Filed Pursuant to Rule 424(b)(1)
Registration No. 33-97100
PROSPECTUS
MAY 7, 1996
$100,000,000
% SENIOR NOTES DUE 2003
The 11 7/8% Senior Notes due 2003 being offered hereby will be issued by
Loehmann's, Inc. The Senior Notes bear interest at the rate of 11 7/8% per
annum, payable semiannually on May 15 and November 15, commencing November 15,
1996. The Senior Notes mature on May 15, 2003 and are subject to optional
redemption on and after May 15, 2000, in whole or in part, at the option of the
Company, at the redemption prices set forth herein, plus accrued and unpaid
interest to the date of redemption. Upon the occurrence of a Change of Control,
the Company will be obligated to make an offer to purchase all outstanding
Senior Notes at a price of 101% of the principal amount thereof, plus accrued
and unpaid interest to the date of repurchase. In addition, the Company is
obligated, subject to certain conditions, to make offers to purchase Senior
Notes at a price of 100% of the principal amount thereof, plus accrued and
unpaid interest to the date of repurchase, with the net cash proceeds of certain
sales or other dispositions of assets. See "Description of the Senior Notes."
The Senior Notes are unsecured general obligations of the Company and will
rank pari passu in right of payment with all senior indebtedness of the Company.
The Company will at the consummation of this Offering enter into a revolving
credit facility which will be secured by security interests in substantially all
of the Company's assets. In addition, the indenture in respect of the Senior
Notes permits the Company to issue additional indebtedness and grant additional
security interests in its assets securing such indebtedness in certain
circumstances. The Senior Notes will be effectively subordinated to all such
secured indebtedness to the extent of such security interests. See "Risk
Factors--Ranking and Security of Senior Notes" and "Description of the Senior
Notes."
The Senior Notes are non-investment grade debt securities and are not listed
on any national securities exchange or authorized for trading on NASDAQ. The
Company has been advised by Donaldson, Lufkin & Jenrette Securities Corporation
("DLJ") that it intends to make a market for the Senior Notes; however, DLJ is
not obligated to do so. Any market making may be discontinued at any time and
there is no assurance that an active public market for the Senior Notes will
develop or that if such a market develops, that it will continue. This
Prospectus, accompanied when appropriate by a prospectus supplement, has been
prepared for use by DLJ in connection with offers and sales of the Senior Notes
which may be made by it from time to time in market-making transactions at
negotiated prices relating to prevailing market prices at the time of sale. DLJ
may act as principal agent in such transactions. See "Risk Factors--Trading
Market for the Senior Notes."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SENIOR NOTES.
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.
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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 UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE SENIOR NOTES
AND OTHER SECURITIES OF THE COMPANY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED
AT ANY TIME.
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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 $0.01 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
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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.
For the fiscal year ended February 3, 1996, the Company's net sales and
EBITDA (excluding a charge for store closings and impairment of assets (see
notes 4 and 5 to the Company's Consolidated Financial Statements) were $386.1
million and $30.7 million, respectively.
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.
THE OFFERING
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Securities Offered............ $100.0 million aggregate principal amount of 11 7/8% Senior
Notes due May 15, 2003 (the "Senior Notes").
Maturity Date................. May 15, 2003.
Interest Payment Dates........ May 15 and November 15 of each year, commencing November 15,
1996.
Mandatory Redemption.......... Except as set forth below, the Company is not required to make
mandatory redemption or sinking fund payments with respect to
the Senior Notes prior to the Maturity Date.
Optional Redemption........... The Senior Notes are redeemable, at the option of the Company,
in whole or in part, at any time on or after May 15, 2000 at
the redemption prices set forth herein, plus accrued and
unpaid interest to the date of redemption.
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Change of Control............. In the event of a Change of Control (as defined herein), the
Company will be required 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. There can be no assurance that the
Company will have sufficient resources to make and consummate
such offer.
Ranking....................... The Senior Notes will be unsecured general obligations of the
Company and will rank pari passu in right of payment with all
senior indebtedness of the Company. The Company has entered
into a revolving credit facility which will be secured by
security interests in substantially all of the Company's
assets. The Senior Notes will be effectively subordinated to
all outstanding indebtedness under such revolving credit
facility (or successor facility) to the extent of such
security interests. In addition, the indenture in respect of
the Senior Notes (the "Indenture") permits the Company to
issue additional indebtedness and grant additional security
interests in its assets securing such indebtedness in certain
circumstances.
Certain Covenants............. The 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,
the Company is, subject to certain conditions, 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. See "Description of
the Senior Notes."
Common Stock Offering......... Concurrently, the Company conducted a public offering of
4,107,800 shares of its common stock (the "Stock Offering").
Consummation of this Offering was conditioned upon
consummation of the Stock Offering.
Use of Proceeds............... Repayment of debt and repurchase of outstanding redeemable
preferred stock. See "Use of Proceeds."
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RISK FACTORS
An investment in the Senior Notes involves a high degree of risk. See "Risk
Factors" for a discussion of certain factors that should be considered in
connection with an investment in the Senior Notes.
THE STOCK OFFERING
Simultaneously with the offering of Senior Notes hereby (the "Offering"),
the Company was offering to sell 3,572,000 shares of Common Stock, par value
$0.01 per share, of the Company. In addition, certain stockholders of the
Company had granted the Underwriters of the Stock Offering an option to purchase
up to an aggregate of 535,800 additional shares of Common Stock solely to cover
over-allotments which option the Underwriters exercised in full. In addition,
the Company also 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") that was entered into at the consummation of this
Offering. The consummation of the Offering and the Stock Offering were
conditioned upon the other.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy the Common Stock. The Common Stock are registered under the
Securities Act of 1933, as amended, and such securities will be offered only by
means of a related prospectus.
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SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA (1)
(IN THOUSANDS, EXCEPT OPERATING AND PRO FORMA PER SHARE DATA)
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FISCAL YEAR
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1991 1992 1993 1994 1995
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 -- --
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Net loss............................................ $ (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
AS ADJUSTED DATA (7):
Interest expense, net......................................................................... $ 12,181
Loss before extraordinary item (3)............................................................ (8,894)
Ratio of earnings to fixed charges (8)(9)..................................................... 0.45x
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AT FEBRUARY 3, 1996
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AS
PRO FORMA ADJUSTED(10)
BALANCE SHEET DATA:
Working capital......................................................... $ 12,669 $ 8,212
Total debt.............................................................. 131,799 102,778
Redeemable Series A preferred stock..................................... 15,279 --
Common stockholders' (deficit) equity................................... (29,080 ) 12,151
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FISCAL YEAR
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1991 1992 1993 1994 1995
SELECTED OPERATING DATA:
Number of stores open at end of period................ 81 85 81 80 69
Average net sales per gross square foot (11).......... $ 350 $ 333 $ 320 $ 337 $ 327
Inventory turnover (12)............................... 5.4x 5.4x 5.1x 5.7x 5.4x
EBITDA excluding charge for store closings and
impairment of assets (in thousands) (13)............. $ 23,608 $ 27,725 $ 22,988 $ 28,568 $ 30,716
Capital expenditures (in thousands)................... 5,851 4,603 5,882 5,853 8,130
Ratio of earnings to fixed charges (8)(9)............. 0.68x 0.97x 0.59x 0.93x 0.33x
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FISCAL YEAR
-------------------
1994 1995
(UNAUDITED)
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SUPPLEMENTAL DATA FOR 69 STORES OPEN AS OF FEBRUARY 3,
1996 (14):
Net sales................................................................... $373,996 $377,849
Gross profit................................................................ 109,831 117,798
Store contribution (2)...................................................... 49,380 51,853
EBITDA excluding charge for store closings and impairment of assets (13).... 28,756 30,410
Operating income............................................................ 16,801 2,990
Average net sales per gross square foot (11)................................ $ 356 $ 343
Gross square footage added to existing stores............................... 20,150 34,700
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(Footnotes continued on following page)
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(Footnotes continued from preceding page)
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(1) Loehmann's is the surviving corporation of the Holdings Merger and
each share of Holdings Common Stock and Holdings Class B Common Stock
has been 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 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 antidilutive. Includes 469,237 shares of
convertible Class B common stock, convertible into 469,237 shares of Common
Stock.
(7) For a discussion of the "as adjusted" adjustments, see footnote (6) to the
"Selected Consolidated Financial and Operating Data."
(8) For purposes of determining the ratio of earnings to fixed charges,
earnings consist of income before taxes plus fixed charges. Fixed charges
consist of interest expense on all indebtedness, including amortization of
deferred debt issuance costs, and that portion of operating lease expenses
that is deemed to be representative of the interest factor.
(9) Earnings were insufficient to cover fixed charges by approximately $6.5
million, $0.7 million, $8.6 million, $1.5 million and $14.9 million for the
fiscal years 1991, 1992, 1993, 1994 and 1995, respectively. On an "as
adjusted" basis, earnings exceeded (were insufficient to cover) fixed
charges by $4.5 million for fiscal 1994 and $(8.7) million for fiscal 1995.
However, if non-cash charges to income consisting of depreciation and
amortization were excluded, the Company's earnings would have exceeded
fixed charges by $5.9 million, $10.8 million, $5.7 million, $10.5 million,
$7.7 million, $15.7 million and $13.1 million, respectively, for such
periods and the Company's ratio of earnings to fixed charges would have
been 1.29x, 1.54x, 1.28x, 1.49x, 1.35x, 2.00x and 1.82x, respectively, for
such periods.
(10) As adjusted to reflect, among other things, the sale of Senior Notes in the
Offering, the sale of Common Stock in the Stock Offering, and the
application of the estimated net proceeds therefrom. See "Use of Proceeds."
(11) 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.
(12) Inventory turnover is determined by dividing cost of sales by the monthly
average inventory valued at cost.
(13) EBITDA is defined as earnings before interest expense, income tax expense
(benefit), depreciation and amortization. The charge for store closings and
impairment of assets for fiscal 1995 was $15.3 million. Certain covenants
in the Indenture are based on EBITDA as defined in the Indenture. EBITDA
should not be considered as an alternative to net income, an indicator of
the Company's operating performance, or an alternative to the Company's
cash flow from operating activities as a measure of liquidity.
(14) 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.
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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 the consummation of the Offering, Holdings, a holding company whose
only material assets consisted of all of the outstanding stock of the Company
and an intercompany note with the Company, merged with and into a new
wholly-owned Delaware subsidiary formed for the purpose of reincorporating
Holdings from Maryland to Delaware. Subsequently, but prior to the consummation
of the Offering, the surviving corporation of such merger was merged 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
$0.0084033610 per share ("Holdings Common Stock") and Holdings Class B Common
Stock, par value $0.008403361 per share ("Holdings Class B Common Stock") was
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") were 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.
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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 Senior Notes 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 on its existing store 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.
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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 Stock 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.
The Company's ability to comply with the terms of its indebtedness and make
scheduled payments or refinance its obligations with respect to its indebtedness
depends on its financial and operating performance, which, in turn, is subject
to prevailing economic conditions and to financial, business and other factors
beyond its control. There can be no assurance that the Company's operating
results will be sufficient for payment of the Company's indebtedness.
CHANGE OF CONTROL
The Indenture will provide that, upon the occurrence of any Change of
Control (as defined in "Description of the Senior Notes"), the Company will make
an offer to purchase all of the Senior Notes issued and outstanding under the
Indenture at a purchase price of 101% of the principal amount thereof, plus
accrued and unpaid interest to the date of repurchase. There can be no assurance
that the Company would be able to repurchase the Senior Notes other than through
refinancing or that the Company would be able to refinance the indebtedness
represented by the Senior Notes.
10
<PAGE>
RANKING AND SECURITY OF SENIOR NOTES
The Senior Notes will be unsecured obligations of the Company, will rank
pari passu with all existing and future senior indebtedness of the Company and
will rank senior in right of payment to all existing and future subordinated
indebtedness of the Company. However, because the Company will grant security
interests in substantially all of its assets in connection with the New Credit
Facility (and any successor facility), the Senior Notes will be effectively
subordinated to the indebtedness under the New Credit Facility (and any
successor facility) to the extent of such security interests. In addition, the
Indenture permits the Company to issue additional indebtedness and grant
additional security interests in its assets to secure such indebtedness in
certain circumstances. In bankruptcy the holder of a security interest with
respect to any assets of the Company will be entitled to have the proceeds of
such assets applied to the payment of such holder's claim before the remaining
proceeds, if any, are applied to the claims of unsecured creditors, including
holders of the Senior Notes.
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.
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 net 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 portion 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.
11
<PAGE>
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 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"), an underwriter
in connection with this Offering, and certain of its affiliates, prior to this
Offering beneficially owned 32.7% (or 12,261,794 shares) of the outstanding
shares of the Series A Preferred Stock, all of which was redeemed following the
consummation of the Offering with a portion of the proceeds thereof. In
addition, DLJ and certain of its affiliates sold 104,653 shares of Common Stock
in connection with the exercise of the Underwriters' over-allotment option and
currently own 14.0% of the Common Stock. See "Security Ownership of Certain
Beneficial Owners," "Certain Relationships and Related Transactions,"
"Underwriting" and Note 1 of Notes to Consolidated Financial Statements.
TRADING MARKET FOR THE SENIOR NOTES
The Senior Notes are not listed for trading on any securities exchange or
included on Nasdaq. DLJ currently makes a market in the Senior Notes. However,
DLJ is not obligated to make a market for the
12
<PAGE>
Senior Notes and may discontinue or suspend such market-making at any time
without notice. Accordingly, no assurance can be given as to the liquidity of,
or trading market for the Senior Notes. Further, the liquidity of, and trading
market for the Senior Notes may be adversely affected by declines and volatility
in the market for high yield securities generally. The liquidity of and trading
market of the Senior Notes may be adversely affected by any changes in the
Company's financial performance or prospects.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Senior Notes offered
hereby (after deducting underwriting discounts and commissions and other
expenses of the Offering) were approximately $96.3 million. Such net proceeds,
together with the net proceeds of the Stock Offering of approximately $55.7
million (after deducting underwriting discounts and commissions and other
expenses) and the proceeds of borrowings under the New Credit Facility (to the
extent necessary) and cash on hand, were used to redeem in full the Company's
(i) 10 1/2% Senior Secured Notes due 1997, plus accrued and unpaid interest,
(ii) 13 3/4% Senior Subordinated Notes due 1999, plus accrued and unpaid
interest, and (iii) all issued and outstanding shares of Series A Preferred
Stock.
The Company will not receive any proceeds from the sale of the Senior Notes
in any market-making transactions in connection with which this Prospectus may
be delivered.
13
<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 $100.0 million aggregate
principal amount of Senior Notes offered by the Company hereby, (ii) the sale of
3,572,000 shares of Common Stock 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 were approximately $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 were approximately $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 with 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.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (1)
(IN THOUSANDS, EXCEPT OPERATING 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 Stock 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 Stock 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.
15
<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......................................... $ (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
AS ADJUSTED DATA (6):
Interest expense, net....................................................................... $ 12,181
Loss before extraordinary item.............................................................. (8,894)
Ratio of earnings to fixed charges (7)(8)................................................... 0.45x
</TABLE>
<TABLE>
<CAPTION>
AT FEBRUARY 3, 1996
------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FEB. 1, JAN. 30, JAN. 29, JAN. 28, FEB. 3, AS
1992 1993 1994 1995 1996 PRO FORMA ADJUSTED(9)
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>
<TABLE>
<CAPTION>
]FISCAL YEAR
----------------------------------------------------
1991 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C>
SELECTED OPERATING DATA:
Number of stores open at end of period........... 81 85 81 80 69
Average net sales per gross square foot (10)..... $ 350 $ 333 $ 320 $ 337 $ 327
Inventory turnover (11).......................... 5.4x 5.4x 5.1x 5.7x 5.4x
EBITDA excluding charge for store closings and
impairment of assets (in thousands) (12)......... $ 23,608 $ 27,725 $ 22,988 $ 28,568 $ 30,716
Capital expenditures (in thousands).............. 5,851 4,603 5,882 5,853 8,130
Ratio of earnings to fixed charges (7)(8)........ 0.68x 0.97x 0.59x 0.93x 0.33x
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------
1994 1995
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
DATA FOR 69 STORES OPEN AS OF FEBRUARY 3, 1996 (13):
Net sales........................................................................ $373,996 $377,849
Gross profit..................................................................... 109,831 117,798
EBITDA excluding charge for store closings and impairment of assets(7)........... 28,756 30,410
Operating income................................................................. 16,801 2,990
Average net sales per gross square foot (5)...................................... $ 356 $ 343
Gross square footage added to existing stores.................................... 20,150 34,700
</TABLE>
- ----------------------
(1) Loehmann's is the surviving corporation of the Holdings Merger and
each share of Holdings Common Stock and Holdings Class B Common Stock has
been 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 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) 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 offered hereby. 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 Stock 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."
(7) For purposes of determining the ratio of earnings to fixed charges,
earnings consist of income before taxes plus fixed charges. Fixed charges
consist of interest expense on all indebtedness including amortization of
deferred debt issuance costs, and that portion of operating lease expenses
that is deemed to be representative of the interest factor.
(8) Earnings were insufficient to cover fixed charges by approximately $6.5
million, $0.7 million, $8.6 million, $1.5 million and $14.9 million for
fiscal 1991, 1992, 1993, 1994 and 1995, respectively. On an "as adjusted"
basis, earnings exceeded (were insufficient to cover) fixed charges by $4.5
million for fiscal 1994 and $(8.7) million for fiscal 1995. However, if
non-cash charges to income consisting of depreciation and amortization were
excluded, the Company's earnings would have exceeded fixed charges by $5.9
million, $10.8 million, $5.7 million, $10.5 million, $7.7 million, $15.7
million and $13.1 million, respectively, for such periods and the Company's
ratio of earnings to fixed charges would have been 1.29x, 1.54x, 1.28x,
1.49x, 1.35x, 2.00x and 1.82x, respectively, for such periods.
(9) As adjusted to reflect, among other things, the sale of Senior Notes
offered hereby, the sale of the Common Stock in the Stock Offering, and the
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Capitalization."
(Footnotes continued on following page)
17
<PAGE>
(Footnotes continued from preceding page)
(10) 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.
(11) Inventory turnover is determined by dividing cost of sales by the monthly
average inventory valued at cost.
(12) EBITDA is defined as earnings before interest expense, income tax expense
(benefit), depreciation and amortization. The charge for store closings and
impairment of assets for fiscal 1995 was $15.3 million. Certain covenants
in the Indenture are based on EBITDA as defined in the Indenture. EBITDA
should not be considered as an alternative to net income, an indicator of
the Company's operating performance, or an alternative to the Company's
cash flow from operating activities as a measure of liquidity.
(13) 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.
18
<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
Stock 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 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 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
19
<PAGE>
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 new 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 Stock 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).
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.
20
<PAGE>
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 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 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
21
<PAGE>
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.
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.
22
<PAGE>
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
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
EBITDA excluding charge
for store closings and
impairment of assets
(3)...................... 8,453 6,259 9,767 4,089 8,816 6,430 10,183 5,287
AS A PERCENTAGE OF NET
SALES:
Gross margin............. 29.4% 29.1% 30.6% 27.3% 31.6% 30.1% 32.9% 29.9%
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%
EBITDA excluding charge
for store closings and
impairment of assets
(3)...................... 8.8% 6.9% 9.2% 4.1% 9.0% 7.2% 10.2% 5.3%
</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) EBITDA is defined as earnings before interest expense, income tax expense
(benefit), depreciation and amortization. The charge for store closings and
impairment of assets was $15.3 million.
23
<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 was expended 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 Stock
Offering will be sufficient to satisfy its cash requirements through fiscal
1996.
24
<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.
25
<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
26
<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
27
<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:
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
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
28
<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
29
<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
30
<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.
31
<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%
-- -----
-- -----
- ----------------------
(1) These percentages exclude sales from the Company's 11 stores closed in
August 1995 and the 2 stores opened in fiscal 1996.
32
<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.
33
<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.
34
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following persons are the executive officers and directors of the
Company.
</TABLE>
<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.
35
<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,
a 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.
36
<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 $897,535
Philip Kaplan............. 14,657 5.6% 5.01 (1) 29,950 70,113
Robert Glass.............. -- -- -- -- -- --
Henry Mittleman........... -- -- -- -- -- --
Bonnie Dexter............. -- -- -- -- -- --
</TABLE>
- ----------------------
(1) One-third of these options vest in each of the next three fiscal years and
expire five years from the date of vesting, with certain exceptions.
37
<PAGE>
The following table sets forth information concerning the value of
unexercised options as of February 3, 1996 held by the executives named in the
Summary Compensation Table above.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
SHARES UNDERLYING VALUE OF UNEXERCISED
ACQUIRED VALUE UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
ON EXERCISE REALIZED AT FISCAL YEAR END(#) AT FISCAL YEAR END ($)
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
38
<PAGE>
Friedman Agreement), the Company will be required to pay his base salary then in
effect for the greater 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
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.
39
<PAGE>
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 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 (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
40
<PAGE>
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.
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. The Board of Directors of Holdings adopted the Loehmann's
Holdings, Inc. 1988 Stock Option Plan (the "1988 Stock Plan") whereby key
employees and directors of Holdings and its subsidiaries may be granted options
to purchase shares of Holdings Common Stock thereunder as determined by the
committee. In connection with the Holdings Merger, each such outstanding option
will become an option to purchase approximately 0.22 shares of Common Stock on
the same terms and conditions.
A maximum of 1,077,010 shares of Common Stock (subject to adjustment upon
the occurrence of certain corporate events) may be delivered by the Company
pursuant to options granted under the 1988 Stock Plan, of which 1,077,010 have
been granted and of which 443,393 are currently exercisable. The committee does
not intend to grant any additional awards under the 1988 Stock Plan.
The Company's Board of Directors may amend, suspend or discontinue the 1988
Stock Plan at any time except that certain material amendments may not be made
without stockholder approval.
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"). A
maximum of 446,892 shares of Common Stock (subject to adjustment) 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 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 1996 Stock Plan will be administered by a committee appointed by the
Company's Board of 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 Company's Board of Directors may amend,
suspend or discontinue the New Stock Plan at any time except that certain
material amendments may not be made without stockholder approval.
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.
41
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information as of April 1, 1996, and
as adjusted to give effect to the Stock Offering (assuming no exercise of the
over-allotment option granted by certain stockholders of the Company to the
Underwriters of the Stock Offering), 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 STOCK AFTER STOCK
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OFFERING OFFERING
<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(1)...................................... 431,429 9.1% 5.2%
Sprout Growth, L.P.(1)................................... 521,656 11.0% 6.3%
Sprout Growth, Ltd.(1)................................... 58,077 1.2% *
DLJ Venture Capital Fund II, L.P.(1)..................... 25,927 * *
Donaldson, Lufkin & Jenrette, Inc.(1).................... 271,092 5.7% 3.3%
Equity-Linked Investors, L.P.(2)......................... 309,932 6.6% 3.7%
Equity-Linked Investors-II(2)............................ 309,932 6.6% 3.7%
Putnam Investors(3)...................................... 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(4)......................................... 286,174 5.8% 3.4%
Robert Friedman(5)....................................... 186,222 3.8% 2.2%
Norman S. Matthews(6).................................... 123,139 2.6% 1.5%
Janet A. Hickey (1)...................................... -- -- --
Richard E. Kroon (1)..................................... -- -- --
Christina A. Mohr........................................ -- -- --
Cynthia Cohen Turk....................................... -- -- --
Bonnie Dexter(7)......................................... 1,788 * *
Robert Glass(8).......................................... 2,234 * *
Henry Mittleman.......................................... 7,134 * *
All directors and executive officers as a group (10
persons)(9).............................................. 606,690 11.8% 7.1%
</TABLE>
- ----------------------
<TABLE>
<C> <S>
* Less than 1%
(1) 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.
(2) 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 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.
(3) 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.
</TABLE>
42
<PAGE>
<TABLE>
<C> <S>
(4) Includes 204,230 options to purchase shares of Common Stock issued pursuant to the
Option Plan which are immediately exercisable.
(5) Includes 140,303 options to purchase shares of Common Stock issued pursuant to the
Option Plan which are immediately exercisable.
(6) Includes 59,586 options to purchase shares of Common Stock issued pursuant to the Option
Plan which are immediately exercisable.
(7) Consists of 1,788 options to purchase shares of Common Stock issued pursuant to the
Option Plan which are immediately exercisable.
(8) Consists of 2,234 options to purchase shares of Common Stock issued pursuant to the
Option Plan which are immediately exercisable.
(9) Includes 408,141 options to purchase shares of Common Stock issued pursuant to the
Option Plan which are immediately exercisable.
</TABLE>
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 Shareholders' 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, 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 Stock then
outstanding have been sold pursuant to one or more public offerings (including
the Stock Offering) 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
43
<PAGE>
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
has acted as an underwriter of the Senior Notes of the Company offered hereby.
In addition, (i) is exercised, DLJ sold certain of its shares of
Common Stock in the Stock Offering pursuant to the exercise of an over-allotment
option granted in connection with the Stock Offering (if the Underwriters'
over-allotment option is exercised), (ii) a portion of the proceeds from the
Offering and the Stock Offering were 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--Stock 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."
44
<PAGE>
DESCRIPTION OF THE SENIOR NOTES
The Senior Notes offered hereby will be issued under the Indenture, to be
dated as of May 10, 1996, between the Company and United States Trust Company of
New York, as trustee (the "Trustee"), a copy of the form of which is filed as an
exhibit to the Registration Statement and will be made available to prospective
purchasers of the Senior Notes upon request. The Indenture is subject to and
governed by the Trust Indenture Act. The following summary of the material
provisions of the Indenture does not purport to be complete, and where reference
is made to particular provisions of the Indenture, such provisions, including
the definitions of certain terms, are qualified in their entirety by reference
to all of the provisions of the Indenture and those terms made a part of the
Indenture by the Trust Indenture Act. For definitions of certain capitalized
terms used in the following summary, see "-- Certain Definitions."
GENERAL
The Senior Notes will mature on May 15, 2003, will be limited to $100
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 the rate set forth on the cover
page hereof 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, to the Person in whose name the Senior
Note (or any predecessor Senior Note) is registered at the close of business on
the May 1st or November 1st next preceding such interest payment date.
Principal of, premium, if any, and interest on the Senior Notes will be
payable, and the Senior Notes will be exchangeable and transferable at the
office or agency of the Company in the City of New York maintained for such
purposes (which initially will be the Trustee); provided, however, that payment
of interest may be made at the option of the Company by check mailed to the
Person entitled thereto as shown on the security register. The Senior Notes will
be issued only in fully registered form without coupons, in denominations of
$1,000 and any integral multiple thereof. (Section 302) No service charge will
be made for any registration of transfer, exchange or redemption of Senior
Notes, except in certain circumstances for any tax or other governmental charge
that may be imposed in connection therewith. (Section 305)
OPTIONAL REDEMPTION
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 an integral multiple
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).
If less than all of the Senior Notes are to be redeemed, the Trustee shall
select the Senior Notes or portions thereof to be redeemed pro rata, by lot or
by any other method the Trustee shall deem fair and reasonable. (Sections 203,
1101, 1105 and 1107)
45
<PAGE>
SINKING FUND
The Senior Notes will not be entitled to the benefit of any sinking fund.
FORM, DENOMINATION AND BOOK-ENTRY PROCEDURES
The Notes initially will be represented by a global Note or Notes
(collectively, the "Book-Entry Notes") in definitive fully registered form
without coupons, which will be deposited with, or on behalf of The Depository
Trust Company ("DTC") as depositary and registered in the name of DTC's nominee.
Accordingly, beneficial interests in the Notes will be shown on, and transfers
thereof will be effected only through, records maintained by DTC and its
participants. Except as set forth below, owners of beneficial interests in the
Book-Entry Notes will not be entitled to receive Notes in definitive form and
will not be considered Holders of Notes under the Indenture.
The Depositary has advised the Company and the Underwriters as follows: The
Depositary is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York Banking
Law, a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered under the Exchange Act. The Depositary was created to hold securities
of its participants and to facilitate and settlement of securities transactions
among its participants in such securities through electronic book-entry changes
in accounts of the participants, thereby eliminating the need for physical
movement of securities certificates. The Depositary's participants include
securities brokers and dealers (including the Underwriters), banks, trust
companies, clearing corporations and certain other organizations, some of whom
(and/or their representatives) own the Depositary. Access to the Depositary's
book-entry system is also available to others such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a participant, either directly or indirectly. The Depositary agrees with and
represents to its participants that it will administer its book-entry system in
accordance with its rules and by-laws and requirements of law.
In connection with the issuance of the Book-Entry Notes, DTC will credit on
its book-entry registration and transfer system the respective principal amounts
of Book-Entry Notes represented by the global Note or Notes deposited with it to
the accounts of institutions that have accounts with DTC or its nominee
("participants") and that beneficially own (or hold for persons who beneficially
own) such Book-Entry Notes. Ownership of beneficial interests in Book-Entry
Notes will be limited to participants or persons that may hold beneficial
interests through participants. Ownership of beneficial interests on Book-Entry
Notes will be shown on, and the transfer of those ownership interests will be
effected only through, records maintained by DTC (with respect to participants'
interests) or such participants (with respect to persons that may hold
beneficial interests in the Book-Entry Notes through such participants.
So long as DTC or its nominee is the registered holder and owner of a global
Note representing Book-Entry Notes, DTC or such nominee, as the case may be,
will be considered the sole owner and Holder of the related Book-Entry Notes for
all purposes of such Book-Entry Notes and for all purposes under the Indenture.
Therefore, neither the Company, the Trustee nor any paying agent has any direct
responsibility or liability for the payment of principal or interest or premium,
if any, on the Notes to owners of beneficial interests in the Book-Entry Notes.
DTC has advised the Company and the Trustee that its current practice is, upon
receipt of any payment of principal or interest or premium, if any, to
immediately credit the accounts of the participants with such payment in amounts
proportionate to their respective holdings in principal amount of beneficial
interests in the Book-Entry Notes as shown in the records of DTC. Payments by
participants and indirect participants to owners of beneficial interests in the
Book-Entry Notes will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of customers
registered in "street name," and will be the responsibility of the participants
or indirect participants.
46
<PAGE>
Owners of beneficial interests in the Book-Entry Notes will not be entitled
to have Notes registered in their names, will not receive or be entitled to
receive physical delivery of certificated Notes in definitive form and will not
be considered to be the owners of holders of any Notes under the Indenture or of
such Book-Entry Notes, unless (a) DTC notifies the Company that it is unwilling
or unable to continue as depositary for such Book-Entry Notes, (b) DTC ceases to
be a clearing agency registered under the Securities Exchange Act of 1934, (c)
the Company delivers to the Trustee a written notice that all Book-Entry Notes
shall be exchangeable for definitive Notes or (d) an Event of Default or event
that after notice or lapse of time, or both, would become an Event of Default
has occurred and is continuing with respect to the Notes.
Payment of principal of and premium and interest, if any, on Book-Entry
Notes will be made to the depositary or its nominee, as the case may be, as the
registered owner and holder thereof.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Company believes to be reliable, but the
Company takes no responsibility for the accuracy thereof.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Indebtedness. (a) The Company will not, and will not permit
any of its Subsidiaries to, create, issue, assume, guarantee, or otherwise in
any manner become directly or indirectly liable for or with respect to or
otherwise incur (collectively, "incur") any Indebtedness (including any Acquired
Indebtedness), except that the Company may incur Indebtedness (including any
Acquired Indebtedness) and any Subsidiary may incur Acquired Indebtedness if, in
each case, the Consolidated Fixed Charge Coverage Ratio for the Company for the
four full fiscal quarters immediately preceding the incurrence of such
Indebtedness taken as one period (and after giving pro forma effect to (i) the
incurrence of such Indebtedness and (if applicable) the application of the net
proceeds therefrom, including to refinance other Indebtedness, as if such
Indebtedness was incurred, and the application of such proceeds occurred, at the
beginning of such four-quarter period; (ii) the incurrence, repayment or
retirement of any other Indebtedness by the Company and its Subsidiaries since
the first day of such four-quarter period as if such Indebtedness was incurred,
repaid or retired at the beginning of such four-quarter period (except that, in
making such computation, the amount of Indebtedness under any revolving credit
facility shall be computed based upon the average daily balance of such
Indebtedness during such four-quarter period); (iii) in the case of Acquired
Indebtedness, the related acquisition, as if such acquisition occurred at the
beginning of such four-quarter period; and (iv) any acquisition or disposition
by the Company and its Subsidiaries of any company or any business or any assets
out of the ordinary course of business, whether by merger, stock purchase or
sale or asset purchase or sale or any related repayment of Indebtedness, in each
case since the first day of such four-quarter period, assuming such acquisition
or disposition had been consummated on the first day of such four-quarter
period) is at least equal to 2.5:1.0 for any such incurrence from the date
hereof until January 31, 1998 and 3.0:1.0 for any such incurrence thereafter.
(b) The foregoing limitation will not apply to the incurrence of any of the
following (collectively, "Permitted Indebtedness"):
(i) Indebtedness of the Company under the Credit Facility in an
aggregate principal amount at any one time outstanding not to exceed (x) the
greater of $35 million or 60% of Eligible Inventory (as defined in the
Credit Facility as in effect on the date of the Indenture) under any
revolving credit facility thereunder and (y) $10.0 million under any letter
of credit facility thereunder;
(ii) Indebtedness of the Company pursuant to the Senior Notes;
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(iii) Indebtedness of the Company and any Subsidiary outstanding on the
date of the Indenture and listed on a schedule thereto;
(iv) Indebtedness of the Company owing to a Subsidiary; provided that
any Indebtedness of the Company owing to a Subsidiary is made pursuant to an
intercompany note in the form attached to the Indenture and is subordinated
in right of payment from and after such time as the Senior Notes shall
become due and payable (whether at Stated Maturity, acceleration or
otherwise) to the payment and performance of the Company's obligations under
the Senior Notes; provided, further, that any disposition, pledge or
transfer of any such Indebtedness to a Person (other than a disposition,
pledge or transfer to a Subsidiary) shall be deemed to be an incurrence of
such Indebtedness by the obligor not permitted by this clause (iv);
(v) Indebtedness of a Wholly Owned Subsidiary owing to the Company or
another Wholly Owned Subsidiary; provided that any such Indebtedness is made
pursuant to an intercompany note in the form attached to the Indenture;
provided, further, that (a) any disposition, pledge or transfer of any such
Indebtedness to a Person (other than a disposition, pledge or transfer to
the Company or a Wholly Owned Subsidiary) shall be deemed to be an
incurrence of such Indebtedness by the obligor not permitted by this clause
(v), and (b) any transaction pursuant to which any Wholly Owned Subsidiary,
which has Indebtedness owing to the Company or any other Wholly Owned
Subsidiary, ceases to be a Wholly Owned Subsidiary shall be deemed to be the
incurrence of Indebtedness by such Wholly Owned Subsidiary that is not
permitted by this clause (v);
(vi) guarantees of any Subsidiary made in accordance with the provisions
of "--Limitation on Issuances of Guarantees of Indebtedness";
(vii) obligations of the Company entered into in the ordinary course of
business pursuant to Interest Rate Agreements designed to protect the
Company or any Subsidiary against fluctuations in interest rates in respect
of Indebtedness of the Company or any Subsidiary as long as such obligations
do not exceed the aggregate principal amount of such Indebtedness then
outstanding;
(viii) any renewals, extensions, substitutions, refundings, refinancings
or replacements (collectively, a "refinancing") of any Indebtedness
described in clauses (ii) and (iii) of this definition of "Permitted
Indebtedness," including any successive refinancings so long as (A) the
aggregate principal amount of Indebtedness represented thereby is not
increased by such refinancing plus the lesser of (I) the stated amount of
any premium or other payment required to be paid in connection with such a
refinancing pursuant to the terms of the Indebtedness being refinanced or
(II) the amount of premium or other payment actually paid at such time to
refinance the Indebtedness, plus, in either case, the amount of expenses of
the Company incurred in connection with such refinancing and, (B) in the
case of Subordinated Indebtedness, such refinancing does not reduce the
Average Life to Stated Maturity or the Stated Maturity of such Indebtedness;
and
(ix) Indebtedness of the Company in addition to that described in
clauses (i) through (viii) above, and any renewals, extensions,
substitutions, refinancings or replacements of such Indebtedness, so long as
the aggregate principal amount of all such Indebtedness shall not exceed $10
million outstanding at any one time in the aggregate. (Section 1008)
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Subsidiary to, directly or indirectly:
(i) declare or pay any dividend on, or make any distribution to holders
of, any shares of the Company's Capital Stock (other than dividends or
distributions payable solely in its shares of Qualified Capital Stock or in
options, warrants or other rights to acquire shares of such Qualified
Capital Stock);
(ii) purchase, redeem or otherwise acquire or retire for value, directly
or indirectly, the Company's Capital Stock or any Capital Stock of any
Affiliate of the Company (other than any Wholly Owned Subsidiary of the
Company) or options, warrants or other rights to acquire such
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Capital Stock; provided, that the Company may redeem all outstanding shares
of Series A Preferred Stock in the manner contemplated under "Use of
Proceeds";
(iii) make any principal payment on, or repurchase, redeem, defease,
retire or otherwise acquire for value, prior to any scheduled principal
payment, sinking fund payment or maturity, any Subordinated Indebtedness;
provided, that the Company may redeem all outstanding 13 3/4% Senior
Subordinated Notes in the manner contemplated under "Use of Proceeds";
(iv) declare or pay any dividend or distribution on any Capital Stock of
any Subsidiary to any Person (other than the Company or any of its Wholly
Owned Subsidiaries) or purchase, redeem or otherwise acquire or retire for
value any Capital Stock of any Subsidiary held by any Person (other than the
Company or any of its Wholly Owned Subsidiaries), other than any such
dividend, distribution, purchase, redemption, acquisition or retirement on a
pro rata basis to all holders of Capital Stock;
(v) incur, create or assume any guarantee of Indebtedness of any
Affiliate (other than Indebtedness of a Wholly Owned Subsidiary of the
Company); or
(vi) make any Investment in any Person (other than any Permitted
Investments) (any of the foregoing payments described in clauses (i) through
(vi), other than any such action that is a Permitted Payment, collectively,
"Restricted Payments") (the amount of any such Restricted Payment, if other
than cash, as determined by the board of directors of the Company, whose
determination shall be conclusive and evidenced by a board resolution),
unless (1) immediately before and immediately after giving effect to such
Restricted Payment on a pro forma basis, no Default or Event of Default shall
have occurred and be continuing and such Restricted Payment shall not be an
event which is, or after notice or lapse of time or both, would be, an "event of
default" under the terms of any Indebtedness of the Company or its Subsidiaries;
(2) immediately before and immediately after giving effect to such Restricted
Payment on a pro forma basis, the Company could incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) under the provisions described
under "--Limitation on Indebtedness"; and (3) after giving effect to the
proposed Restricted Payment, the aggregate amount of all such Restricted
Payments declared or made after the date of the Indenture does not exceed the
sum of:
(A) 50% of the aggregate Consolidated Net Income of the Company
accrued on a cumulative basis during the period beginning on the first
day of the Company's fiscal quarter commencing after the date of the
Indenture and ending on the last day of the Company's last fiscal quarter
ending prior to the date of the Restricted Payment (or, if such aggregate
cumulative Consolidated Net Income shall be a loss, minus 100% of such
loss);
(B) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company from the issuance or sale (other than to any of
its Subsidiaries) of Qualified Capital Stock of the Company or any
options, warrants or rights to purchase such Qualified Capital Stock of
the Company (except, in each case, to the extent such proceeds are used
to purchase, redeem or otherwise retire Capital Stock or Subordinated
Indebtedness as set forth below in clause (ii) or (iii) of paragraph (b)
below);
(C) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company (other than from any of its Subsidiaries) upon
the exercise of any options or warrants to purchase Qualified Capital
Stock of the Company; and
(D) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company from the conversion or exchange, if any, of debt
securities or Redeemable Capital Stock of the Company or its Subsidiaries
into or for Qualified Capital Stock of the Company plus, to the extent
such debt securities or Redeemable Capital Stock were issued after the
date of the Indenture, the aggregate of Net Cash Proceeds from their
original issuance.
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(b) Notwithstanding the foregoing, and in the case of clauses (ii) through
(iv) below, so long as there is no Default or Event of Default continuing, the
foregoing provisions shall not prohibit the following actions (clauses (i)
through (iv) being referred to as "Permitted Payments"):
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment would be
permitted by the provisions of paragraph (a) of this Section and such
payment shall be deemed to have been paid on such date of declaration for
purposes of the calculation required by paragraph (a) of this Section;
(ii) the repurchase, redemption, or other acquisition or retirement of
any shares of any class of Capital Stock of the Company in exchange for
(including any such exchange pursuant to the exercise of a conversion right
or privilege in connection therewith cash is paid in lieu of the issuance of
fractional shares or scrip), or out of the Net Cash Proceeds of a
substantially concurrent issue and sale for cash (other than to a
Subsidiary) of, other shares of Qualified Capital Stock of the Company;
provided that the Net Cash Proceeds from the issuance of such shares of
Qualified Capital Stock are excluded from clause (3)(B) of paragraph (a) of
this Section;
(iii) the repurchase, redemption, defeasance, retirement or acquisition
for value or payment of principal of any Subordinated Indebtedness in
exchange for, or in an amount not in excess of the net proceeds of, a
substantially concurrent issuance and sale for cash (other than to any
Subsidiary of the Company) of any Qualified Capital Stock of the Company,
provided that the Net Cash Proceeds from the issuance of such shares of
Qualified Capital Stock are excluded from clause (3)(B) of paragraph (a) of
this Section;
(iv) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of principal of any Subordinated
Indebtedness (other than Redeemable Capital Stock) (a "refinancing") through
the issuance of new Subordinated Indebtedness of the Company, provided that
any such new Subordinated Indebtedness (1) shall be in a principal amount
that does not exceed the principal amount so refinanced (or, if such
Subordinated Indebtedness provides for an amount less than the principal
amount thereof to be due and payable upon a declaration of acceleration
thereof, then such lesser amount as of the date of determination), plus the
lesser of (I) the stated amount of any premium or other payment required to
be paid in connection with such a refinancing pursuant to the terms of the
Indebtedness being refinanced or (II) the amount of premium or other payment
actually paid at such time to refinance the Indebtedness, plus, in either
case, the amount of expenses of the Company incurred in connection with such
refinancing; (2) has an Average Life to Stated Maturity greater than the
remaining Average Life to Stated Maturity of the Notes; (3) has a Stated
Maturity for its final scheduled principal payment later than the Stated
Maturity for the final scheduled principal payment of the Senior Notes; and
(4) is expressly subordinated in right of payment to the Senior Notes at
least to the same extent as the Indebtedness to be refinanced; and
(v) the redemption, repurchase or acquisition of Common Stock or other
equity interests from time to time under management equity subscription
agreements or stock option agreements or plans in existence on the date of
this Indenture, so long as such redemptions (x) do not exceed $5 million in
the aggregate and (y) do not otherwise result in an Event of Default or an
event that, after notice or lapse of time or both, would become an Event of
Default; provided that amounts expended pursuant to this clause (v) will be
subtracted from the amounts available for Restricted Payments pursuant to
paragraph (a) hereof.
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any of its Subsidiaries to, directly or indirectly, enter into or
suffer to exist any transaction or series of related transactions (including,
without limitation, the sale, purchase, exchange or lease of assets, property or
services) with any Affiliate of the Company (other than the Company or a Wholly
Owned Subsidiary) unless (a) such transaction or series of transactions is in
writing on terms that are no less favorable to the Company or such Subsidiary,
as the case may be, than would be available in a comparable
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transaction in arm's-length dealings with an unrelated third party and (b) with
respect to any transaction or series of transactions involving aggregate value
in excess of $1,000,000, the Company delivers an officers' certificate to the
Trustee certifying that such transaction or series of related transactions
complies with clause (a) above and such transaction or series of related
transactions has been approved by the board of directors of the Company (and
approved by a majority of the Independent Directors of the Company, or in the
event there is only one Independent Director, by such Independent Director);
provided, however, that this provision shall not apply to (A) any transaction
with an officer or director of the Company entered into in the ordinary course
of business (including compensation or employee benefit arrangements with any
officer or director of the Company) and (B) transactions pursuant to agreements
in existence on the date of the Indenture. This limitation shall not apply to
(i) transactions among the Company and its wholly owned Subsidiaries or among
wholly owned Subsidiaries of the Company, (ii) the provision of directors and
officers insurance for the benefit of the directors and officers of the Company,
(iii) indemnification payments to directors and officers of the Company in
accordance with applicable state law and (iv) payments to all holders of Capital
Stock of the Company on a pro rata basis. (Section 1010)
Limitation on Liens. The Company will not, and will not permit any
Subsidiary to, directly or indirectly, create, incur, affirm or suffer to exist
any Lien of any kind upon any of its property or assets (including any
intercompany notes), owned at the date of the Indenture or acquired after the
date of the Indenture, or any income or profits therefrom, except if the Senior
Notes are directly secured equally and ratably with (or prior or senior thereto
in the case of Liens with respect to Subordinated Indebtedness) the obligation
or liability secured by such Lien, excluding, however, from the operation of the
foregoing any of the following:
(a) any Lien existing as of the date of the Indenture and listed on a
schedule thereto;
(b) any Lien arising by reason of (1) any judgment, decree or order of
any court, so long as such Lien is adequately bonded and any appropriate
legal proceedings which may have been duly initiated for the review of such
judgment, decree or order shall not have been finally terminated or the
period within which such proceedings may be initiated shall not have
expired; (2) taxes, assessments, govermental charges or claims not yet
delinquent or which are being contested in good faith; (3) security for
payment of workers' compensation or other insurance related obligations; (4)
deposits made in the ordinary course of business in connection with tenders,
leases, contracts (other than contracts for the payment of money); (5)
zoning restrictions, easements, licenses, reservations, provisions,
covenants, conditions, waivers, restrictions on the use of property or minor
irregularities of title (and with respect to leasehold interests, mortgages,
obligations, liens and other encumbrances incurred, created, assumed or
permitted to exist and arising by, through or under a landlord or owner of
the leased property, with or without consent of the lessee), none of which
materially impairs the use of any parcel of property material to the
operation of the business of the Company or any Subsidiary or the value of
such property for the purpose of such business; (6) deposits to secure
public or statutory obligations, or in lieu of surety or appeal bonds; (7)
certain surveys, exceptions, title defects, encumbrances, easements,
reservations of, or rights of others for, rights of way, sewer, electric
lines, telegraph or telephone lines and other similar purposes or zoning or
other restrictions as to the use of real property not interfering with the
ordinary conduct of the business of the Company or any of its Subsidiaries;
(8) operation of law in favor of mechanics, material men, laborers,
employees or suppliers, incurred in the ordinary course of business for sums
which are not yet delinquent or are being contested in good faith by
negotiations or by appropriate proceedings which suspend the collection
thereof or (9) contracts to sell assets that are not otherwise prohibited
hereunder;
(c) any Lien now or hereafter existing on property of the Company or any
Subsidiary pursuant to the Credit Facility, provided that any Indebtedness
so secured by any Lien created after the date hereof is permitted to be
incurred under clause (b)(i) of the provisions described under "--Limitation
on Indebtedness";
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(d) any Lien securing Acquired Indebtedness created prior to (and not
created in connection with, or in contemplation of) the incurrence of such
Indebtedness by the Company or any Subsidiary, in each case which
Indebtedness is permitted under the provisions of "Limitation on
Indebtedness"; provided that any such Lien only extends to the assets that
were subject to such Lien securing such Acquired Indebtedness prior to the
related transaction by the Company or its Subsidiaries; and
(e) any extension, renewal, refinancing or replacement, in whole or in
part, of any Lien described in the foregoing clauses (a) through (d) so long
as the amount of security is not increased thereby. (Section 1012)
Limitation on Sale of Assets. (a) The Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, consummate an Asset Sale
unless (i) at least 85% of the Net Cash Proceeds from such Asset Sale are
received in cash and (ii) the Company or such Subsidiary receives consideration
at the time of such Asset Sale at least equal to the Fair Market Value of the
shares or assets sold (as determined by the board of directors of the Company
and evidenced in a board resolution).
(b) If all or a portion of the Net Cash Proceeds of any Asset Sale are not
required to be applied to repay permanently any portion of the Credit Facility
then outstanding as required by the terms thereof, or the Company determines not
to apply such Net Cash Proceeds to the permanent prepayment of any portion of
the Credit Facility or if the Credit Facility is not then outstanding, then the
Company or a Subsidiary may within twelve months of the Asset Sale invest the
Net Cash Proceeds in properties and other assets that (as determined by the
board of directors of the Company) replace the properties and assets that were
the subject of the Asset Sale or in properties and assets that will be used in
the businesses of the Company or its Subsidiaries existing on the date of the
Indenture or in businesses reasonably related thereto. The amount of such Net
Cash Proceeds neither used to permanently repay or prepay any portion of the
Credit Facility nor used or invested as set forth in this paragraph constitutes
"Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds equals $5 million or more,
the Company will apply the Excess Proceeds to the repayment of the Senior Notes
and any Pari Passu Indebtedness required to be repurchased under the instrument
governing such Pari Passu Indebtedness as follows: (a) the Company will make an
offer to purchase (an "Offer") from all holders of the Senior Notes in
accordance with the procedures set forth in the Indenture in the maximum
principal amount (expressed as a multiple of $1,000) of Senior Notes that may be
purchased out of an amount (the "Senior Note Amount") equal to the product of
such Excess Proceeds multiplied by a fraction, the numerator of which is the
outstanding principal amount of the Senior Notes, and the denominator of which
is the sum of the outstanding principal amount of the Senior Notes and such Pari
Passu Indebtedness (subject to proration in the event such amount is less than
the aggregate Offered Price (as defined herein) of all Senior Notes tendered)
and (b) to the extent required by such Pari Passu Indebtedness to permanently
reduce the principal amount of such Pari Passu Indebtedness, the Company will
make an offer to purchase or otherwise repurchase or redeem Pari Passu
Indebtedness (a "Pari Passu Offer") in an amount (the "Pari Passu Debt Amount")
equal to the excess of the Excess Proceeds over the Senior Note Amount; provided
that in no event will the Company be required to make a Pari Passu Offer in a
Pari Passu Debt Amount exceeding the principal amount of such Pari Passu
Indebtedness plus the amount of any premium required to be paid to repurchase
such Pari Passu Indebtedness. The offer price will be payable in cash in an
amount equal to 100% of the principal amount of the Senior Notes plus accrued
and unpaid interest, if any, to the date (the "Offer Date") such Offer is
consummated (the "Offered Price"), in accordance with the procedures set forth
in the Indenture. To the extent that the aggregate Offered Price of the Senior
Notes tendered pursuant to the Offer is less than the Senior Note Amount
relating thereto or the aggregate amount of Pari Passu Indebtedness that is
purchased is less than the Pari Passu Debt Amount (the amount of such shortfall,
if any, constituting a "Deficiency"), the Company will use such Deficiency in
the business of the Company and its Subsidiaries for general corporate purposes.
Upon completion of the purchase of all the Senior Notes tendered pursuant to an
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Offer and repurchase of the Pari Passu Indebtedness pursuant to a Pari Passu
Offer, the amount of Excess Proceeds, if any, shall be reset at zero.
(d) Whenever the Excess Proceeds received by the Company exceed $5 million,
such Excess Proceeds will, prior to any purchase of Senior Notes or Pari Passu
Indebtedness described in paragraph (c) above, be set aside by the Company in a
separate account pending (i) deposit with the depository or a paying agent of
the amount required to purchase the Senior Notes or Pari Passu Indebtedness
tendered in an Offer or a Pari Passu Offer, (ii) delivery by the Company of the
Offered Price to the holders of the Senior Notes or Pari Passu Indebtedness
tendered in an Offer or a Pari Passu Offer and (iii) application, as set forth
above, of Excess Proceeds in the business of the Company and its Subsidiaries
for general corporate purposes. Such Excess Proceeds may be invested in
Temporary Cash Investments, provided that the maturity date of any such
investment made after the amount of Excess Proceeds exceeds $5 million shall not
be later than the Offer Date. The Company shall be entitled to any interest or
dividends accrued, earned or paid on such Temporary Cash Investments, provided
that the Company shall not withdraw such interest from the separate account if
an Event of Default has occurred and is continuing.
(e) If the Company becomes obligated to make an Offer pursuant to clause (c)
above, the Senior Notes shall be purchased by the Company, at the option of the
holder thereof, in whole or in part in integral multiples of $1,000, on a date
that is not earlier than 45 days and not later than 60 days from the date the
notice is given to holders, or such later date as may be necessary for the
Company to comply with the requirements under the Exchange Act, subject to
proration in the event the Senior Note Amount is less than the aggregate Offered
Price of all Senior Notes tendered.
(f) The Company will comply with the applicable tender offer rules,
including Rule 14e-1 under the Exchange Act, and any other applicable securities
laws or regulations in connection with an Offer.
(g) The Company will not, and will not permit any Subsidiary to, create or
permit to exist or become effective any restriction (other than restrictions
existing under Indebtedness as in effect on the date of the Indenture and listed
on a schedule thereto as such Indebtedness may be refinanced from time to time,
provided that such restrictions are no less favorable to the holders of Senior
Notes than those existing on the date of the Indenture), that would materially
impair the ability of the Company to make an Offer to purchase the Senior Notes
or, if such Offer is made, to pay for the Senior Notes tendered for purchase.
(Section 1013)
Limitation on Sale and Leaseback Transactions. The Company will not, and
will not permit any Subsidiary of the Company to, enter into any Sale and
Leaseback Transaction with respect to any property or assets (whether now owned
or hereafter acquired) unless (i) the sale or transfer of such property or
assets to be leased complies with the provisions of "--Certain
Covenants--Limitation on Sale of Assets", provided that the Net Cash Proceeds
therefrom, to the extent not applied to the permanent repayment or prepayment of
any portion of the Credit Facility or used to purchase Senior Notes pursuant to
an Offer (whether or not such Offer is accepted), will be used to invest in
properties and assets that will be used in the businesses of the Company or its
Subsidiaries existing on the date of this Indenture or reasonably related
thereto and (ii) the Company or such Subsidiary would be entitled under the
provisions of "--Certain Covenants--Limitation on Indebtedness" to incur any
Capital Lease Obligations in respect of such Sale and Leaseback Transaction.
(Section 1011)
Limitation on Issuances of Guarantees of Indebtedness. (a) The Company will
not permit any Subsidiary, directly or indirectly, to guarantee, assume or in
any other manner become liable with respect to any Indebtedness of the Company
(i) unless such Subsidiary simultaneously executes and delivers a supplemental
indenture to the Indenture providing for a guarantee of the Senior Notes on the
same terms as the guarantee of such Indebtedness except that (A) such guarantee
need not be secured unless required pursuant to "--Limitation on Liens," and (B)
if such Indebtedness is by its terms expressly subordinated to the Senior Notes,
any such assumption, guarantee or other liability of such Subsidiary with
respect to such Indebtedness shall be subordinated to such Subsidiary's
assumption,
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guarantee or other liability with respect to the Senior Notes to the same extent
as such Indebtedness is subordinated to the Senior Notes and (ii) such
Subsidiary waives and will not in any manner whatsoever claim or take the
benefit or advantage of any rights of reimbursement, indemnity or subrogation or
any other rights against the Company or any other Subsidiary as a result of any
payment by such Subsidiary under its guarantee.
(b) Notwithstanding the foregoing, any guarantee by a Subsidiary of the
Senior Notes shall provide by its terms that it shall be automatically and
unconditionally released and discharged upon any sale, exchange or transfer, to
any Person not an Affiliate of the Company, of all of the Company's Capital
Stock in, or all or substantially all the assets of, such Subsidiary, which is
in compliance with the terms of the Indenture. (Section 1014)
Purchase of Senior Notes Upon a Change of Control. If a Change of Control
shall occur at any time, then each holder of Senior Notes shall have the right
to require that the Company purchase such holder's Senior Notes in whole or in
part in integral multiples of $1,000, at a purchase price (the "Change of
Control Purchase Price") in cash in an amount equal to 101% of the principal
amount of such Senior Notes, plus accrued and unpaid interest, if any, to the
date of purchase (the "Change of Control Purchase Date"), pursuant to the offer
described below (the "Change of Control Offer") and in accordance with the other
procedures set forth in the Indenture.
Within 15 days following any Change of Control, the Company shall notify the
Trustee thereof and give written notice of such Change of Control to each holder
of Senior Notes, by first-class mail, postage prepaid, at his address appearing
in the security register, stating, among other things, the purchase price and
that the purchase date shall be a business day no earlier than 30 days nor later
than 60 days from the date such notice is mailed, or such later date as is
necessary to comply with requirements under the Exchange Act; that any Senior
Note not tendered will continue to accrue interest; that, unless the Company
defaults in the payment of the purchase price, any Senior Notes accepted for
payment pursuant to the Change of Control Offer shall cease to accrue interest
after the Change of Control Purchase Date; and certain other procedures that a
holder of Senior Notes must follow to accept a Change of Control Offer or to
withdraw such acceptance. (Section 1015)
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Senior Notes that might be delivered by holders of
the Senior Notes seeking to accept the Change of Control Offer. The failure of
the Company to make or consummate the Change of Control Offer or pay the Change
of Control Purchase Price when due will give the Trustee and the holders of the
Senior Notes the rights described under "--Events of Default."
The term "all or substantially all" as used in the definition of "Change of
Control" has not been interpreted under New York law (which is the governing law
of the Indenture) to represent a specific quantitative test. As a consequence,
in the event the holders of the Senior Notes elected to exercise their rights
under the Indenture and the Company elected to contest such election, there
could be no assurance as to how a court interpreting New York law would
interpret the phrase.
The existence of a holder's right to require the Company to repurchase such
holder's Senior Notes upon a Change of Control may deter a third party from
acquiring the Company in a transaction which constitutes a Change of Control.
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The provisions of the Indenture will not afford holders of Senior Notes the
right to require the Company to repurchase the Senior Notes in the event of a
highly leveraged transaction or certain transactions with the Company's
management or its Affiliates, including a reorganization, restructuring, merger
or similar transaction (including, in certain circumstances, an acquisition of
the Company by management or its Affiliates) involving the Company that may
adversely affect holders of the Senior Notes, if such transaction is not a
transaction defined as a Change of Control. A transaction involving the
Company's management or its Affiliates, or a transaction involving a
recapitalization of the Company, will result in a Change of Control only if it
is the type of transaction specified by such definition.
The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws or
regulations in connection with a Change of Control Offer.
The Company will not, and will not permit any Subsidiary to, create or
permit to exist or become effective any restriction (other than restrictions
existing under Indebtedness as in effect on the date of the Indenture or under
any refinancings thereof no more onerous than the restrictions as in effect on
the date of the Indenture) that would materially impair the ability of the
Company to make a Change of Control Offer to purchase the Senior Notes or, if
such Change of Control Offer is made, to pay for the Senior Notes tendered for
purchase. (Section 1015)
Limitation on Subsidiary Capital Stock. The Company will not, and will not
permit any Subsidiary of the Company to, issue, sell or otherwise transfer any
Capital Stock of any Subsidiary, except for (i) Capital Stock issued to and held
by the Company or a Wholly Owned Subsidiary, and (ii) Capital Stock issued by a
Person prior to the time (A) such Person becomes a Subsidiary, (B) such Person
merges with or into a Subsidiary or (C) a Subsidiary merges with or into such
Person; provided that such Capital Stock was not issued or incurred by such
Person in anticipation of the type of transaction contemplated by subclause (A),
(B) or (C). (Section 1016)
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not permit any of its Subsidiaries
to, directly or indirectly, create or otherwise cause or suffer to exist or
become effective any consensual encumbrance or restriction on the ability of any
Subsidiary to (i) pay dividends or make any other distribution on its Capital
Stock, (ii) pay any Indebtedness owed to the Company or any other Subsidiary,
(iii) make any Investment in the Company or any other Subsidiary or (iv)
transfer any of its properties or assets to the Company or any other Subsidiary,
except (a) any encumbrance or restriction, with respect to a Subsidiary that is
not a Subsidiary of the Company on the date of the Indenture, in existence at
the time such Person becomes a Subsidiary of the Company and not incurred in
connection with, or in contemplation of, such Person becoming a Subsidiary; and
(b) any encumbrance or restriction existing under any agreement that extends,
renews, refinances or replaces the agreements containing the encumbrances or
restrictions in the foregoing clause (a) or in this clause (b), provided that
the terms and conditions of any such encumbrances or restrictions are no more
restrictive in any material respect than those under or pursuant to the
agreement evidencing the Indebtedness so extended, renewed, refinanced or
replaced. (Section 1017)
Provision of Financial Statements. The Indenture provides that, whether or
not the Company is subject to Section 13(a) or 15(d) of the Exchange Act, the
Company will, to the extent permitted under the Exchange Act, file with the
Commission the annual reports, quarterly reports and other documents which the
Company would have been required to file with the Commission pursuant to such
Sections 13(a) or 15(d) if the Company were so subject, such documents to be
filed with the Commission on or prior to the respective dates (the "Required
Filing Dates") by which the Company would have been required so to file such
documents if the Company were so subject. The Company will also in any event (x)
within 15 days of each Required Filing Date (i) transmit by mail to all holders,
as their names and addresses appear in the security register, without cost to
such holders and (ii) file with the Trustee
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copies of the annual reports, quarterly reports and other documents which the
Company would have been required to file with the Commission pursuant to Section
13(a) or 15(d) of the Exchange Act if the Company were subject to such Sections
and (y) if filing such documents by the Company with the Commission is not
permitted under the Exchange Act, promptly upon written request and payment of
the reasonable cost of duplication and delivery, supply copies of such documents
to any prospective holder at the Company's cost. (Section 1018)
Additional Covenants. The Indenture also contains covenants with respect to
the following matters: (i) payment of principal, premium and interest; (ii)
maintenance of an office or agency in the City of New York; (iii) arrangements
regarding the handling of money held in trust; (iv) maintenance of corporate
existence; (v) payment of taxes and other claims; (vi) maintenance of
properties; and (vii) maintenance of insurance.
CONSOLIDATION, MERGER, SALE OF ASSETS
The Company will not, in a single transaction or through a series of related
transactions, consolidate with or merge with or into any other Person or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially all
of its properties and assets to any Person or group of affiliated Persons, or
permit any of its Subsidiaries to enter into any such transaction or
transactions if such transaction or transactions, in the aggregate, would result
in a sale, assignment, conveyance, transfer, lease or disposition of all or
substantially all of the properties and assets of the Company and its
Subsidiaries on a Consolidated basis to any other Person or group of affiliated
Persons, unless (i) at the time and after giving effect thereto (i) either (a)
the Company will be the continuing corporation or (b) the Person (if other than
the Company) formed by such consolidation or into which the Company is merged or
the Person which acquires by sale, assignment, conveyance, transfer, lease or
disposition all or substantially all of the properties and assets of the Company
and its Subsidiaries on a Consolidated basis (the "Surviving Entity") will be a
corporation duly organized and validly existing under the laws of the United
States of America, any state thereof or the District of Columbia and such Person
expressly assumes, by a supplemental indenture, in a form satisfactory to the
Trustee, all the obligations of the Company under the Senior Notes and the
Indenture, and the Indenture will remain in full force and effect; (ii)
immediately before and immediately after giving effect to such transaction on a
pro forma basis, no Default or Event of Default will have occurred and be
continuing; (iii) except in the case of the consolidation or merger of any
Wholly Owned Subsidiary with or into the Company, immediately after giving
effect to such transaction on a pro forma basis, the Consolidated Net Worth of
the Company (or the Surviving Entity if the Company is not the continuing
obligor under the Indenture) is equal to or greater than the Consolidated Net
Worth of the Company immediately prior to such transaction; (iv) except in the
case of the consolidation or merger of any Wholly Owned Subsidiary with or into
the Company, immediately before and immediately after giving effect to such
transaction on a pro forma basis (on the assumption that the transaction
occurred on the first day of the four-quarter period immediately prior to the
consummation of such transaction with the appropriate adjustments with respect
to the transaction being included in such pro forma calculation), the Company
(or the Surviving Entity if the Company is not the continuing obligor under the
Indenture) could incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the provisions of "--Certain Covenants--Limitation on
Indebtedness"; (v) at the time of the transaction if any of the property or
assets of the Company or any of its Subsidiaries would thereupon become subject
to any Lien, the provisions of "--Certain Covenants--Limitation on Liens" are
complied with; and (vi) at the time of the transaction the Company or the
Surviving Entity will have delivered, or caused to be delivered, to the Trustee,
in form and substance reasonably satisfactory to the Trustee, an officers'
certificate and an opinion of counsel, each to the effect that such
consolidation, merger, transfer, sale, assignment, conveyance, transfer, lease
or other transaction and the supplemental indenture in respect thereof comply
with the Indenture and that all conditions precedent herein provided for
relating to such transaction have been complied with. (Section 801)
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EVENTS OF DEFAULT
An Event of Default will occur under the Indenture if:
(i) there shall be a default in the payment of any interest on any
Senior Note when it becomes due and payable, and such default shall continue
for a period of 30 days;
(ii) there shall be a default in the payment of the principal of (or
premium, if any, on) any Senior Note at its Maturity (upon acceleration,
optional or mandatory redemption, required repurchase or otherwise);
(iii) (a) there shall be a default in the performance, or breach of any
covenant or agreement of the Company under the Indenture (other than a
default in the performance, or breach, of a covenant or agreement which is
specifically dealt with in clause (i) or (ii) or in clause (b), (c) or (d)
of this clause (iii)) and such default or breach shall continue for a period
of 30 days after written notice has been given, by certified mail, (x) to
the Company by the Trustee or (y) to the Company and the Trustee by the
holders of at least 25% in aggregate principal amount of the outstanding
Senior Notes; (b) there shall be a default in the performance or breach of
the provisions described in "--Consolidation, Merger, Sale of Assets"; (c)
the Company shall have failed to make or consummate an Offer in accordance
with the provisions of "--Certain Covenants--Limitation on Sale of Assets;"
or (d) the Company shall have failed to make or consummate a Change of
Control Offer in accordance with the provisions of "--Certain
Covenants--Purchase of Senior Notes Upon a Change of Control";
(iv) one or more defaults in the payment of the principal, premium, if
any, or interest on any Indebtedness shall have occurred under any
agreements, indentures or instruments under which the Company or any
Subsidiary then has outstanding Indebtedness which aggregates in excess of
$5 million when the same shall become due and payable and continuation of
such default for any applicable grace period and, if such Indebtedness has
not already matured at its final maturity in accordance with its terms, the
holder of such Indebtedness shall have the right to accelerate such
Indebtedness;
(v) one or more events of default as defined in any of the agreements,
indentures or instruments described in clause (iv) of this section shall
have occurred and the Indebtedness thereunder, if not already matured at its
final maturity in accordance with its terms, shall have been accelerated;
(vi) one or more judgments, orders or decrees for the payment of money
in excess of $5 million, either individually or in the aggregate (net of
amounts paid by insurance, bond or similar instrument), shall be rendered
against the Company or any Subsidiary or any of their respective properties
and shall not be discharged and either (a) any creditor shall have commenced
an enforcement proceeding upon such judgment, order or decree or (b) there
shall have been a period of 60 consecutive days during which a stay of
enforcement of such judgment or order, by reason of an appeal or otherwise,
shall not be in effect;
(vii) any holder or holders of at least $2 million in aggregate
principal amount of Indebtedness of the Company or any Subsidiary after a
default under such Indebtedness shall notify the Trustee of the intended
sale or disposition of any assets of the Company or any Subsidiary that have
been pledged to or for the benefit of such holder or holders to secure such
Indebtedness or shall commence proceedings, or take any action (including by
way of set-off), to retain in satisfaction of such Indebtedness or to
collect on, seize, dispose of or apply in satisfaction of Indebtedness,
assets of the Company or any Subsidiary (including funds on deposit or held
pursuant to lock-box and other similar arrangements);
(viii) there shall have been the entry by a court of competent
jurisdiction of (a) a decree or order for relief in respect of the Company
or any Subsidiary in an involuntary case or proceeding
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under any applicable Bankruptcy Law or (b) a decree or order adjudging the
Company or any Subsidiary bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment or composition of or in respect of the Company or
any Subsidiary under any applicable federal or state law, or appointing a
custodian, receiver, liquidator, assignee, trustee, sequestrator (or other
similar official) of the Company or any Subsidiary or of any substantial
part of their respective properties, or ordering the winding up or
liquidation of their affairs, and any such decree or order for relief shall
continue to be in effect, or any such other decree or order shall be
unstayed and in effect, for a period of 60 consecutive days; or
(ix) (a) the Company or any Subsidiary commences a voluntary case or
proceeding under any applicable Bankruptcy Law or any other case or
proceeding to be adjudicated bankrupt or insolvent, (b) the Company or any
Subsidiary consents to the entry of a decree or order for relief in respect
of the Company or such Subsidiary in an involuntary case or proceeding under
any applicable Bankruptcy Law or to the commencement of any bankruptcy or
insolvency case or proceeding against it, (c) the Company or any Subsidiary
files a petition or answer or consent seeking reorganization or relief under
any applicable federal or state law, (d) the Company or any Subsidiary (x)
consents to the filing of such petition or the appointment of, or taking
possession by, a custodian, receiver, liquidator, assignee, trustee,
sequestrator or similar official of the Company or such Subsidiary or of any
substantial part of their respective properties, (y) makes an assignment for
the benefit of creditors or (z) admits in writing its inability to pay its
debts generally as they become due or (e) the Company or any Subsidiary
takes any corporate action in furtherance of any such actions in this
paragraph (ix). (Section 501)
If an Event of Default (other than as specified in clauses (viii) and (ix)
of the prior paragraph) shall occur and be continuing, the Trustee or the
holders of not less than 25% in aggregate principal amount of the Senior Notes
then outstanding may, and the Trustee at the request of such holders shall,
declare all unpaid principal of, premium, if any, and accrued interest on all
the Senior Notes to be due and payable immediately, by a notice in writing to
the Company (and to the Trustee if given by the holders of the Senior Notes) and
upon any such declaration, such principal, premium, if any, and interest shall
become immediately due and payable. If an Event of Default specified in clause
(viii) or (ix) of the prior paragraph occurs and is continuing, then all the
Senior Notes shall ipso facto become and be immediately due and payable, in an
amount equal to the principal amount of the Senior Notes, together with premium,
if any, and accrued and unpaid interest, if any, to the date the Senior Notes
become due and payable, without any declaration or other act on the part of the
Trustee or any holder. Thereupon, the Trustee may, at its discretion, proceed to
protect and enforce the rights of the holders of Senior Notes by appropriate
judicial proceedings.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the Trustee, the holders of a
majority in aggregate principal amount of Senior Notes outstanding, by written
notice to the Company and the Trustee, may rescind and annul such declaration
and its consequences if (a) the Company has paid or deposited with the Trustee a
sum sufficient to pay (i) all sums paid or advanced by the Trustee under the
Indenture and the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel, (ii) all overdue interest on all Senior
Notes, (iii) the principal of and premium, if any, on any Senior Notes which
have become due otherwise than by such declaration of acceleration and interest
thereon at a rate borne by the Senior Notes and (iv) to the extent that payment
of such interest is lawful, interest upon overdue interest at the rate borne by
the Senior Notes; and (b) all Events of Default, other than the nonpayment of
principal of the Senior Notes which have become due solely by such declaration
of acceleration, have been cured or waived. (Section 502)
The holders of not less than a majority in aggregate principal amount of the
Senior Notes outstanding may on behalf of the holders of all the Senior Notes
waive any past default under the Indenture and its consequences, except a
default in the payment of the principal of, premium, if any, or
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interest on any Senior Note, or in respect of a covenant or provision which
under the Indenture cannot be modified or amended without the consent of the
holder of each Senior Note outstanding affected by such modification or
amendment. (Section 513)
The Company is also required to notify the Trustee within 30 calendar days
of the occurrence of any Default. (Section 501) The Company is required to
deliver to the Trustee, on or before a date not more than 60 days after the end
of each fiscal quarter and not more than 120 days after the end of each fiscal
year, a written statement as to compliance with the Indenture, including whether
or not any Default has occurred. (Section 1019) The Trustee is under no
obligation to exercise any of the rights or powers vested in it by the Indenture
at the request or direction of any of the holders of the Senior Notes unless
such holders offer to the Trustee security or indemnity satisfactory to the
Trustee against the costs, expenses and liabilities which might be incurred
thereby. (Section 603)
The Trust Indenture Act contains limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases or to realize on certain property received by it in respect of any
such claims, as security or otherwise. The Trustee is permitted to engage in
other transactions, provided that if it acquires any conflicting interest it
must eliminate such conflict upon the occurrence of an Event of Default or else
resign.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company and any other obligor upon the Senior Notes
discharged with respect to the outstanding Senior Notes ("defeasance"). Such
defeasance means that the Company and any other obligor under the Indenture
shall be deemed to have paid and discharged the entire Indebtedness represented
by the outstanding Senior Notes, except for (i) the rights of holders of
outstanding Senior Notes to receive payments in respect of the principal of,
premium, if any, and interest on such Senior Notes when such payments are due,
(ii) the Company's obligations with respect to the Senior Notes concerning
issuing temporary Senior Notes, registration of Senior Notes, mutilated,
destroyed, lost or stolen Senior Notes, and the maintenance of an office or
agency for payment and money for security payments held in trust, (iii) the
rights, powers, trusts, duties and immunities of the Trustee and (iv) the
defeasance provisions of the Indenture. In addition, the Company may, at its
option and at any time, elect to have the obligations of the Company released
with respect to certain covenants that are described in the Indenture ("covenant
defeasance") and any omission to comply with such obligations shall not
constitute a Default or an Event of Default with respect to the Senior Notes. In
the event covenant defeasance occurs, certain events (not including non-payment,
bankruptcy and insolvency events) described under "Events of Default" will no
longer constitute an Event of Default with respect to the Senior Notes.
(Sections 401, 402 and 403)
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the holders of the Senior Notes, cash in United States dollars, U.S. Government
Obligations (as defined in the Indenture), or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants or a nationally recognized investment banking
firm, to pay and discharge the principal of, premium, if any, and interest on
the outstanding Senior Notes on the Stated Maturity (or on any date after May
15, 2000 (such date being referred to as the "Defeasance Redemption Date")), if
at or prior to electing either defeasance or covenant defeasance, the Company
has delivered to the Trustee an irrevocable notice to redeem all of the
outstanding Senior Notes on the Defeasance Redemption Date); (ii) in the case of
defeasance, the Company shall have delivered to the Trustee an opinion of
independent counsel in the United States stating that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and based
thereon such opinion of independent counsel in the United States shall confirm
that, the holders of the
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outstanding Senior Notes will not recognize income, gain or loss for federal
income tax purposes as a result of such defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such defeasance had not occurred; (iii) in the
case of covenant defeasance, the Company shall have delivered to the Trustee an
opinion of independent counsel in the United States to the effect that the
holders of the outstanding Senior Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such covenant defeasance and will
be subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such covenant defeasance had not
occurred; (iv) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit or insofar as clause (viii) or (ix) under
the first paragraph under "Events of Default" are concerned, at any time during
the period ending on the 91st day after the date of deposit; (v) such defeasance
or covenant defeasance shall not cause the Trustee for the Senior Notes to have
a conflicting interest as defined in the Indenture and for purposes of the Trust
Indenture Act with respect to any securities of the Company; (vi) such
defeasance or covenant defeasance shall not result in a breach or violation of,
or constitute a Default under, the Indenture or any other material agreement or
instrument to which the Company, or any Subsidiary is a party or by which it is
bound; (vii) such defeasance or covenant defeasance shall not result in the
trust arising from such deposit constituting an investment company within the
meaning of the Investment Company Act of 1940, as amended, unless such trust
shall be registered under such Act or exempt from registration thereunder;
(viii) the Company will have delivered to the Trustee an opinion of independent
counsel in the United States to the effect that after the 91st day following the
deposit, the trust funds will not be subject to the effect of any applicable
bankruptcy, insolvency, reorganization or similar laws affecting creditors'
rights generally; (ix) the Company shall have delivered to the Trustee an
officers' certificate stating that the deposit was not made by the Company with
the intent of preferring the holders of the Senior Notes over the other
creditors of the Company with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; (x) no event or condition shall
exist that would prevent the Company from making payments of the principal of,
premium, if any, and interest on the Senior Notes on the date of such deposit or
at any time ending on the 9lst day after the date of such deposit; and (xi) the
Company will have delivered to the Trustee an officers' certificate and an
opinion of independent counsel, each stating that all conditions precedent
provided for relating to either the defeasance or the covenant defeasance, as
the case may be, have been complied with. (Section 404)
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Senior Notes, as expressly
provided for in the Indenture) as to all outstanding Senior Notes when (a)
either (i) all the Senior Notes theretofore authenticated and delivered (except
lost, stolen or destroyed Senior Notes which have been replaced or paid or
Senior Notes whose payment has been deposited in trust or segregated and held in
trust by the Company and thereafter repaid to the Company or discharged from
such trust as provided for in the Indenture) have been delivered to the Trustee
for cancellation or (ii) all Senior Notes not theretofore delivered to the
Trustee for cancellation (x) have become due and payable, (y) will become due
and payable at their Stated Maturity within one year, or (z) are to be called
for redemption within one year under arrangements satisfactory to the Trustee
for the giving of notice of redemption by the Trustee in the name, and at the
expense, of the Company; and the Company has irrevocably deposited or caused to
be deposited with the Trustee as trust funds in trust an amount in United States
dollars sufficient to pay and discharge the entire indebtedness on the Senior
Notes not therefore delivered to the Trustee for cancellation, including
principal of, premium, if any, and accrued interest at such Maturity, Stated
Maturity or Redemption; (b) the Company has paid or caused to be paid all other
sums payable under the Indenture by the Company; and (c) the Company has
delivered to the Trustee an officers' certificate and an opinion of independent
counsel each stating that (i) all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with and (ii) such satisfaction and discharge will not result in a breach or
violation of, or constitute a default under, the Indenture or any other material
agreement or instrument to which the Company or any Subsidiary is a party or by
which the Company or any Subsidiary is bound. (Section 1201)
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MODIFICATIONS AND AMENDMENTS
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the holders of at least a majority of aggregate
principal amount of the Senior Notes then outstanding, provided, however, that
no such modification or amendment may, without the consent of the holder of each
outstanding Senior Note affected thereby, (i) change the Stated Maturity of the
principal of, or any installment of interest on, any Senior Note or reduce the
principal amount thereof or the rate of interest thereon or any premium payable
upon the redemption thereof, or change the coin or currency in which the
principal of any Senior Note or any premium or the interest thereon is payable,
or impair the right to institute suit for the enforcement of any such payment
after the Stated Maturity thereof (or, in the case of redemption, on or after
the redemption date); (ii) amend, change or modify the obligation of the Company
to make and consummate an Offer with respect to any Asset Sale or Asset Sales in
accordance with "--Certain Covenants--Limitation on Sale of Assets" or the
obligation of the Company to make and consummate a Change of Control Offer in
the event of a Change of Control in accordance with "--Certain
Covenants--Purchase of Senior Notes Upon a Change of Control," including
amending, changing or modifying any definitions with respect thereto; (iii)
reduce the percentage in principal amount of outstanding Senior Notes, the
consent of whose holders is required for any such supplemental indenture, or the
consent of whose holders is required for any waiver or compliance with certain
provisions of the Indenture; (iv) modify any of the provisions relating to
supplemental indentures requiring the consent of holders or relating to the
waiver of past defaults or relating to the waiver of certain covenants, except
to increase the percentage of outstanding Senior Notes required for such actions
or to provide that certain other provisions of the Indenture cannot be modified
or waived without the consent of the holder of each Senior Note affected
thereby; (v) except as otherwise permitted under "--Consolidation, Merger, Sale
of Assets," consent to the assignment or transfer by the Company of any of its
rights and obligations under the Indenture; or (vi) amend or modify any of the
provisions of the Indenture relating to the subordination of the Senior Notes in
any manner adverse to the holders of the Senior Notes. (Section 902)
Notwithstanding the foregoing, without the consent of any holders of the
Senior Notes, the Company and the Trustee may modify or amend the Indenture (a)
to evidence the succession of another Person to the Company, and the assumption
by any such successor of the covenants of the Company in the Indenture and in
the Senior Notes in accordance with "--Consolidation, Merger, Sale of Assets,"
(b) to add to the covenants of the Company or any other obligor upon the Senior
Notes for the benefit of the holders of the Senior Notes, or to surrender any
right or power conferred upon the Company or any other obligor upon the Senior
Notes, as applicable, in the Indenture, in the Senior Notes; (c) to cure any
ambiguity, or to correct or supplement any provision in the Indenture or the
Senior Notes which may be defective or inconsistent with any other provision in
the Indenture or the Senior Notes or make any other provisions with respect to
matters or questions arising under the Indenture or the Senior Notes; provided
that, in each case, such provisions shall not adversely affect the interest of
the holders of the Senior Notes; (d) to comply with the requirements of the
Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act; (e) to evidence and provide the acceptance of the
appointment of a successor Trustee under the Indenture; or (f) to mortgage,
pledge, hypothecate or grant a security interest in favor of the Trustee for the
benefit of the holder of the Senior Notes as additional security for the payment
and performance of the Company's obligations under the Indenture, in any
property, or assets, including any of which are required to be mortgaged,
pledged or hypothecated, or in which a security interest is required to be
granted to the Trustee pursuant to the Indenture or otherwise. (Section 901)
The holders of a majority in aggregate principal amount of the Senior Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture. (Section 1020)
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GOVERNING LAW
The Indenture and the Senior Notes will be governed by, and construed in
accordance with the laws of the State of New York, without giving effect to the
conflicts of law principles thereof.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Subsidiary or (ii) assumed in connection with the
acquisition of assets from such Person, in each case, other than Indebtedness
incurred in connection with, or in contemplation of, such Person becoming a
Subsidiary or such acquisition. Acquired Indebtedness shall be deemed to be
incurred on the date of the related acquisition of assets from any Person or the
date the acquired Person becomes a Subsidiary.
"Affiliate" means, with respect to any specified Person, (i) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person; (ii) any other Person that
owns, directly or indirectly, 5% or more of such specified Person's Capital
Stock or any executive officer or director of any such specified Person or other
Person or, with respect to any natural Person, any person having a relationship
with such Person by blood, marriage or adoption not more remote than first
cousin or (iii) any other Person 5% or more of the Voting Stock of which is
beneficially owned or held directly or indirectly by such specified Person. For
the purposes of this definition, "control" when used with respect to any
specified Person means the power to direct the management and policies of such
Person directly or indirectly, whether through ownership of voting securities,
by contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
Sale and Leaseback Transaction)(collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of (i) any Capital Stock
of any Subsidiary; (ii) all or substantially all of the properties and assets of
any division or line of business of the Company or its Subsidiaries; or (iii)
any other properties or assets of the Company or any Subsidiary, other than in
the ordinary course of business. For the purposes of this definition, the term
"Asset Sale" shall not include any transfer of properties and assets that (A) is
governed by the provisions described under "--Consolidation, Merger, Sale of
Assets," (B) is by the Company to any Wholly Owned Subsidiary, or of any
Subsidiary to the Company or any Wholly Owned Subsidiary in accordance with the
terms of the Indenture, or (C) is of obsolete equipment in the ordinary course
of business.
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from the date of determination to the
date or dates of each successive scheduled principal payment of such
Indebtedness multiplied by (b) the amount of each such principal payment by (ii)
the sum of all such principal payments.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as
amended, or any similar United States federal or state law relating to
bankruptcy, insolvency, receivership, winding up, liquidation, reorganization or
relief of debtors or any amendment to, succession to or change in any such law.
"Capital Lease Obligation" of any Person means any obligation of such Person
and its Subsidiaries on a Consolidated basis under any capital lease of real or
personal property which, in accordance with GAAP, has been recorded as a
capitalized lease obligation.
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"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of such Person's
capital stock or other equity interests.
"Change of Control" means the occurrence of either of the following events:
(i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d)
of the Exchange Act), other than Permitted Holders, is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that a Person shall be deemed to have beneficial ownership of all shares
that such Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of more
than 50% of the total outstanding Voting Stock of the Company; (ii) during any
period of two consecutive years, individuals who at the beginning of such period
constituted the board of directors of the Company (together with any new
directors whose election to such board or whose nomination for election by the
stockholders of the Company, was approved by a vote of 66 2/3% of the directors
then still in office who were either directors at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of such board of directors then in
office; (iii) the Company consolidates with or merges with or into any Person or
conveys, transfers or leases all or substantially all of its assets to any
Person, or any corporation consolidates with or merges into or with the Company,
in any such event pursuant to a transaction in which the outstanding Voting
Stock of the Company is changed into or exchanged for cash, securities or other
property, other than any such transaction where the outstanding Voting Stock of
the Company is not changed or exchanged at all (except to the extent necessary
to reflect a change in the jurisdiction of incorporation of the Company) or
where (A) the outstanding Voting Stock of the Company is changed into or
exchanged for (x) Voting Stock of the surviving corporation which is not
Redeemable Capital Stock or (y) cash, securities and other property (other than
Capital Stock of the surviving corporation) in an amount which could be paid by
the Company as a Restricted Payment as described under "--Limitation on
Restricted Payments" (and such amount shall be treated as a Restricted Payment
subject to the provisions in the Indenture described under "-- Limitation on
Restricted Payments") and (B) no "person" or "group" owns immediately after such
transaction, directly or indirectly, more than 50% of the total outstanding
Voting Stock of the surviving corporation; or (iv) the Company is liquidated or
dissolved or adopts a plan of liquidation or dissolution other than in a
transaction which complies with the provisions described under "Consolidation,
Merger, Sale of Assets."
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or if at any time after the
execution of the Indenture such Commission is not existing and performing the
duties now assigned to it under the Trust Indenture Act then the body performing
such duties at such time.
"Common Stock" means the common stock, par value $0.01 per share, of the
Company.
"Company" means Loehmann's, Inc., a corporation incorporated under the laws
of Delaware, until a successor Person shall have become such pursuant to the
applicable provisions of the Indenture, and thereafter "Company" shall mean such
successor Person.
"Consolidated Fixed Charge Coverage Ratio" of any Person means, for any
period, the ratio of (a) EBITDA to (b) the sum of Consolidated Interest Expense
for such period and cash and non-cash dividends paid on any Preferred Stock of
the Company during such period; provided that (i) in making such computation,
the Consolidated Interest Expense attributable to interest on any Indebtedness
computed on a pro forma basis and (A) bearing a floating interest rate shall be
computed as if the rate in effect on the date of computation had been the
applicable rate for the entire period and (B) which was not outstanding during
the period for which the computation is being made but which bears, at the
option of the Company, a fixed or floating rate of interest, shall be computed
by applying at the option of the Company, either the fixed or floating rate and
(ii) in making such computation, the Consolidated
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Interest Expense of the Company attributable to interest on any Indebtedness
under a revolving credit facility computed on a pro forma basis shall be
computed based upon the average daily balance of such Indebtedness during the
applicable period.
"Consolidated Income Tax Expense" of any Person means, for any period, the
provision for federal, state, local and foreign income taxes of such Person and
its Consolidated Subsidiaries for such period as determined in accordance with
GAAP.
"Consolidated Interest Expense" of any Person means, without duplication,
for any period, the sum of (a) the interest expense of such Person and its
Subsidiaries for such period, on a Consolidated basis, including, without
limitation, (i) amortization of debt discount, (ii) the net cost under Interest
Rate Agreements and Currency Hedging Agreements (including amortization of
discounts), (iii) the interest portion of any deferred payment obligation and
(iv) accrued interest, plus (b)(i) the interest component of the Capital Lease
Obligations paid, accrued and/or scheduled to be paid or accrued by such Person
and its Subsidiaries during such period and (ii) all capitalized interest of
such Person and its Subsidiaries, in each case as determined in accordance with
GAAP.
"Consolidated Net Income (Loss)" of any Person means, for any period, the
Consolidated net income (or loss) of the Company and its Subsidiaries for such
period on a Consolidated basis as determined in accordance with GAAP, adjusted,
to the extent included in calculating such net income (or loss), by excluding,
without duplication, (i) all extraordinary gains or losses (less all fees and
expenses relating thereto), (ii) the portion of net income (or loss) of the
Company and its Subsidiaries on a Consolidated basis allocable to minority
interests in unconsolidated Persons to the extent that cash dividends or
distributions have not actually been received by the Company or one of its
Consolidated Subsidiaries, (iii) net income (or loss) of any Person combined
with the Company or any of its Subsidiaries on a "pooling of interests" basis
attributable to any period prior to the date of combination, (iv) any gain or
loss, net of taxes, realized upon the termination of any employee pension
benefit plan, (v) net gains (but not losses) (less all fees and expenses
relating thereto) in respect of dispositions of assets other than in the
ordinary course of business, (vi) the net income of any Subsidiary to the extent
that the declaration of dividends or similar distributions by that Subsidiary of
that income is not at the time permitted, directly or indirectly, by operation
of the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to that Subsidiary or
its stockholders, (vii) any restoration to income of any contingency reserve,
except to the extent provision for such reserve was made out of income accrued
at any time following the date of the Indenture, or (viii) any gain arising from
the acquisition of any securities, or the extinguishment, under GAAP, of any
Indebtedness of such Person.
"Consolidated Net Worth" of any Person, as of a date, means the Consolidated
stockholders' equity (excluding Redeemable Capital Stock) of such Person and its
Subsidiaries, as of such date, as determined in accordance with GAAP.
"Consolidated Non-cash Charges" of any Person means, for any period, the
aggregate depreciation, amortization and other non-cash charges of such Person
and its subsidiaries on a Consolidated basis for such period, as determined in
accordance with GAAP (excluding any non-cash charge which requires an accrual or
reserve for cash charges for any future period).
"Consolidation" means, with respect to any Person, the consolidation of the
accounts of such Person and each of its subsidiaries if and to the extent the
accounts of such Person and each of its subsidiaries would normally be
consolidated with those of such Person, all in accordance with GAAP. The term
"Consolidated" shall have a similar meaning.
"Credit Facility" means the Credit Facility, dated as of May 6, 1996, among
the Company, the lenders parties thereto, and BankAmerica Business Credit, Inc.,
as agent, as such agreement may be
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amended, renewed, extended, substituted, refinanced, restructured, replaced,
supplemented or otherwise modified from time to time (including, without
limitation, any successive renewals, extensions, substitutions, refinancings,
restructurings, replacements, supplementations or other modifications of the
foregoing).
"Currency Hedging Arrangements" means one or more of the following
agreements which shall be entered into by one or more financial institutions:
foreign exchange contracts, currency swap agreements or other similar agreements
or arrangements designed to protect against the fluctuations in currency values.
"Default" means any event which is, or after notice or passage of any time
or both would be, an Event of Default.
"EBITDA" means the sum of Consolidated Net Income (Loss), Consolidated
Interest Expense, Consolidated Income Tax Expense and Consolidated Non-cash
Charges deducted in computing Consolidated Net Income (Loss) in each case, for
such period, of the Company and its Subsidiaries on a Consolidated basis, all
determined in accordance with GAAP.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, which
are in effect on the date of the Indenture.
"Guaranteed Debt" of any Person means, without duplication, all Indebtedness
of any other Person referred to in the definition of Indebtedness guaranteed
directly or indirectly in any manner by such Person, or in effect guaranteed
directly or indirectly by such Person through an agreement (i) to pay or
purchase such Indebtedness or to advance or supply funds for the payment or
purchase of such Indebtedness, (ii) to purchase, sell or lease (as lessee or
lessor) property, or to purchase or sell services, primarily for the purpose of
enabling the debtor to make payment of such Indebtedness or to assure the holder
of such Indebtedness against loss, (iii) to supply funds to, or in any other
manner invest in, the debtor (including any agreement to pay for property or
services without requiring that such property be received or such services be
rendered), (iv) to maintain working capital or equity capital of the debtor, or
otherwise to maintain the net worth, solvency or other financial condition of
the debtor or (v) otherwise to assure a creditor against loss; provided that the
term "guarantee" shall not include endorsements for collection or deposit, in
either case in the ordinary course of business.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services, excluding any trade payables and other accrued
current liabilities arising in the ordinary course of business, but including,
without limitation, all obligations, contingent or otherwise, of such Person in
connection with any letters of credit issued under letter of credit facilities,
acceptance facilities or other similar facilities and in connection with any
agreement to purchase, redeem, exchange, convert or otherwise acquire for value
any Capital Stock of such Person, or any warrants, rights or options to acquire
such Capital Stock, now or hereafter outstanding, (ii) all obligations of such
Person evidenced by bonds, notes, debentures or other similar instruments, (iii)
all indebtedness created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such Person (even if
the rights and remedies of the seller or lender under such agreement in the
event of default are limited to repossession or sale of such property), but
excluding trade payables arising in the ordinary course of business, (iv) all
obligations under Interest Rate Agreements and Currency Hedging Agreements of
such Person, (v) all Capital Lease Obligations of such Person, (vi) all
Indebtedness referred to in clauses (i) through (v)
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above of other Persons and all dividends of other Persons, the payment of which
is secured by (or for which the holder of such Indebtedness has an existing
right, contingent or otherwise, to be secured by) any Lien, upon or with respect
to property (including, without limitation, accounts and contract rights) owned
by such Person, even though such Person has not assumed or become liable for the
payment of such Indebtedness, (vii) all Guaranteed Debt of such Person, (viii)
all Redeemable Capital Stock valued at the greater of its voluntary or
involuntary maximum fixed repurchase price plus accrued and unpaid dividends,
and (ix) any amendment, supplement, modification, deferral, renewal, extension,
refunding or refinancing of any liability of the types referred to in clauses
(i) through (viii) above. For purposes hereof, the "maximum fixed repurchase
price" of any Redeemable Capital Stock which does not have a fixed repurchase
price shall be calculated in accordance with the terms of such Redeemable
Capital Stock as if such Redeemable Capital Stock were purchased on any date on
which Indebtedness shall be required to be determined pursuant to the Indenture,
and if such price is based upon, or measured by, the Fair Market Value of such
Redeemable Capital Stock, such Fair Market Value to be determined in good faith
by the board of directors of the issuer of such Redeemable Capital Stock.
"Indenture Obligations" means the obligations of the Company and any other
obligor under the Indenture or under the Senior Notes, to pay principal of,
premium, if any, and interest when due and payable, and all other amounts due or
to become due under or in connection with the Indenture, the Senior Notes and
the performance of all other obligations to the Trustee and the holders under
the Indenture and the Senior Notes, according to the terms thereof.
"Independent Director" means a director of the Company other than a director
(i) who (apart from being a director of the Company or any Subsidiary) is an
employee, insider, associate or Affiliate of the Company or a Subsidiary or has
held any such position during the previous five years or (ii) who is a director,
an employee, insider, associate or Affiliate of another party to the transaction
in question.
"Interest Rate Agreements" means one or more of the following agreements
which shall be entered into by one or more financial institutions: interest rate
protection agreements (including, without limitation, interest rate swaps, caps,
floors, collars and similar agreements) and/or other types of interest rate
hedging agreements from time to time.
"Investment" means, with respect to any Person, directly or indirectly, any
advance, loan (including guarantees), or other extension of credit or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase, acquisition or ownership by such Person of any Capital Stock, bonds,
notes, debentures or other securities issued or owned by any other Person, other
than Senior Debt, and all other items that would be classified as investments on
a balance sheet prepared in accordance with GAAP.
"Lien" means any mortgage or deed of trust, charge, pledge, lien (statutory
or otherwise), privilege, security interest, assignment, deposit, arrangement,
easement, hypothecation, claim, preference, priority or other encumbrance upon
or with respect to any property of any kind (including any conditional sale,
capital lease or other title retention agreement, any leases in the nature
thereof, and any agreement to give any security interest), real or personal,
movable or immovable, now owned or hereafter acquired.
"Maturity" means, when used with respect to any Senior Note, the date on
which the principal of such Senior Note becomes due and payable as therein
provided or as provided in the Indenture, whether at Stated Maturity, the Offer
Date or the redemption date and whether by declaration of acceleration, Offer in
respect of Excess Proceeds, Change of Control Offer in respect of a Change of
Control, call for redemption or otherwise.
"Net Cash Proceeds" means (a) with respect to any Asset Sale by any Person,
the proceeds thereof (without duplication in respect of all Asset Sales) in the
form of cash or Temporary Cash Investments including payments in respect of
deferred payment obligations when received in the form of, or stock or
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other assets when disposed of for, cash or Temporary Cash Investments (except to
the extent that such obligations are financed or sold with recourse to the
Company or any Subsidiary) net of (i) brokerage commissions and other reasonable
fees and expenses (including fees and expenses of counsel and investment
bankers) related to such Asset Sale, (ii) provisions for all taxes payable as a
result of such Asset Sale, (iii) payments made to retire Indebtedness where
payment of such Indebtedness is secured by the assets or properties the subject
of such Asset Sale, (iv) amounts required to be paid to any Person (other than
the Company or any Subsidiary) owning a beneficial interest in the assets
subject to the Asset Sale and (v) appropriate amounts to be provided by the
Company or any Subsidiary, as the case may be, as a reserve, in accordance with
GAAP, against any liabilities associated with such Asset Sale and retained by
the Company or any Subsidiary, as the case may be, after such Asset Sale,
including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities under
any indemnification obligations associated with such Asset Sale, all as
reflected in an officers' certificate delivered to the Trustee and (b) with
respect to any issuance or sale of Capital Stock or options, warrants or rights
to purchase Capital Stock, or debt securities or Capital Stock that have been
converted into or exchanged for Capital Stock, as referred to under "--Certain
Covenants-- Limitation on Restricted Payments," the proceeds of such issuance or
sale in the form of cash or Temporary Cash Investments, including payments in
respect of deferred payment obligations when received in the form of, or stock
or other assets when disposed of for, cash or Temporary Cash Investments (except
to the extent that such obligations are financed or sold with recourse to the
Company or any Subsidiary), net of attorney's fees, accountant's fees and
brokerage, consultation, underwriting and other fees and expenses actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Pari Passu Indebtedness" means any Indebtedness of the Company that is pari
passu in right of payment to the Senior Notes.
"Permitted Holders" means as of the date of determination: (i) any of
Sefinco Ltd., Donaldson, Lufkin & Jenrette, Inc., and Desai Capital Management,
Incorporated; (ii) general partners, officers, directors or Affiliates of any of
the Persons described in clause (i); (iii) family members or relatives of the
Persons described in clause (ii); (iv) any trusts created for the benefit of the
Persons described in clause (ii) or (iii); (v) in the event of incompetence or
death of any of the Persons described in clause (ii) or (iii), such Person's
estate, executor, administrator, committee or other personal representative or
beneficiaries.
"Permitted Investment" means (i) Investments in any Wholly Owned Subsidiary
or any Person which, as a result of such Investment, (a) becomes a Wholly Owned
Subsidiary or (b) is merged or consolidated with or into, or transfers or
conveys substantially all of its assets to, or is liquidated into, the Company
or any Wholly Owned Subsidiary; (ii) Indebtedness of the Company or a Subsidiary
described under clauses (iv) and (v) of the definition of "Permitted
Indebtedness"; (iii) Temporary Cash Investments; (iv) Investments acquired by
the Company or any Subsidiary in connection with an Asset Sale permitted under
"--Certain Covenants--Limitation on Sale of Assets" to the extent such
Investments are non-cash proceeds as permitted under such covenant; and (v)
Investments in existence on the date of the Indenture.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Preferred Stock" means, with respect to any Person, any Capital Stock of
any class or classes (however designated) which is preferred as to the payment
of dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over the
Capital Stock of any other class in such Person.
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"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any Capital Stock that, either by its terms
or by the terms of any security into which it is convertible or exchangeable or
otherwise, is or upon the happening of an event or passage of time would be,
required to be redeemed prior to any Stated Maturity of the principal of the
Senior Notes or is redeemable at the option of the holder thereof at any time
prior to any such Stated Maturity, or is convertible into or exchangeable for
debt securities at any time prior to any such Stated Maturity at the option of
the holder thereof.
"Sale and Leaseback Transaction" means any transaction or series of related
transactions pursuant to which the Company or a Subsidiary sells or transfers
any property or asset in connection with the leasing, or the resale against
installment payments, of such property or asset to the seller or transferor.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor statute.
"Senior Debt" means all Indebtedness of the Company other than Subordinated
Indebtedness.
"Stated Maturity" when used with respect to any Indebtedness or any
installment of interest thereon, means the dates specified in such Indebtedness
as the fixed date on which the principal of such Indebtedness or such
installment of interest, as the case may be, is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Company subordinated
in right of payment to the Senior Notes.
"Subsidiary" means any Person, a majority of the equity ownership or the
Voting Stock of which is at the time owned, directly or indirectly, by the
Company or by one or more other Subsidiaries, or by the Company and one or more
other Subsidiaries.
"Temporary Cash Investments" means (i) any evidence of Indebtedness,
maturing not more than one year after the date of acquisition, issued by the
United States of America, or an instrumentality or agency thereof and guaranteed
fully as to principal, premium, if any, and interest by the United States of
America or that are subject to a repurchase agreement with an institution
described in clause (ii) below exercisable within 270 days, (ii) any certificate
of deposit, maturing not more than one year after the date of acquisition,
issued by, or time deposit of, a commercial banking institution that is a member
of the Federal Reserve System and that has combined capital and surplus and
undivided profits of not less than $500 million, whose debt has a rating, at the
time as of which any investment therein is made, of "P-1" according to Moody's
Investors Service, Inc. ("Moody's") or any successor rating agency or "A-1"
according to Standard & Poor's Corporation ("S&P") or any successor rating
agency, (iii) commercial paper, maturing not more than one year after the date
of acquisition, issued by a corporation (other than an Affiliate or Subsidiary
of the Company) organized and existing under the laws of the United States of
America with a rating, at the time as of which any investment therein is made,
of "P-1" according to Moody's or "A-1" according to S&P and (iv) any money
market deposit accounts issued or offered by a domestic commercial bank having
capital and surplus in excess of $500 million; provided that the short term debt
of such commercial bank, has a rating at the time of Investment, of "P-1" (or
higher) according to Moody's or "A-1" (or higher) according to S&P.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended, or
any successor statute.
"Voting Stock" means Capital Stock of the class or classes pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers or trustees of
a corporation (irrespective of whether or not at the time Capital Stock of any
other class or classes shall have or might have voting power by reason of the
happening of any contingency).
"Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock of which
is owned by the Company or another Wholly Owned Subsidiary.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
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 Stock Offering and the remainder
out of cash on hand on such date, to redeem and repay the Existing Obligations.
The Company anticipates that 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) 0.50% per annum above the
latest federal funds rate, in either case, plus 0.75% or (ii) LIBOR plus 2.2%.
The Company also will be 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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PLAN OF DISTRIBUTION
This Prospectus has been prepared for use by DLJ in connection with offers
and sales of the Senior Notes in market-making transactions at negotiated prices
related to prevailing market prices at the time of the sale. DLJ may act as
principal or agent in such transactions. DLJ has advised the Company that it
currently intends to make a market in the Senior Notes but it is not obligated
to do so and may discontinue any such market-making at any time without notice.
Accordingly, no assurance can be given that an active trading market will
develop for or as to the liquidity of the Senior Notes.
DLJ has served as an underwriter in the offering of the Senior Notes and
received total underwriting discounts and commissions of $2,100,000 in
connection therewith.
An aggregate of 1,308,181 shares of Common Stock of the Company is owned by
DLJ or its affiliates. DLJ or its affiliates also owned 12,261,794 shares of the
Company's Series A Preferred Stock. DLJ sold certain of its shares of Common
Stock in the Stock Offering, and a portion of the proceeds of the Offering and
the Stock Offering were used to redeem all of the Series A Preferred Stock.
Certain of the affiliates of DLJ are party to the Shareholders Agreement.
Pursuant to the Shareholders Agreement, such affiliates of DLJ have the right to
nominate two of the ten members of the Board of Directors. These affiliates
currently have appointed Janet A. Hickey and Richard E. Kroon to the Board of
Directors. In addition, DLJ was paid $50,000 for financial advisory services
rendered to the Company during fiscal 1994. See "Certain Relationships and
Related Transactions."
LEGAL MATTERS
Certain legal matters in connection with the Senior Notes offered hereby
have been passed upon 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
Senior Notes offered hereby. This Prospectus 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 Senior Notes 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
70
<PAGE>
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 Indenture for the Senior Notes provides that the Company will furnish
summaries of the information contained in the periodic reports required to be
filed with the Commission under the Exchange Act to the holders of the Senior
Notes. If the Company is not subject to the periodic reporting and informational
requirements of the Exchange Act, it will provide the holders of the Senior
Notes with summaries of such supplementary and periodic information, documents
and reports which may be required pursuant to Section 13 of the Exchange Act in
respect of a security listed and registered on a national securities exchange.
71
<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
----------- -----------
(IN THOUSANDS)
<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
----------------
<S> <C>
(IN THOUSANDS)
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
----------------
<S> <C>
(IN THOUSANDS)
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:
(IN THOUSANDS)
--------------
1996.......................................................... $ 10,066
1997.......................................................... 11,639
1998.......................................................... 11,337
1999.......................................................... 10,605
2000.......................................................... 9,733
Thereafter.................................................... 110,946
--------------
Total......................................................... $164,326
--------------
--------------
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
------- -------- -------- -------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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)
------- -------- -------- -------
------- -------- -------- -------
0FISCAL 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, SALESPERSON OR OTHER PERSON HAS
BEEN AUTHORIZED TO GIVE ANY INFORMATION OR $100,000,000
TO MAKE ANY REPRESENTATION, OTHER
THAN THOSE HEREIN, IN CONNECTION WITH THIS
OFFERING, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE [ LOGO ]
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SECURITIES TO WHICH IT RELATES,
NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THESE 11 7/8% SENIOR NOTES
SECURITIES BY ANYONE IN ANY JURISDICTION IN DUE 2003
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 ANY PERSON TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE AS OF
WHICH INFORMATION IS FURNISHED.
------------------- -------------------
TABLE OF CONTENTS PROSPECTUS
-------------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary..................... 3
The Company............................ 8
Risk Factors........................... 9
Use of Proceeds........................ 13
Capitalization......................... 14
Selected Consolidated Financial and
Operating Data......................... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 19
Business............................... 25
Management............................. 35
Security Ownership of Certain
Beneficial Owners...................... 42
Certain Relationships and Related
Transactions........................... 44
Description of the Senior Notes........ 45
Description of Certain Indebtedness.... 69
Plan of Distribution................... 70
Legal Matters.......................... 70
Experts................................ 70
Additional Information................. 70
Index to Financial Statements.......... F-1 May 7, 1996
</TABLE>
- ------------------------------------------- -----------------------------------
- ------------------------------------------- -----------------------------------
