
Loehmann's, Inc. and its wholly-owned subsidiaries (the "Company"), is a
national specialty retailer of women's fashion apparel, accessories and shoes.
Effective August 28, 1988 (the "Purchase Date") for accounting purposes but
occurring on September 19, 1988, the Company's stock was acquired for a purchase
price of $170.3 million in a leveraged buyout transaction. The acquisition was
accounted for using the purchase method of accounting. At the date of
acquisition, the excess of the purchase price over the appraised fair market
value of the identifiable net assets acquired was reflected as goodwill.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
FISCAL YEAR
The Company follows the standard fiscal year of the retail industry which is
a 52 or 53 week period ending on Saturday closest to January 31. Fiscal years
ended February 3, 1996, January 28, 1995 and January 29, 1994 had 53 weeks, 52
weeks and 52 weeks, respectively.
F-7
<PAGE>
LOEHMANN'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid marketable securities purchased with
an original maturity of three months or less to be cash and cash equivalents.
The carrying amount reported in the consolidated balance sheets for cash and
cash equivalents approximates fair value.
MERCHANDISE INVENTORY
Merchandise inventory is valued at the lower of cost or market as determined
by the retail inventory method. However, certain warehoused inventory that is
not available for sale is valued on a specific cost basis. The merchandise
inventory valued on a specific cost basis at February 3, 1996 and January 28,
1995 included $10.5 million and $9.7 million, respectively.
ADVERTISING EXPENSE
The cost of advertising is expensed as incurred. The Company incurred $13.0
million, $10.2 million, and $7.7 million in advertising costs during fiscal
1995, fiscal 1994, and fiscal 1993, respectively.
DEPRECIATION AND AMORTIZATION
Building and furniture, fixtures and equipment are depreciated on a
straight-line basis over their estimated useful lives of 20 years and a range
from three years to eight years, respectively. Leasehold interests represent the
beneficial value of operating leases as determined by an independent appraisal
of the individual leases at the Purchase Date. Such amounts are amortized on a
straight-line basis over the related lease term. The Company evaluates the
ongoing value of the leasehold interests based upon each store's operating
results. Leasehold improvements are amortized on a straight-line basis over the
shorter of the related lease terms or their useful life. Amortization expense
for fiscal 1995, fiscal 1994 and fiscal 1993 includes stock option compensation
expense of $199,000, $195,000 and $728,000, respectively.
PRE-OPENING COSTS
Expenses incurred in connection with the opening of new stores are expensed
in the fiscal quarter in which the stores open. There were no expenses incurred
in connection with the opening of new stores in fiscal 1995. In fiscal 1994 and
fiscal 1993, the Company expensed $147,000 and $213,000 of pre-opening costs,
respectively.
F-8
<PAGE>
LOEHMANN'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
PURCHASE PRICE IN EXCESS OF NET ASSETS ACQUIRED, NET
The purchase price in excess of identifiable net assets acquired is being
amortized on a straight-line basis over 40 years. Amortization expense for
fiscal 1995, fiscal 1994 and fiscal 1993 amounted to $1.3 million annually.
Accumulated amortization at February 3, 1996 and January 28, 1995 was $9.6
million and $8.3 million, respectively.
On an on going basis, the Company evaluates the carrying value of its
goodwill relying on a number of factors, including operating results, business
plans and certain economic projections. In addition, the Company's evaluation
considers nonfinancial data such as changes in the operating environment,
competitive information, market trends and business relationships. Finally, the
evaluation also considers changes in the Company's strategic direction or market
emphasis. The Company believes the carrying value of goodwill at February 3,
1996 to be economically recoverable.
DEFERRED DEBT ISSUANCE COSTS
Deferred debt issuance costs are amortized over the terms of the related
debt agreements. Deferred debt issuance costs were $6.9 million at February 3,
1996 and January 28, 1995. Amortization expense for fiscal 1995, fiscal 1994 and
fiscal 1993 amounted to $1.2 million, $1.2 million, and $2.7 million,
respectively. Total accumulated amortization at February 3, 1996 and January 28,
1995 amounted to $4.5 million and $3.3 million, respectively.
INCOME TAXES
Income taxes are provided using the liability method. Under the liability
method, deferred income taxes reflect tax carryforwards and the net tax effects
of temporary differences between the carrying amount of assets and liabilities
for financial statement and income tax purposes, as determined under enacted tax
laws and rates. The financial effect of changes in tax laws or rates is
accounted for in the period of enactment.
PRO FORMA NET LOSS PER SHARE OF COMMON STOCK
Net loss per share is determined by dividing net loss (after deducting
dividends on and accretion of preferred stock) by the weighted average number of
Common and Class B Common shares outstanding on a pro forma basis. In
contemplation of the Company's offering to sell 3,572,000 shares of Common Stock
(see Note 1), the impact of options granted in the twelve month period preceding
the offering are reflected in all years' computations of net loss applicable to
Common Stock. Outstanding options to purchase Common Stock that were granted
prior to fiscal 1995 were not considered in the calculation of pro forma net
loss per share applicable to Common Stock for fiscal 1995, fiscal 1994 and
fiscal 1993, as their effects were antidilutive.
3. INCOME TAXES
The Company's provision for income taxes primarily represents state and
local minimum and alternative minimum taxes. Tax expense for fiscal 1995, fiscal
1994 and fiscal 1993 was $106,000, $34,000 and $79,000, respectively.
F-9
<PAGE>
LOEHMANN'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. INCOME TAXES--(CONTINUED)
Significant components of deferred tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
JANUARY 28, FEBRUARY 3,
1995 1996
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
<CAPTION>
<S> <C> <C>
Deferred tax liabilities............................. $ (104) $ (130)
Deferred tax assets:
Excess book over tax depreciation.................. 2,506 3,097
Capitalization of inventory expenses............... 381 469
Book rent in excess of tax......................... 272 323
Compensation....................................... 2,093 1,851
State income taxes................................. 66 28
Asset impairment reserve........................... -- 2,349
Net operating loss carryforwards................... 7,980 10,550
----------- -----------
Total deferred tax assets............................ 13,298 18,667
----------- -----------
Net deferred tax assets.............................. 13,194 18,537
Less valuation allowance............................. (13,194) (18,537)
----------- -----------
$ -- $ --
----------- -----------
----------- -----------
</TABLE>
At February 3, 1996, the Company had net operating loss carryforwards of
approximately $27.0 million and $18.0 million for regular and alternative
minimum tax purposes, respectively.
The Company believes it has not had a more than 50% change in its ownership
within the meaning of Section 382 of the Internal Revenue Code such that there
would be a limitation on its ability to use loss carryforwards to offset taxes
payable on future income. If such a change had occurred, the Company's use of
its loss carryforwards could be limited on an annual basis under Section 382
(see Note 1).
4. CHARGE FOR STORE CLOSINGS
During the second quarter of fiscal 1995, the Company implemented a plan to
close 11 underperforming stores and, as a result, recorded a $10.35 million
charge to continuing operations. These closures are intended to improve overall
chain profitability and achieve a more competitive cost structure.
The store closures were completed by the end of August 1995. Reserved
amounts remaining at February 3, 1996 relating to long-term lease commitments
are not material. Net sales and operating income (loss), including certain
specifically allocated charges, for these stores were $8.2 million and $117,000,
respectively, in fiscal 1995 and $18.6 million and $(265,000), respectively, in
fiscal 1994.
F-10
<PAGE>
LOEHMANN'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. CHARGE FOR STORE CLOSINGS--(CONTINUED)
The charge for store closings consisted of the following components:
<TABLE>
<CAPTION>
FISCAL
YEAR ENDED
FEBRUARY 3, 1996
----------------
(IN THOUSANDS)
<S> <C>
Write-off of leasehold interest, leasehold improvements and
furniture, fixtures and equipment........................... $ 5,500
Estimated costs associated with obligations for leased
properties after closing dates, net of settlement
income...................................................... 950
Additional expenses and markdowns associated with store
closings.................................................... 3,600
Costs of severance arrangements and related expenses........ 300
--------
Total charge for store closings............................. $ 10,350
--------
--------
</TABLE>
5. CHARGE FOR IMPAIRMENT OF ASSETS
During the second quarter of fiscal 1995, the Company completed certain
market analyses as part of an overall strategic plan. As an outcome of those
analyses, the Company shortened the period of time in which it intended to
occupy certain stores and as a consequence, the undiscounted cash flows
estimated to be generated from the revised intended use was not sufficient to
recover the assets' carrying amount. Based on these indicators, the primary
intangible assets associated with these locations were determined to be impaired
as defined by Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," ("FAS No. 121").
Accordingly, the Company recorded a $4.95 million impairment loss to
continuing operations, representing the excess net book value of these assets
over their fair value. Fair value was based on appraisal value.
The impairment charge consisted of the following components:
<TABLE>
<CAPTION>
FISCAL
YEAR ENDED
FEBRUARY 3, 1996
----------------
(IN THOUSANDS)
<S> <C>
Furniture, fixtures and equipment........................... $ 250
Leasehold interests......................................... 4,450
Leasehold improvements...................................... 250
-------
Total charge for impairment of assets....................... $4,950
-------
-------
</TABLE>
F-11
<PAGE>
LOEHMANN'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. PROPERTY, EQUIPMENT AND LEASEHOLDS, NET
Property, equipment and leaseholds are recorded at cost less accumulated
depreciation and amortization. The components of property, equipment and
leaseholds are as follows:
<TABLE>
<CAPTION>
JANUARY 28, FEBRUARY 3,
1995 1996
----------- -----------
<S> <C> <C>
(IN THOUSANDS)
Building............................................. $ 7,879 $ 7,879
Furniture, fixtures and equipment.................... 30,461 27,610
Leasehold interests.................................. 65,695 51,781
Leasehold improvements............................... 18,213 20,881
----------- -----------
Total property, equipment and leaseholds............. 122,248 108,151
Accumulated depreciation and amortization............ (50,339) (47,906)
----------- -----------
Property, equipment and leaseholds, net.............. $71,909 $60,245
----------- -----------
----------- -----------
</TABLE>
7. PROFIT-SHARING PLAN
The Company maintains a defined contribution profit-sharing plan. Employees
become eligible for participation in the plan after completing one year of
service, as defined by the plan provisions. Contributions are made out of the
adjusted net profits of the Company, as defined, as determined by the Board of
Directors. The Company recorded a contribution of $500,000 to the profit-sharing
plan during fiscal 1995 and fiscal 1994. No contribution was made in fiscal
1993.
8. LONG-TERM DEBT
Long-term debt principally consists of $77.55 million face amount of 13 3/4%
Senior Subordinated Notes due 1999 and $54.1 million face amount of 10 1/2%
Senior Secured Notes due 1997. Such debt is held by Holdings and pushed down to
the Company.
The 10 1/2% Senior Secured Notes were sold at a discount from par of 10.08%
along with approximately 419,000 shares of common stock in October 1993. The net
proceeds were used to repay the remaining balance on an existing term loan of
$12.0 million and to repurchase $30.0 million of the 13 3/4% Senior Subordinated
Notes at 106.789% plus accrued interest. The 10 1/2% Senior Secured Notes are
carried at the discounted value and accreted to face value over their term using
the effective interest method.
In connection with the above transactions, the Company wrote off in fiscal
1993, as an extraordinary item, approximately $1.5 million representing
previously deferred financing costs attributed to the existing term loan and a
pro rata portion of the deferred financing costs related to the repurchased 13
3/4% Senior Subordinated Notes. In addition, the Company incurred an
extraordinary loss of approximately $2.0 million on the early extinguishment of
the 13 3/4% Senior Subordinated Notes.
Based upon a quoted market price of 91, the fair value of the 13 3/4% Senior
Subordinated Notes outstanding at February 3, 1996 approximated $70.6 million.
Using available market information and appropriate valuation methodologies, the
fair value of the 10 1/2% Senior Secured Notes outstanding at February 3, 1996
approximated $54.9 million.
F-12
<PAGE>
LOEHMANN'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. LONG-TERM DEBT--(CONTINUED)
In addition the Company has outstanding $2.8 million New York City Revenue
Bonds and Notes, principally due 2004, with interest rates ranging from 5 1/2%
to 9 1/2%.
The Company also has a Revolving Credit Agreement, as amended, which
provides for a credit facility totaling $20.0 million. The facility bears
interest at a base rate (equivalent to the bank's reference rate) plus 1.5% and
is secured by substantially all of the Company's assets, including accounts
receivable, inventory and fixtures and equipment. At February 3, 1996 and
January 28, 1995, no borrowings were outstanding under the facility. Pursuant to
the Revolving Credit Agreement, as amended, all cash receipts from the normal
course of business are required to be deposited into a depository account (as
defined) which is used to repay borrowings, if any, under the facility. The
revolving credit facility commitment termination date is October 14, 1997. There
is a 0.5% annual commitment fee associated with the unused portion of the
facility.
The principal financial covenants, which are applicable under the Revolving
Credit Agreement, as amended, and the Indenture pursuant to which the 10 1/2%
Senior Secured Notes were issued are as follows: the Company is required to
maintain, for the twelve-month period ending on the last day of each fiscal
quarter, a "Fixed Charge Coverage Ratio" of 1.2 to 1 through February 3, 1996
and thereafter and an "Interest Coverage Ratio" of not less than 1.2 to 1
through February 3, 1996 and thereafter. At February 3, 1996, the Company
maintained a Fixed Charge Coverage Ratio of 1.37 and an Interest Coverage Ratio
of 1.86 for the preceding twelve-month period. In addition, there are
limitations on the Company's ability to incur additional borrowings. The Company
is also required to repay the facility in full once each year and maintain a
zero principal balance for at least 30 days during such period.
9. COMMITMENTS AND CONTINGENCIES
The Company is the lessee under various long-term operating leases for store
locations and equipment rentals for up to 29 years, including renewal options.
The leases typically provide for three five-year renewals that are automatic
unless the Company elects to terminate the lease. Rent expense related to these
leases amounted to $8.1 million, $7.4 million and $7.5 million for the fiscal
years ended February 3, 1996, January 28, 1995 and January 29, 1994,
respectively. Future minimum payments under noncancelable operating leases
consisted of the following at February 3, 1996:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1996.......................................................... $ 10,066
1997.......................................................... 11,639
1998.......................................................... 11,337
1999.......................................................... 10,605
2000.......................................................... 9,733
Thereafter.................................................... 110,946
--------------
Total......................................................... $164,326
--------------
--------------
</TABLE>
F-13
<PAGE>
LOEHMANN'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. STOCK OPTION PLAN
On September 30, 1988, the Company adopted the Loehmann's Holdings, Inc.
1988 Stock Option Plan, as amended on April 2, 1992, pursuant to which a
committee appointed by the Board of Directors is authorized to grant options to
purchase up to 1,077,000 shares of Common Stock to key employees and directors.
The following information pertains to the Company's stock option plan:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 29, JANUARY 28, FEBRUARY 3,
1994 1995 1996
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Outstanding options, beginning of year..................... 895,000 857,000 604,000
Granted.................................................... 77,000 45,000 264,000
Canceled................................................... (5,000) (18,000) (120,000)
Exercised.................................................. (110,000) (280,000) (19,000)
----------- ----------- -----------
Outstanding options, end of year........................... 857,000 604,000 729,000
----------- ----------- -----------
----------- ----------- -----------
Options exercisable, end of year........................... 400,000 354,000 432,000
----------- ----------- -----------
----------- ----------- -----------
Options available for future grant......................... 77,000 50,000 42,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
Stock options are granted to officers and key employees based upon a price
determined by the Board of Directors of the Company. Compensation expense is
recorded in the period that options are earned.
The 729,000 options outstanding at February 3, 1996, vest equally over a
range of two to five years from the date of grant provided the individuals
remain in the employ of the Company. Options are exercisable at a price ranging
from $1.07 to $8.95. Options must be exercised within five years from the date
they are earned.
In addition to the aforementioned plan, 134,000 options were granted to a
key executive in fiscal 1995 pursuant to an individual plan. Such options have
an exercise price of $5.01 and vest equally over a three year period.
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based Compensation, which provides an alternative
to APB Opinion No. 25, Accounting for Stock Issued to Employees, in accounting
for stock-based compensation issued to employees. The Statement allows for a
fair value based method of accounting for employee stock options and similar
equity instruments. The Company has determined it will continue to report stock-
based compensation for all options that are earned under APB Opinion No. 25. The
Company expects that the adoption of FAS No. 123 would result in increased
compensation expense in future periods.
11. SERIES A PREFERRED STOCK AND CLASS B COMMON STOCK
The Series A Preferred Stock of Holdings is redeemable by Holdings at any
time at $.56 per share plus accrued and unpaid dividends. Holdings is required
to redeem 50% of the outstanding shares of Series A Preferred Stock on August 1,
1999 and the remainder of the outstanding shares of Series A Preferred Stock on
August 1, 2000, at a mandatory redemption price equal to the liquidation
preference per share of $.56 plus all accrued and unpaid cash dividends thereon.
Holders of the Series A Preferred Stock are entitled to receive a 5% semiannual
dividends payable in shares of preferred stock, through
F-14
<PAGE>
LOEHMANN'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. SERIES A PREFERRED STOCK AND CLASS B COMMON STOCK--(CONTINUED)
and including February 1, 1997, unless the Company's credit agreements permit
the payment of cash dividends, and payable in cash subsequent to the date,
subject to restrictions in the Company's credit agreements. The Company's credit
agreements prohibit and restrict the payment of cash dividends. Fifteen stock
dividends with respect to the Series A Preferred Stock were declared and
recorded during the period August 1, 1989 to February 3, 1996, aggregating
19,412,939 shares. The accretion on the Preferred Stock has been calculated
using the effective interest method.
Each share of Class B Common Stock will be convertible into one share of
Common Stock, subject to adjustment at any time. Subject to restrictions
contained in the Company's various credit agreements, the Company will be
required to offer to repurchase the Class B Common Stock at its independently
appraised value. The Company's various credit agreements prohibit or restricted
any such repurchase.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following summarizes the Company's results of operations for each
quarter of fiscal 1995 and 1994. The net income (loss) per share applicable to
Common Stock computation for each quarter is based on the weighted average
number of shares of Common and Class B Common shares outstanding on a pro forma
basis during the period. Accordingly, the sum of the quarterly pro forma per
share amounts may not equal the total pro forma per share amount for the
respective years. In contemplation of the Company's offering to sell 3,572,000
shares of Common Stock (See Note 1), the impact of options granted in the twelve
month period preceding the offering are reflected in all quarterly computations
of pro forma net income (loss) applicable to common stock presented. The
Company's outstanding stock options granted prior to fiscal 1995 were not
included in the quarterly computations of pro forma net income (loss) applicable
to Common Stock as the market value of its Common Stock was estimated to be less
than the exercise price of all options granted or their effects were
antidilutive.
F-15
<PAGE>
LOEHMANN'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. QUARTERLY FINANCIAL DATA (UNAUDITED)--(CONTINUED)
Results of operations during the second and fourth quarters are
traditionally impacted by end of season clearance events. In addition, fourth
quarter operations are impacted by employee performance bonuses which were
earned as of February 3, 1996.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
FISCAL YEAR ENDED FEBRUARY 3, 1996
Net sales........................................... $97,506 $ 89,426 $ 99,362 $99,796
------- -------- -------- -------
------- -------- -------- -------
Gross profit........................................ $30,823 $ 26,882 $ 32,694 $29,802
------- -------- -------- -------
------- -------- -------- -------
Store closings and impairment of assets............. -- 15,300 -- --
------- -------- -------- -------
------- -------- -------- -------
Operating income (loss)............................. $ 5,818 $(11,934) $ 7,364 $ 2,048
Interest expense, net............................... 4,422 4,533 4,460 4,738
------- -------- -------- -------
Income (loss) before income taxes................... 1,396 (16,467) 2,904 (2,690)
Provision (benefit) for income taxes................ 59 49 7 (9)
------- -------- -------- -------
Net income (loss)................................... 1,337 (16,516) 2,897 (2,681)
Stock dividends on and accretion of preferred stock
of Holdings....................................... 506 416 416 718
------- -------- -------- -------
Pro forma net income (loss) applicable to common
stock............................................... $ 831 $(16,932) $ 2,481 $(3,399)
------- -------- -------- -------
------- -------- -------- -------
Pro forma net income (loss) income per share
applicable to common stock.......................... $ 0.16 $ (3.23) $ 0.47 $ (0.65)
------- -------- -------- -------
------- -------- -------- -------
FISCAL YEAR ENDED JANUARY 28, 1995
Net sales........................................... $96,170 $ 90,798 $105,762 $99,876
------- -------- -------- -------
------- -------- -------- -------
Gross profit........................................ $28,248 $ 26,419 $ 32,322 $27,219
------- -------- -------- -------
------- -------- -------- -------
Operating income.................................... $ 5,448 $ 3,334 $ 6,776 $ 1,055
Interest expense, net............................... 4,612 4,454 4,528 4,491
------- -------- -------- -------
Income (loss) before income taxes................... 836 (1,120) 2,248 (3,436)
Provision (benefit) for income taxes................ 26 19 10 (21)
------- -------- -------- -------
Net income (loss)................................... 810 (1,139) 2,238 (3,415)
Stock dividends on and accretion of preferred stock
of Holdings....................................... 406 462 465 469
------- -------- -------- -------
Pro forma net income (loss) applicable to common
stock............................................... $ 404 $ (1,601) $ 1,773 $(3,884)
------- -------- -------- -------
------- -------- -------- -------
Pro forma net (loss) income per share applicable to
common stock........................................ $ 0.08 $ (0.32) $ 0.36 $ (0.74)
------- -------- -------- -------
------- -------- -------- -------
</TABLE>
F-16
<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
No dealer, representative or any other
person has been authorized to give any
information or to make any represen-
tations other than those contained in
this Prospectus, and, if given or made,
such information or representation must 3,572,000 SHARES
not be relied upon as having been
authorized by the Company, the Selling
Stockholders or by the Underwriters. LOEHMANN'S
Neither the delivery of this
Prospectus nor any sale made hereunder
shall under any circumstances create any COMMON STOCK
implication that there has been no
change in the affairs of the Company
since the date hereof. This Prospectus
does not constitute an offer to sell or
a solicitation of an offer to buy any
securities offered hereby by anyone in
any jurisdiction in which such offer
or solicitation is not authorized or in
which the person making such offer or
solicitation is not qualified to do so
or to anyone to whom it is unlawful to
make such offer or solicitation.
----------------------
TABLE OF CONTENTS
---------------------- -------------------
Page
---- PROSPECTUS
Prospectus Summary................ 3
The Company....................... 8 -------------------
Risk Factors...................... 9
Use of Proceeds................... 14
Dividend Policy................... 14
Dilution.......................... 15
Capitalization.................... 16
Selected Consolidated Financial
and Operating Data.............. 17
Management's Discussion and MONTGOMERY SECURITIES
Analysis of Financial Condition
and Results of Operations....... 20 SALOMON BROTHERS INC
Business.......................... 26
Management........................ 36 ROBERTSON, STEPHENS & COMPANY
Security Ownership of Certain
Beneficial Owners............... 47
Certain Relationships and Related
Transactions.................... 49
Description of Capital Stock...... 50
Description of Certain
Indebtedness...................... 54
Shares Eligible for Future Sale... 56
Underwriting...................... 57
Legal Matters..................... 58
Experts........................... 58
Additional Information............ 58
Index to Financial Statements..... F-1
Until June 1, 1996 (25 days after the
date of this Prospectus), all dealers May 7, 1996
effecting transactions in the registered
securities, whether or not participating
in this distribution, may be required to
deliver a Prospectus. This is in addition
to the obligation of dealers to deliver a
Prospectus when acting as underwriters and
with respect to their unsold allotments or
subscriptions.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
