<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 10, 1994
REGISTRATION NO. 33-51847
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CARTER HAWLEY HALE STORES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-0457907
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
</TABLE>
3880 NORTH MISSION ROAD
LOS ANGELES, CALIFORNIA 90031
(213) 227-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MARC E. BERCOON, ESQ., SENIOR VICE PRESIDENT, GENERAL COUNSEL AND CORPORATE
SECRETARY
CARTER HAWLEY HALE STORES, INC.
3880 NORTH MISSION ROAD
LOS ANGELES, CALIFORNIA 90031
(213) 227-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
It is requested that copies of communications be sent to:
<TABLE>
<S> <C>
ERIC H. SCHUNK, ESQ. SANDRA A. SEVILLE-JONES, ESQ.
MILBANK, TWEED, HADLEY & MCCLOY MUNGER, TOLLES & OLSON
601 SO. FIGUEROA STREET, SUITE 3000 355 SO. GRAND AVENUE
LOS ANGELES, CALIFORNIA 90017 LOS ANGELES, CALIFORNIA 90071
(213) 892-4000 (213) 683-9100
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALES TO THE PUBLIC:
AT SUCH TIME OR TIMES ON AND AFTER THE EFFECTIVE DATE OF THIS
REGISTRATION STATEMENT AS THE SELLING HOLDERS MAY DETERMINE.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities
may not be sold nor may offers to buy be accepted prior to the time the
registration statement becomes effective. This prospectus shall not
constitute an offer to sell or the solicitation of an offer to
buy nor shall there be any sale of these securities in any State in which
such offer, solicitation or sale would be unlawful prior to registration or
qualification under the securities laws of any such State.
SUBJECT TO COMPLETION DATED MARCH 10, 1994
PROSPECTUS
$143,750,000 [LOGO]
CARTER HAWLEY HALE STORES, INC.
6 1/4% CONVERTIBLE SENIOR SUBORDINATED NOTES DUE 2000
This Prospectus relates to the 6 1/4% Convertible Senior Subordinated Notes due
2000 (the "Notes") of Carter Hawley Hale Stores, Inc. (the "Company") and the
shares of the Company's common stock, par value $.01 per share ("Common Stock"),
issuable upon conversion of the Notes. The Notes were issued and sold on
December 21, 1993 (the "Original Offering"), in a transaction exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), to persons reasonably believed by the initial purchaser of
the Notes to be "qualified institutional buyers" (as defined by Rule 144A under
the Securities Act), other institutional "accredited investors" (as defined in
Rule 501(a)(1), (2), (3) or (7) under the Securities Act) or in transactions
complying with the provisions of Regulation S under the Securities Act. The
Notes and the Common Stock issuable upon conversion thereof may be offered and
sold from time to time by such holders or by their transferees, pledgees, donees
or their successors (collectively, the "Selling Holders") pursuant to this
Prospectus. The Registration Statement of which this Prospectus is a part has
been filed with the Securities and Exchange Commission pursuant to a
registration rights agreement entered into in connection with the Original
Offering.
The Notes will mature on December 31, 2000. Interest on the Notes will be paid
semi-annually on December 31 and June 30 of each year, commencing June 30, 1994.
The Notes are convertible at the option of the holder thereof at any time after
90 days following the date of original issuance thereof and prior to maturity,
unless previously redeemed, into shares of Common Stock of the Company, at a
conversion price of $12.19 per share, subject to adjustment in certain events.
On March 9, 1994, the last reported sale price of the Company's Common Stock on
the New York Stock Exchange (symbol "CHH") was $12.75 per share.
The Notes are redeemable at the option of the Company, in whole or in part, at
any time on and after December 31, 1998, at a redemption price equal to 100% of
the principal amount thereof, together with accrued and unpaid interest. The
Notes do not provide for any sinking fund. Upon a Change in Control (as
defined), holders of the Notes will have the right, subject to certain
restrictions and conditions, to require the Company to purchase all or any part
of the Notes at the principal amount thereof together with accrued and unpaid
interest to the date of purchase.
The Notes are unsecured obligations of the Company and (i) are subordinate in
right of payment to all existing and future Senior Debt (as defined) of the
Company and (ii) rank pari passu in right of payment with all existing and
future Senior Subordinated Indebtedness (as defined). On January 29, 1994, the
Company had approximately $897.6 million of Senior Debt outstanding.
The Notes and the Common Stock issuable upon conversion of the Notes may be sold
by the Selling Holders from time to time directly to purchasers or through
agents, underwriters or dealers. See "Plan of Distribution." If required, the
names of any such agents or underwriters involved in the sale of the Notes and
the Common Stock issuable upon conversion of the Notes in respect of which this
Prospectus is being delivered and the applicable agent's commission, dealer's
purchase price or underwriter's discount, if any, will be set forth in an
accompanying supplement to this Prospectus (the "Prospectus Supplement").
The Selling Holders will receive all of the net proceeds from the sale of the
Notes and the Common Stock issuable upon conversion of the Notes and will pay
all underwriting discounts and selling commissions, if any, applicable to the
sale of the Notes and the Common Stock issuable upon conversion of the Notes.
The Company is responsible for payment of all other expenses incident to the
offer and sale of the Notes and the Common Stock issuable upon conversion of the
Notes.
The Selling Holders and any broker-dealers, agents or underwriters which
participate in the distribution of the Notes and the Common Stock issuable upon
conversion of the Notes may be deemed to be "underwriters" within the meaning of
the Securities Act, and any commission received by them or purchase by them of
the Notes and Common Stock issuable upon conversion of the Notes at a price less
than the initial price to the public may be deemed to be underwriting
commissions or discounts under the Securities Act. See "Plan of Distribution"
for a description of indemnification arrangements.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER MATTERS DISCUSSED UNDER THE
CAPTION "INVESTMENT CONSIDERATIONS."
------------------------
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.
------------------------
The date of this Prospectus is , 1994.
<PAGE> 3
AVAILABLE INFORMATION
The Company is currently subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements, information statements and
other information with the Securities and Exchange Commission ("the
Commission"). Any reports, proxy statements, information statements and other
information filed by the Company with the Commission may be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices located at Suite 1400, Northwestern Atrium Center,
500 West Madison Street, Chicago, Illinois 60661 and 13th Floor, Seven World
Trade Center, New York, New York 10048, and copies of such material may also be
obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Company's Common Stock is listed on the New York Stock Exchange
("NYSE") and the Pacific Stock Exchange. The Company files the reports, proxy
and information statements and other information described above with the NYSE,
and such material may be inspected at the offices of the NYSE, 20 Broad Street,
New York, New York 10005.
The Company has filed with the Commission a Registration Statement on Form
S-3 (herein together with all amendments and exhibits thereto, called the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Act") with respect to the securities offered by this Prospectus. This
Prospectus does not contain all of the information set forth or incorporated by
reference in the Registration Statement and the exhibits and schedules relating
thereto, certain portions of which have been omitted as permitted by the rules
and regulations of the Commission. For further information with respect to the
Company and the securities offered by this Prospectus, reference is made to the
Registration Statement and the exhibits filed or incorporated as a part thereof,
which are on file at the offices of the Commission and may be obtained upon
payment of the fee prescribed by the Commission, or may be examined without
charge at the offices of the Commission. Statements contained in this Prospectus
as to the contents of any documents referred to are not necessarily complete,
and, in each such instance, are qualified in all respects by reference to the
applicable documents filed with the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are hereby
incorporated by reference into this Prospectus:
(a) The Company's Annual Report on Form 10-K for the fifty-two week
period ended January 30, 1993, as amended by the Company's Annual Report on
Form 10-K/A No. 1 dated May 14, 1993;
(b) The Company's Quarterly Reports on Form 10-Q for the thirteen-week
period ended May 1, 1993, the thirteen-week period ended July 31, 1993, and
the thirteen-week period ended October 30, 1993;
(c) The Company's Current Reports on Form 8-K, dated October 25, 1993,
November 8, 1993, December 21, 1993, March 9, 1994 and March 14, 1994; and
(d) The description of the Common Stock of the Company contained in
its Registration Statement on Form 8-A (File No. 1-8765), dated August 13,
1992, as amended by Amendment No. 1 on Form 8, dated September 10, 1992 and
any amendment or report filed with the Commission for the purpose of
updating such description.
All documents subsequently filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act prior to the termination of the offering
of securities hereunder, shall be deemed to be incorporated by reference in this
Prospectus and to be a part of this Prospectus from the date of the filing
thereof. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person to
whom a copy of this Prospectus has been delivered, on the written or oral
request of any such person, a copy of any or all of the documents referred to
above which have been or may be incorporated in this Prospectus by reference
(other than certain exhibits). Requests for such copies should be directed to:
Carter Hawley Hale Stores, Inc., 3880 North Mission Road, Los Angeles,
California 90031. Attention: Marc E. Bercoon, Esq., telephone (213) 227-2000.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information contained elsewhere in this Prospectus, which should be read in its
entirety. Prospective investors should carefully consider matters discussed
under the caption "Investment Considerations." Unless the context otherwise
requires, references to the "Company" include Carter Hawley Hale Stores, Inc.
and its subsidiaries.
THE COMPANY
The Company is one of the leading operators of department stores in
California and the Southwestern United States. Organized in 1896, the Company
currently operates 83 department stores under the names The Broadway, Emporium
and Weinstocks. The Company generates approximately 50% of its sales from
Southern California, 40% of its sales from Northern California and 10% of its
sales from four other states in the Southwest. The management of the Company
(the "Management") believes the Company enjoys a number of significant strengths
including convenient store locations, a loyal customer base and an advanced
management information system. The Company emerged from bankruptcy, pursuant to
a plan of reorganization on October 8, 1992. In July, 1993, the Company
completed a public offering of the Company's Common Stock with net proceeds of
$147.5 million. As of January 29, 1994, Zell/Chilmark Fund, L.P.
("Zell/Chilmark") owned approximately 54.4% of the outstanding Common Stock of
the Company.
David L. Dworkin joined the Company as its President and Chief Executive
Officer on March 24, 1993. Prior to joining the Company, he served as Chairman
and Chief Executive Officer of London-based retailer BhS (British Home Stores),
a division of Storehouse PLC ("Storehouse"), from November 1989 until July 1992,
and as Group Chief Executive of Storehouse from July 1992 until joining the
Company. During the time he was at BhS and Storehouse, BhS refocused its
merchandise assortment, strengthened its merchandising organization, remodeled
64 of its 137 stores and substantially reduced its supplier base. Mr. Dworkin
has in excess of 25 years experience in the retailing industry. In addition, as
part of the process of building a strong management team, Mr. Dworkin has either
hired or promoted six new senior executive officers since May 1993.
BUSINESS STRATEGY
Under David Dworkin's leadership, the Company has begun the process of
transforming itself into a focused, value-oriented retail operation with a
merchandising strategy and a customer base that reflects the demographic, ethnic
and life-style diversity of California and the Southwest. Toward this goal, the
Company is in the process of implementing, or has already implemented,
strategies to improve the merchandise offerings, remodel the stores, improve
inventory management, refocus marketing efforts, improve the selling culture and
reduce costs. The specific strategies are described below.
Improve Merchandise Offerings: The Company is adjusting its merchandise
assortments toward faster-turning, higher profit core merchandise
categories which include women's and men's apparel, accessories, women's
shoes, cosmetics and soft home goods. Management believes the Company's
increased offering of private label products across the merchandise
spectrum will enhance this strategy and assist the Company in
differentiating both its product lines and its image in the marketplace.
Furthermore, the Company's newly implemented everyday value pricing
strategy currently offers over 17% of the Company's merchandise at "value"
prices. Management believes this value image coupled with broad assortments
in staple items, differentiation of the Company's product line, the rapid
flow of merchandise to the selling floor and minimization of out-of-stock
items allows the Company to present an authoritative and competitive
merchandising image. During the second half of 1993, Mr. Dworkin recruited
and put in place a new merchandising team of key executives in core
business areas. Management expects that the Company will not realize the
full benefits of its new merchandising strategy until 1994 and beyond.
3
<PAGE> 5
Remodel the Stores: To create an appealing shopping environment, the
Company intends to spend approximately $336 million on capital expenditures
over the next three years, consisting of $276 million to remodel and/or
reallocate space within at least 40 of its 83 stores and $60 million for
maintenance capital expenditures. The goal of the remodeling program is to
increase the space allocated to core merchandise, increase selling square
footage, improve merchandise presentation and facilitate more efficient
customer service, and modernize the stores. The Company began the
remodeling program in 1993 by completing 58 quick-win capital investments
at a cost of $17.4 million and investing an additional $12.5 million on new
fixtures to enhance merchandising and displays. (Quick-win investments
involve the installation of vendor shops and low cost upgrade and
reallocation of selling space without significant relocation of walls and
fixtures.) The Company also created a "model store" space distribution
floor plan in concert with the new merchandising strategy. This space
redistribution/remodel plan will be the foundation of the capital
expenditure program and will be implemented in the Company's stores over
the next three years in conjunction with the introduction of new fixtures
to maximize merchandise presentation and capacity.
Improve Inventory Management: To continuously provide a fresh flow of new
goods to the selling floor, increase inventory turnover and reduce
markdowns, the Company has implemented a new inventory management strategy.
Since 1992, the Company has reduced the number of its vendors by over 40%,
thereby becoming more important to the remaining vendors. The Company has
also expanded vendor participation in its quick response inventory
replenishment program to reduce purchase lead-time, maintain a faster and
more continuous flow of merchandise and facilitate automatic replenishment
of staple items. In addition, the Company has entered into strategic
alliances with vendors in which vendors cooperate with respect to
assortment, marketing, visual presentation and sales promotion. Coupled
with more effective vendor relationships, the Company has implemented a new
receipt-based internal inventory management system which is designed to
improve the efficiency of its inventory management through a new focus on
receipt flow, gross margin return on investment and timely markdowns to
insure the freshness of its merchandise offerings. This system has already
resulted in an improvement in the aging of the Company's inventory and a
reduction in the weeks of supply on hand. Management believes this new
inventory management system will allow the Company to continue to improve
its inventory turns and decrease its weeks of supply on hand.
Refocus Marketing Efforts: To present a focused image to its customers, the
Company has redirected its marketing efforts to create a research-based
marketing strategy that is fully integrated with both the merchandising and
store operations functions. To this end, the Company has created a customer
database through the use of both proprietary internal information and
externally available information which enables the Company to identify its
target customers by region and to tailor its marketing and merchandising
strategy to best serve that customer base. In addition, in order to
increase the number of target customers, the Company is pursuing a strategy
of marketing to the ethnically diverse population of California and the
Southwest through the use of targeted marketing programs and bilingual
sales associates, signage and advertising.
Improve the Selling Culture: The Company is in the process of creating a
new selling culture. This new culture is customer driven, competitive and
focuses on improving productivity and providing an improved shopping
environment. To accomplish these goals, the Company is recruiting talented
store personnel, improving customer service and sales training and
redesigning the compensation structure to align more closely the sales
associates' incentives with the customer service goals.
Reduce Costs: The consolidation of operations to date has significantly
reduced the Company's expense infrastructure. Furthermore, in September
1993, the Company completed an Activity Value Analysis ("AVA") program.
This program was designed to evaluate the importance and value of all
activities within each of its areas of operation and identify duplicative
and
4
<PAGE> 6
low value-added functions, potential staff reductions and other actions
which would improve efficiency. This review yielded more than 1,500
cost-saving ideas and identified approximately $40 million of annual
expense reductions. The Company began implementing these measures earlier
this year and expects to complete their implementation in 1995. Management
believes the implementation of these measures will result in incremental
annual savings of $7.0 million in 1993, $30 million in 1994 and $3.0
million in 1995. Management intends to invest some of the annual savings
generated by the expense reductions in programs designed to improve the
Company's sales and marketing efforts. In addition to the above-mentioned
cost savings, the Company continually strives for ways to control expenses
and expects to develop further cost efficiencies.
The Company's principal place of business is located at 3880 North Mission
Road, Los Angeles, California 90031; telephone (213) 227-2000.
RECENT DEVELOPMENTS
In July 1993 the Company raised net proceeds of $147.5 million in a public
offering of its Common Stock to fund its business strategy, including the
remodeling and upgrading of stores. As a result of the implementation of its
business strategy, the Company has incurred significant one-time charges. These
charges included a $25 million charge in connection with the AVA program
recorded in the second quarter of 1993 (which is expected to achieve $40 million
in annual expense reductions by 1995) and $18 million of inventory clearance
markdowns designed to upgrade the Company's merchandise offerings ($6 million of
which was incurred in the fourth quarter). In addition, during the fourth
quarter of 1994, the Company expects to incur a charge of $20 million consisting
of $15 million for deductibles and other uninsured costs incurred as a result of
the January 1994 Los Angeles earthquake and $5 million for implementation of new
expense reduction programs. During fiscal 1993, the Company expended $60 million
on its capital expenditure program, $66 million on cash interest payments and
$14 million to repay debt. The Company believes that cash flow from operations,
amounts available under its credit facilities and the proceeds from the Original
Offering will enable it to implement the major elements of its business
strategy. However, the Company continuously evaluates increasing or decreasing
the number of stores, the terms of its credit facilities and other operating and
financing alternatives.
The Company had to close four of its 83 stores in connection with the
January 17, 1994 earthquake. Although the reopening of these stores will be
subject to numerous factors beyond the Company's control, including construction
schedules and regulatory permits, the Company anticipates reopening two of these
stores by late spring 1994 and the two other stores by the latter part of 1994.
5
<PAGE> 7
THE OFFERING
Issue...................$143,750,000 principal amount of 6 1/4% Convertible
Senior Subordinated Notes due 2000.
Maturity................December 31, 2000.
Interest Payment
Dates...................December 31 and June 30 of each year, commencing June
30, 1994.
Conversion..............The Notes, unless previously redeemed, are convertible
at the option of the holder at any time after 90 days
following the date of original issuance thereof and
prior to maturity into shares of Common Stock at a
conversion price of $12.19 per share, subject to
adjustment in certain events. See "Description of the
Notes -- Conversion."
Optional Redemption.....The Notes may be redeemed, at the Company's option, in
whole or from time to time in part, on and after
December 31, 1998, at a price equal to 100% of the
principal amount thereof, together with accrued and
unpaid interest to the date of redemption. See
"Description of the Notes -- Optional Redemption."
Ranking.................The Notes are unsecured obligations of the Company and
(i) are subordinate in right of payment to all
existing and future Senior Debt (as defined) of the
Company and (ii) rank pari passu in right of payment
with all existing and future Senior Subordinated
Indebtedness (as defined). On January 29, 1994, the
Company had approximately $897.6 million of Senior
Debt outstanding.
Change in Control.......Upon a Change in Control (as defined), holders of the
Notes will have the right, subject to certain
restrictions and conditions, to require the Company
to purchase all or any part of their Notes at the
principal amount thereof plus accrued and unpaid
interest thereon to the date of purchase. See
"Description of the Notes -- Change in Control."
Use of Proceeds.........The Net Proceeds from the Original Offering were used by
the Company to make capital available to fund the
Company's business strategy, including the
modernization of the Company's stores, and, until
such capital expenditures are made, to the repayment
of certain amounts outstanding under the Company's
credit facilities. The Company will not receive any
proceeds from the Sale of Notes and/or Common Stock
offered pursuant to this Prospectus. See "Use of
Proceeds" and "Selling Holders."
6
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SUMMARY OF CONSOLIDATED FINANCIAL DATA AND CERTAIN OPERATING DATA
The following table presents summary consolidated financial data and
certain operating data of the Company as of and for the 52-week periods ended
January 30, 1993, February 1, 1992 and February 2, 1991 and for the 39-week
periods ended October 30, 1993 and October 31, 1992. The financial data has
generally been derived from the Company's consolidated financial statements. The
following financial and other operating data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the consolidated financial statements included in the Company's
Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q, the related
summaries of significant accounting policies and financial review contained
therein and the other information contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FOR THE PERIOD ENDED
-----------------------------------------------------------------------------
OCTOBER 30, OCTOBER 31, JANUARY 30, FEBRUARY 1, FEBRUARY 2,
1993 1992 1993(1) 1992 1991
(39 WEEKS) (39 WEEKS) (52 WEEKS) (52 WEEKS) (52 WEEKS)
----------- ----------- ----------- ----------- -----------
(DOLLAR AMOUNTS IN MILLIONS,
EXCEPT SALES PER GROSS SQUARE FOOT)
<S> <C> <C> <C> <C> <C>
EARNINGS DATA
Sales............................. $ 1,387.1 $ 1,405.3 $ 2,137.8 $ 2,127.9 $ 2,532.7
Finance charge revenue............ 60.0 61.9 82.7 94.0 110.7
Cost of goods sold, including
occupancy and buying costs...... 1,049.8 1,065.6 1,577.0 1,581.1 1,885.1
Selling, general and
administrative expenses......... 393.3 397.6 572.6 570.5 681.6
Other expense, net(2)............. 25.0 -- -- -- 17.6
----------- ----------- ----------- ----------- -----------
Earnings (loss) from operations
before interest expense,
reorganization income (costs)
and income taxes ("EBIT")....... (21.0) 4.0 70.9 70.3 59.1
Interest expense, net............. 63.8 67.3 89.8 102.3 145.0
----------- ----------- ----------- ----------- -----------
Loss from operations before
reorganization income (costs)
and income taxes................ (84.8) (63.3) (18.9) (32.0) (85.9)
Reorganization income (costs)(3).. -- 884.1 884.1 (138.1) (40.0)
----------- ----------- ----------- ----------- -----------
Earnings (loss) from operations
before income taxes............. (84.8) 820.8 865.2 (170.1) (125.9)
Income tax benefit (expense)...... 6.9 6.8 (9.8) -- 26.3
----------- ----------- ----------- ----------- -----------
Earnings (loss) from operations... (77.9) 827.6 855.4 (170.1) (99.6)
Extraordinary income (costs) and
changes in accounting(4)........ -- 323.2 323.2 (46.9) (20.1)
----------- ----------- ----------- ----------- -----------
Net earnings (loss)............... $ (77.9) $ 1,150.8 $ 1,178.6 $ (217.0) $ (119.7)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
OTHER DATA
Depreciation and amortization..... $ 25.0 $ 30.7 $ 38.5 $ 43.6 $ 42.6
Capital expenditures.............. $ 39.7 $ 19.6 $ 38.2 $ 34.8 $ 80.6
Gross square footage at period end
(in thousands).................. 15,177 15,842 15,177 15,995 16,156
Sales per gross square foot(5).... N/A N/A $ 137 $ 133 $ 145
Comparative store sales gain
(decrease)...................... 1.8% (1.3)% 0.9% (9.9)% (2.3)%
Number of stores.................. 83 87 83 88 89
Inventory turnover................ N/A N/A 2.1x 2.1x 2.2x
BALANCE SHEET DATA
Working capital................... $ 674.3 $ 602.2 $ 701.5 $ 628.3 $ 978.1
Total assets...................... $ 1,869.4 $ 1,866.2 $ 1,912.9 $ 1,667.7 $ 1,755.4
Liabilities subject to settlement
under reorganization
proceedings..................... $ -- $ -- -- $ 598.3 $ 598.6
Receivables based financing....... $ 388.7 $ 398.0 $ 467.6 $ 489.3 $ 633.8
Other long-term debt and capital
lease obligations............... $ 559.8 $ 566.7 $ 563.2 $ 508.4 $ 515.3
Stockholders' equity (deficit).... $ 445.3 $ 344.9 $ 374.8 $ (508.5) $ (272.6)
</TABLE>
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- ---------------
(1) Upon emergence from bankruptcy, the Company adopted the principles of fresh
start reporting as of October 3, 1992 to reflect the impact of the
reorganization. The 52-week period ended January 30, 1993 is thus comprised
of the 35 weeks ended October 3, 1992 and the 17 weeks ended January 30,
1993. In addition, the 39-week period ended October 31, 1992 is comprised of
the 35 weeks ended October 3, 1992 and the 4 weeks ended October 31, 1992.
As a result of the application of fresh start reporting, the financial
condition and results of operations of the Company for dates and periods
subsequent to October 3, 1992 are not necessarily comparable to those prior
to October 3, 1992.
(2) Includes a $25.0 million charge for costs to implement the Company's
strategic plan which is designed to streamline the Company's organizational
structure, in the 39-week period ended October 30, 1993, and a $30.0 million
gain on sale of the Company's Thalhimer Brothers, Inc. subsidiary
("Thalhimers") and a $47.0 million provision for consolidation programs in
the 52-week period ended February 2, 1991.
(3) Includes income of $906.4 million resulting from adjustments to reflect the
revaluation of assets and liabilities as a result of the application of
fresh start reporting, $13.8 million in costs directly related to the
reorganization, and $8.5 million in adjustments to the provision for
disputed claims in the 52-week period ended January 30, 1993; $65.0 million
provision for consolidation, $29.4 million in costs related to the
reorganization, $25.0 million in adjustments to the provisions for disputed
claims, a $9.7 million charge for unamortized costs on subordinated debt,
and $9.0 million of adjustments to the carrying value of assets in the
52-week period ended February 1, 1992; and a $40.0 million provision for
store closings in the 52-week period ended February 2, 1991.
(4) Includes an extraordinary gain on debt discharge of $304.4 million and
income from a change in accounting for income taxes of $18.8 million for the
52-week period ended January 30, 1993; a charge for a change in accounting
for post-retirement medical benefits of $30.0 million and an extraordinary
charge of $16.9 million for costs relating to early retirements of debt for
the 52-week period ended February 1, 1992; and extraordinary charges of
$14.1 million for costs relating to early retirements of debt and $6.0
million for uninsured losses associated with the October 1989 San Francisco
earthquake for the 52-week period ended February 2, 1991.
(5) Based on sales for stores open at each period end.
8
<PAGE> 10
INVESTMENT CONSIDERATIONS
The Notes offered hereby are subject to a number of material risks and
other investment considerations, including those summarized below. These risks
and investment considerations should be carefully considered by prospective
investors.
LEVERAGE; RESTRICTIVE COVENANTS AND OTHER TERMS OF INDEBTEDNESS
The Company has consolidated indebtedness that is greater than its
stockholders' equity. See "Capitalization." This degree of leverage increases
the Company's vulnerability to adverse general economic and retailing industry
conditions and to increased competitive pressures, including pricing pressure
from better capitalized competitors. The Indenture (as hereafter defined) and
the other debt instruments to which the Company is a party contain a number of
restrictive covenants, including covenants limiting capital expenditures,
incurrence of debt and sales of assets and prohibiting the payment of dividends
on the Company's Common Stock. In addition, under certain of its debt
instruments, the Company is required to achieve certain minimum levels for net
cash flows, earnings before interest, taxes, depreciation and amortization, and
other financial measures. See "Indebtedness of the Company." In the event that
the Company fails to comply with the financial covenants and certain other
covenants associated with the Company's debt instruments, the Company will be in
default under those debt instruments, which could result in the acceleration of
all of the Company's indebtedness and other obligations. The Company's ability
to comply with such covenants could be affected by lower than anticipated
margins or sales and there can be no assurance that the Company would be able to
obtain amendments to such covenants should this occur. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." In addition, in the event of
such a default, the creditors to certain debt instruments could proceed against
collateral securing such debt, which includes substantially all of the Company's
assets. As a result of the Company's continuing substantial indebtedness,
restrictive covenants and other terms of its debt instruments, the Company's
ability to obtain additional financing in the future, make acquisitions,
complete its planned capital expenditure program or take advantage of
significant business opportunities could be impaired.
OPERATING LOSSES; CHANGES IN OPERATIONS
The Company reported losses from operations before reorganization income
(costs) and income taxes for the 52-week periods ended January 30, 1993,
February 1, 1992 and February 2, 1991 of $18.9 million, $32.0 million and $85.9
million, respectively, and for the 39-week period ended October 30, 1993 of
$84.8 million. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The Company emerged from bankruptcy pursuant to a
plan of reorganization ("POR") on October 8, 1992 (the "Emergence Date"). See
"Business -- Recapitalization." Recently, the Company has implemented measures
designed to reduce operating costs, has hired new senior management and is in
the process of implementing a new business strategy intended to improve the
overall operating performance of the Company. Seven of the Company's nine
executive officers have either joined the Company or were promoted to their
present positions since February 1993. See "Business -- Business Strategy." No
assurance can be given that such measures will be successful or that the Company
will not continue to incur losses in subsequent periods. Losses could negatively
affect working capital and the extension of credit to the Company's suppliers by
the factor community, significantly impair the Company's ability to reduce or
refinance existing indebtedness and impact the Company's ability to implement
its strategic plan.
The Company does not, as a matter of policy, publish projections covering
future performance. However, in connection with the consummation of the POR, the
Company was required by law to include certain projections in its disclosure
statement to establish the viability of the POR. Those projections were prepared
in early 1992. With the introduction of new management and the implementation of
its business strategy, along with other factors, the Company believes that the
9
<PAGE> 11
projections it prepared in connection with its emergence from bankruptcy are not
necessarily indicative of future performance.
SUBORDINATION
The Notes are unsecured and subordinate in right of payment to all existing
and future Senior Debt of the Company, including the Credit Facility. In the
event of the Company's insolvency or liquidation, or upon acceleration of the
Senior Debt, the holders of the Senior Debt must be paid in full before holders
of the Notes may be paid. Furthermore, payment on the Notes may not be permitted
if a default exists on the Senior Debt. On January 29, 1994, the Company had
approximately $897.6 million of Senior Debt outstanding. The Company may incur
additional Senior Debt to the extent permitted by the terms of such Senior Debt.
See "Indebtedness of the Company -- Credit Facility" and "Description of the
Notes -- Subordination of Notes." In addition, substantially all of the
Company's assets have been pledged to secure indebtedness of the Company. In the
event of the Company's insolvency or liquidation, the claims of the secured
lenders would have to be satisfied out of such collateral before any such assets
would be available to pay claims of the Company's other debtholders, including
holders of the Notes. See "Indebtedness of the Company."
CONSEQUENCES OF FURTHER EQUITY OFFERINGS
The Company could make additional sales of equity securities. Depending on
market conditions and other factors, the effect of such equity offerings could
be to cause a dilution with respect to the holders of the Common Stock.
DEPENDENCE ON KEY PERSONNEL
The development and operation of the Company depends significantly upon the
continued efforts of David L. Dworkin, the Company's President and Chief
Executive Officer. He joined the Company in March 1993 and has a three-year
employment agreement with the Company, which includes a provision permitting him
to terminate the agreement in the event of a change of control. See
"Management -- Employment Agreements." The loss of David Dworkin's services
could have an adverse effect upon the Company's operations.
ISSUANCE OF ADDITIONAL SHARES FOR DISPUTED CLAIMS
Notwithstanding the confirmation and effectiveness of the POR, the
bankruptcy court continues to have jurisdiction to, among other things, resolve
disputed prepetition claims against the Company and to resolve other matters
that may arise in connection with or relate to the POR. The terms of the POR
require the Company to exchange .046 shares of Common Stock for each $1.00 of
allowed general unsecured claims. As of January 29, 1994, $52.9 million of
disputed claims remained outstanding. Management believes such claims will
ultimately be allowed upon settlement or litigation for approximately $19.0
million, for which the Company has reserved approximately 1.0 million shares.
Management believes that reserved shares of Common Stock will be sufficient to
meet the Company's obligations to such claim holders. If all disputed claims
were allowed in full, such claim holders would be entitled to a total of 2.4
million shares of Common Stock, compared to the 1.0 million shares reserved,
resulting in dilution to holders of the outstanding Common Stock of
approximately 3%. In addition, the Company has reserved approximately 0.2
million shares for preconfirmation stockholders of the Company who have not yet
claimed the distribution of Common Stock to which they were entitled under the
POR. The total of 1.2 million shares is included in the Company's outstanding
Common Stock. In addition, 0.2 million warrants to purchase Common Stock (the
"Warrants") remain issuable to certain preconfirmation stockholders pursuant to
the POR. There are no contractual restrictions on the resale of any of these
securities issuable pursuant to the POR. Such securities may be sold into a
public market without restriction at any time, potentially resulting in an
adverse effect on the market for, or the market price of, shares of Common
Stock. See "Business -- Legal Proceedings -- Chapter 11 Proceedings; Unresolved
Claims."
10
<PAGE> 12
COMPETITIVE CONDITIONS; REGULATION; SEASONALITY; REGIONAL CONCENTRATIONS
The retailing industry, in general, and the department store business, in
particular, are highly competitive. The Company's stores compete with the other
department stores in the geographic areas in which they operate and also with
numerous other types of retail outlets, including specialty stores, general
merchandise stores, and off-price and discount stores. Some of the retailers
with which the Company competes have substantially greater financial resources
than the Company. See "Business -- Competition." In addition, the Company's
proprietary credit card operations are subject to legal and regulatory
requirements which, if changed, could adversely affect the Company's results of
operations. See "Business -- Proprietary Credit Card Operations."
The department store business is seasonal in nature with a high proportion
of sales and operating income generated in November and December. Working
capital requirements fluctuate during the year, increasing somewhat in late
Summer in anticipation of the Fall merchandising season and increasing
substantially at the outset of the holiday season as significantly higher
inventory levels are necessary. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Seasonality."
In addition, approximately 90% of the Company's sales are generated by its
stores located in California. As a result, the Company's sales are very
sensitive to fluctuations in the level of economic activity in California. The
California economy has remained in a recession longer than the economy in many
other portions of the United States. The current recession has had an adverse
effect on the Company's revenues and operating results and there can be no
assurance it will not continue to do so.
MAJORITY STOCKHOLDER; RESTRICTED STOCK
As of January 29, 1994 Zell/Chilmark owned approximately 24.8 million
shares or 54.4% of the outstanding Common Stock. Zell/Chilmark, therefore, may
control the election of the Company's directors and may be able to effect
amendments to the Company's Certificate of Incorporation or a merger, sale of
assets, "going private," or other corporate transactions. Under the Company's
Amended and Restated Certificate of Incorporation, at least two members of the
Company's Board of Directors must be neither members of the Company's management
nor designated by Zell/Chilmark or any of its affiliates.
Any transactions involving shares of Common Stock owned by Zell/Chilmark or
First Plaza Group Trust ("First Plaza"), which owns 2.5 million shares of the
Common Stock, may have an adverse effect on the market for, or the market price
of, the Common Stock. See "Security Ownership of Certain Persons." Such shares
may be sold in the public market, subject to the volume limitations and other
conditions of Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"), or the filing of a registration statement with the Securities
and Exchange Commission.
MARKET FOR THE NOTES
The Company does not intend to list the Notes for trading on any exchange.
Accordingly, there can be no assurance as to the development or liquidity of any
market that may develop for the Notes.
11
<PAGE> 13
USE OF PROCEEDS
The Selling Holders will receive all of the net proceeds from the Notes
sold pursuant to this Prospectus and the Common Stock issuable upon conversion
thereof sold pursuant to this Prospectus.
The net proceeds to the Company from the Original Offering were
approximately $137.9 million. The Original Offering was principally intended to
make capital available for the execution of the Company's business strategy
including the remodeling and upgrading of stores. Pending such expenditures, the
Company has applied the net proceeds of the Original Offering (i) to repay
indebtedness outstanding under the Company's $225.0 million credit facility (as
heretofore amended, the "Credit Facility"), (ii) to repay a portion of the
Company's credit card receivables securitization facility (the "Receivables
Facility"), and (iii) for other general corporate purposes.
The interest rate on borrowings under the Credit Facility was 7.5% at
January 29, 1994 and borrowings thereunder are repayable on or before October
31, 1995. The interest rate on borrowings under the Receivables Facility was
4.3% at January 29, 1994 and borrowings thereunder are repayable on or before
October 8, 1995. As of January 29, 1994, no advances were outstanding under the
Credit Facility and $332.2 million was outstanding under the Receivables
Facility. See "Indebtedness of the Company."
Upon consummation of the Original Offering and the application of the net
proceeds, the Company did not have any outstanding indebtedness under the Credit
Facility. The Company expects to utilize certain of the available borrowing
capacity under the Credit Facility and Receivables Facility not needed for
seasonal working capital requirements to implement its business strategy,
including the remodeling and upgrading of stores.
PRICE RANGE OF COMMON STOCK
The Common Stock is listed on the New York Stock Exchange and the Pacific
Stock Exchange under the symbol CHH. The following table sets forth, for the
indicated periods, the high and low last reported sale prices per share of the
Common Stock after the Emergence Date as furnished by the New York Stock
Exchange. See "Business -- Recapitalization."
<TABLE>
<CAPTION>
COMMON STOCK
-------------
HIGH LOW
---- ----
<S> <C> <C>
4-week period ended February 26, 1994....................... $10 3/8 $9 1/8
13-week period ended January 29, 1994....................... 14 3/4 8 1/2
13-week period ended October 30, 1993....................... 16 12 7/8
13-week period ended July 31, 1993.......................... 17 3/8 12 3/8
13-week period ended May 1, 1993............................ 12 3/4 9 1/2
13-week period ended January 30, 1993....................... 10 3/8 5 3/4
For the period from October 8 to October 31, 1992........... 7 1/4 5 7/8
</TABLE>
The last reported sale price of the Common Stock as quoted on the New York
Stock Exchange on March 9, 1994 was $12 3/4 per share. As of February 3, 1994,
there were 18,596 holders of record of the Common Stock.
Although the Company's stock was publicly traded prior to the period from
October 8 to October 31, 1992, the table above excludes data with respect to the
Company's common stock outstanding prior to the Emergence Date, which data is
not comparable with data related to the Common Stock.
12
<PAGE> 14
DIVIDEND POLICY
Since May 1987, the Company has not declared or paid any cash dividends on
its common stock. The Company anticipates that no cash dividends on its Common
Stock will be declared in the foreseeable future, and that all earnings will be
retained for the development of the Company's business. Any future dividends
would be conditioned upon, among other things, future earnings, the financial
condition of the Company and regulatory requirements. In addition, certain of
the Company's credit agreements currently prohibit the Company from paying
dividends to stockholders. See "Indebtedness of the Company."
13
<PAGE> 15
CAPITALIZATION
The following table sets forth the consolidated capitalization and
short-term debt of the Company as of October 30, 1993, and as adjusted to give
effect to the Original Offering and the application of approximately $137.9
million of net proceeds therefrom.
<TABLE>
<CAPTION>
AS ADJUSTED
ACTUAL AS OF FOR THE
OCTOBER 30, ORIGINAL
1993 OFFERING
--------------- --------------
(dollar amounts in thousands)
<S> <C> <C>
SHORT-TERM DEBT
Credit Facility(1)....................................................... $ 44,280 $ --
Current portion of long-term secured debt................................ 275 275
Current portion of capital lease obligations............................. 2,920 2,920
--------------- --------------
TOTAL............................................................. $ 47,475 $ 3,195
--------------- --------------
--------------- --------------
LONG-TERM SENIOR DEBT
Receivables Facility(1)(2)............................................... $ 388,681 $ 295,042
--------------- --------------
Secured Debt
Term Loans due in 1999 (3.8125% at October 30, 1993)................... 89,663 89,663
9.0% Note due 2002..................................................... 65,490 65,490
9.9% Note due 2010..................................................... 9,441 9,441
10.67% Notes due 2002(3)............................................... 344,000 344,000
Other.................................................................. 6,152 6,152
--------------- --------------
Total secured debt................................................ 514,746 514,746
Less current portion of secured debt................................... (275) (275)
--------------- --------------
Total long-term portion of secured debt........................... 514,471 514,471
--------------- --------------
TOTAL LONG-TERM SENIOR DEBT....................................... 903,152 809,513
--------------- --------------
CAPITAL LEASE OBLIGATIONS (excluding current maturities of $2,920)......... 45,338 45,338
--------------- --------------
CONVERTIBLE SENIOR SUBORDINATED NOTES...................................... -- 143,750
--------------- --------------
STOCKHOLDERS' EQUITY
Preferred Stock -- 25 million $.01 par value shares authorized; 0.9
million shares outstanding............................................. 11 11
Common Stock -- 100 million $.01 par value shares authorized; 46.7
million shares outstanding(4).......................................... 467 467
Other Paid-in Capital.................................................... 499,991 499,991
Accumulated Earnings..................................................... (55,194) (55,194)
--------------- --------------
TOTAL STOCKHOLDERS' EQUITY........................................ 445,275 445,275
--------------- --------------
TOTAL CAPITALIZATION....................................................... $ 1,393,765 $1,443,876
--------------- --------------
--------------- --------------
</TABLE>
- ---------------
(1) As of January 29, 1994, there were no outstanding borrowings under the
Credit Facility and outstanding borrowings under the Receivables Facility
were $332.2 million. Pending usage of the proceeds of the Original Offering
for remodeling and upgrading of stores, the net proceeds were used to
paydown borrowings under the Credit Facility and the Receivables Facility.
(2) The Company funds its credit card activities through the Receivables
Facility, which provides for a special purpose corporation, whose accounts
are consolidated into the Company, to purchase the Company's proprietary
credit card receivables and to pay for these interests through the issuance
of up to $575.0 million in commercial paper. The securitization program is
currently scheduled to mature on October 8, 1995.
(3) Cash interest is payable on the 10.67% Notes at the reduced rate of 7.5% per
annum until October 8, 1994. The remaining interest (the difference between
the contractual rate of 10.67% and 7.5%) is capitalized into the 9.0% Notes
due 2002. After October 8, 1994 cash interest will be payable at 10.67%.
(4) Based on the number of shares of Common Stock outstanding as of October 30,
1993. Includes approximately 1,318,167 shares of Common Stock reserved for
issuance or otherwise issuable to certain prepetition creditors or
preconfirmation stockholders pursuant to the Company's POR. Does not
include: (i) 5,900,000 shares reserved for issuance under the 1992 Stock
Incentive Plan, as amended (of which options with respect to 1,448,988
shares of Common Stock are outstanding and immediately exercisable at prices
of between $10.22 and $11.00 per share); (ii) 1,500,000 shares reserved for
issuance to the Company's 401(k) Plan (none of which will be issued in
calendar year 1993); or (iii) 2,476,054 shares issuable at $17.00 per share
upon exercise of Warrants issued or issuable pursuant to the POR. Warrants
to purchase 1,380,713 of such shares are currently outstanding; Warrants to
purchase 905,474 shares are issuable upon surrender of outstanding Series A
Exchangeable Preferred Stock (the "Preferred Stock") for exchange; and
Warrants for 189,867 shares remain issuable to certain preconfirmation
stockholders.
14
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
A summary of certain financial information about the Company is presented
in the following tables. The financial data for the first table has generally
been derived from the Company's consolidated financial statements. The
information for the second table has been derived from the Company's unaudited
quarterly financial data. Both tables should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the consolidated financial statements contained in the Company's
Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q, the related
summaries of significant accounting policies and financial review contained
therein and the other information contained elsewhere in this Prospectus.
Effective as of February 2, 1991, the Company changed its fiscal year end from
the Saturday closest to July 31 of each year to the Saturday closest to January
31 of each year.
<TABLE>
<CAPTION>
AS OF AND FOR THE PERIOD ENDED
-------------------------------------------------------------------------------------------------------------
JANUARY 30, JANUARY 30, OCTOBER 3, FEBRUARY 1, FEBRUARY 2, FEBRUARY 2, AUGUST 4, JULY 29,
1993(1) 1993 1992 1992 1991 1991 1990 1989
(52 WEEKS) (17 WEEKS) (35 WEEKS) (52 WEEKS) (52 WEEKS) (26 WEEKS) (53 WEEKS) (52 WEEKS)
------------ ------------ ------------ ------------ ------------ ------------ ----------- ----------
(PRO FORMA (UNAUDITED)
COMBINED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(DOLLAR AMOUNTS IN THOUSANDS)
EARNINGS DATA
Sales............. $2,137,847 $ 889,843 $1,248,004 $2,127,917 $2,532,749 $1,318,565 $2,857,819 $2,787,393
Finance charge
revenue.......... 82,642 27,265 55,377 93,992 110,707 49,262 125,036 94,888
Cost of goods
sold, including
occupancy and
buying costs..... 1,576,952 638,173 938,779 1,581,144 1,885,152 985,018 2,085,344 2,001,188
Selling, general
and
administrative
expenses......... 572,637 209,992 362,645 570,512 681,561 341,503 742,616 702,329
Other expense,
net(2)........... -- -- -- -- 17,681 17,000 4,831 6,000
------------ ------------ ------------ ------------ ------------ ------------ ----------- ----------
EBIT.............. 70,900 68,943 1,957 70,253 59,062 24,306 150,064 172,764
Interest expense,
net.............. 89,808 29,623 60,185 102,288 144,982 71,046 161,534 160,344
------------ ------------ ------------ ------------ ------------ ------------ ----------- ----------
Earnings (loss)
from operations
before
reorganization
costs and income
taxes............ (18,908) 39,320 (58,228) (32,035) (85,920) (46,740) (11,470 ) 12,420
Reorganization
income
(costs)(3)....... 884,131 -- 884,131 (138,057) (40,000) (40,000) -- --
------------ ------------ ------------ ------------ ------------ ------------ ----------- ----------
Pretax earnings
(loss) from
operations....... 865,223 39,320 825,903 (170,092) (125,920) (86,740) (11,470 ) 12,420
Income tax benefit
(expense)........ (9,800) (16,600) 6,800 -- 26,250 13,200 2,000 (5,000 )
------------ ------------ ------------ ------------ ------------ ------------ ----------- ----------
Earnings (loss)
from
operations....... 855,423 22,720 832,703 (170,092) (99,670) (73,540) (9,470 ) 7,420
Extraordinary
income (costs)
and changes in
accounting(4).... 323,220 -- 323,220 (46,894) (20,070) (14,070) (16,500 ) 6,050
------------ ------------ ------------ ------------ ------------ ------------ ----------- ----------
Net earnings
(loss)........... $1,178,643 $ 22,720 $1,155,923 $ (216,986) $ (119,740) $ (87,610) $ (25,970 ) $ 13,470
------------ ------------ ------------ ------------ ------------ ------------ ----------- ----------
------------ ------------ ------------ ------------ ------------ ------------ ----------- ----------
OTHER DATA
Depreciation and
amortization..... $ 38,540 $ 10,617 $ 27,923 $ 43,636 $ 42,630 $ 21,836 $ 50,995 $ 52,956
Capital
expenditures..... $ 38,242 $ 21,190 $ 17,052 $ 34,850 $ 80,556 $ 37,989 $ 83,220 $ 75,849
Gross square
footage at period
end
(in thousands)... 15,177 15,177 15,842 15,995 16,156 16,156 18,958 18,815
Sales per gross
square foot(5)... $ 137 N/A N/A $ 133 $ 145 N/A $ 147 $ 150
Comparative store
sales gain
(decrease)....... 0.9% 3.5% (0.9)% (9.9)% (2.3)% (3.5)% 2.0 % 5.6 %
Number of
stores........... 83 83 87 88 89 89 115 114
Inventory
turnover......... 2.1x N/A N/A 2.1x 2.2x N/A 2.2 x 2.2 x
BALANCE SHEET DATA
Working capital... $ 701,478 $ 701,478 $ 598,806 $ 628,270 $ 978,082 $ 978,082 $ 843,414 $ 873,307
Total assets...... $1,912,902 $1,912,902 $1,918,701 $1,667,662 $1,755,421 $1,755,421 $2,045,194 $1,988,365
Liabilities
subject to
settlement under
reorganization
proceedings...... -- -- -- $ 598,321 $ 598,650 $ 598,650 -- --
Receivables based
financing........ $ 467,577 $ 467,577 $ 388,306 $ 489,254 $ 633,798 $ 633,798 $ 678,646 $ 652,432
Other long-term
debt and capital
lease
obligations...... $ 563,216 $ 563,216 $ 566,267 $ 508,429 $ 515,290 $ 515,290 $ 939,797 $ 956,665
Stockholders'
equity
(deficit)........ $ 374,761 $ 374,761 $ 350,000 $ (508,476) $ (272,627) $ (272,627) $ (193,820 ) $(211,617 )
Common shares
outstanding
(in thousands)... 35,200(6) 35,200(6) 34,986(6) 30,349 30,369 30,369 29,848 23,060
</TABLE>
(see footnotes on following page)
15
<PAGE> 17
- ---------------
(1) Upon emergence from bankruptcy on October 8, 1992, the Company adopted the
principles of fresh start reporting as of October 3, 1992 to reflect the
impact of the reorganization. The 52-week period ended January 30, 1993 is
thus comprised of the 35 weeks ended October 3, 1992 and the 17 weeks ended
January 30, 1993. As a result of the application of fresh start reporting,
the financial condition and results of operations of the Company for dates
and periods subsequent to October 3, 1992 are not necessarily comparable to
those prior to October 3, 1992.
(2) Includes a $30.0 million gain on the sale of Thalhimers and a $47.0 million
provision for consolidation programs in the 52-and 26-week periods ended
February 2, 1991; gains on asset sales of $7.3 million and costs of closing
certain facilities of $12.1 million for the 53-week period ended August 4,
1990; and a $6.0 million charge for costs of closing certain facilities for
the 52-week period ended July 29, 1989.
(3) Includes income of $906.4 million resulting from adjustments to reflect the
revaluation of assets and liabilities as a result of the application of
fresh start reporting, $13.8 million in costs directly related to the
reorganization, and $8.5 million in adjustments to the provision for
disputed claims in the 52-week period ended January 30, 1993 and the 35-week
period ended October 3, 1992; $65.0 million provision for consolidation,
$29.4 million in costs related to the reorganization, $25.0 million in
adjustments to the provisions for disputed claims, a $9.7 million charge for
unamortized costs on subordinated debt, and $9.0 million of adjustments to
the carrying value of assets in the 52-week period ended February 1, 1992;
and a $40.0 million provision for store closing in the 52-and 26-week
periods ended February 2, 1991.
(4) Includes an extraordinary gain on debt discharge of $304.4 million and
income from a change in accounting for income taxes of $18.8 million for the
52-week period ended January 30, 1993 and the 35-week period ended October
3, 1992; a charge for a change in accounting for post-retirement medical
benefits of $30.0 million and an extraordinary charge of $16.9 million for
costs relating to early retirements of debt for the 52-week period ended
February 1, 1992; extraordinary charges of $14.1 million for costs relating
to early retirements of debt for the 52-and 26-week periods ended February
2, 1991, and $6.0 million for uninsured losses associated with the October
1989 San Francisco earthquake for the 52-week period ended February 2, 1991;
an extraordinary charge of $16.5 million for the uninsured loss associated
with the October 1989 San Francisco earthquake for the 53-week period ended
August 4, 1990; and income from a change in accounting for income taxes of
$15.3 million and an extraordinary charge for costs relating to the early
retirements of debt of $9.2 million for the 52-week period ended July 29,
1989.
(5) Based on sales for stores open at each period-end excluding Thalhimers for
the 53-week period ended August 4, 1990 and the 52-week period ended July
29, 1989.
(6) Includes shares of Common Stock reserved for issuance or otherwise issuable
to certain prepetition creditors or preconfirmation stockholders in
accordance with the POR. Does not include shares reserved for issuance under
the 1992 Stock Incentive Plan, as amended, shares reserved for issuance to
the Company's 401(k) Plan, or shares issuable upon exercise of Warrants.
16
<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
AS OF AND FOR THE PERIOD ENDED
---------------------------------
OCTOBER 30, OCTOBER 31,
1993 1992
(39 WEEKS) (39 WEEKS)
-------------- --------------
<S> <C> <C>
<CAPTION>
(UNAUDITED) (UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C>
EARNINGS DATA
Sales........................................................................................ $1,387,103 $1,405,321
Finance charge revenue....................................................................... 59,988 61,908
Cost of goods sold, including occupancy and buying costs..................................... 1,049,833 1,065,584
Selling, general and administrative expenses................................................. 393,271 397,663
Charge for non-recurring costs(1)............................................................ 25,000
-------------- --------------
EBIT......................................................................................... (21,013) 3,982
Interest expense, net........................................................................ 63,801 67,312
-------------- --------------
Loss from operations before reorganization costs and income taxes............................ (84,814) (63,330)
Reorganization income........................................................................ -- 884,131
-------------- --------------
Pretax earnings (loss) from operations....................................................... (84,814) 820,801
Income tax benefits.......................................................................... 6,900 6,800
-------------- --------------
Earnings (loss) before extraordinary item and cumulative effect of change in accounting...... (77,914) 827,601
Extraordinary gain in debt discharge......................................................... -- 304,388
Cumulative effect of change in accounting for income taxes................................... -- 18,832
-------------- --------------
Net earnings (loss).......................................................................... $ (77,914) $1,150,821
-------------- --------------
-------------- --------------
OTHER DATA
Depreciation and amortization................................................................ $ 25,033 $ 30,657
Capital expenditures......................................................................... $ 39,674 $ 19,608
Gross square footage at period end (in thousands)............................................ 15,177 15,842
Comparative store sales gain (decrease)...................................................... 1.8% (1.3)%
Number of stores............................................................................. 83 87
BALANCE SHEET DATA
Working capital.............................................................................. $ 674,260 $ 602,193
Total assets................................................................................. $1,869,351 $1,866,223
Receivables based financing.................................................................. $ 388,681 $ 397,972
Other long-term debt and capital lease obligations........................................... $ 559,809 $ 566,651
Stockholders' equity......................................................................... $ 445,275 $ 344,898
Common shares outstanding (in thousands)..................................................... 46,781(2) 34,986(2)
</TABLE>
- ---------------
(1) Represents a second-quarter charge for non-recurring costs to be incurred in
connection with the implementation of the Company's strategic plan to
streamline its organizational structure.
(2) Includes shares of Common Stock reserved for issuance or otherwise issuable
to certain prepetition creditors or preconfirmation stockholders in
accordance with the POR. Does not include shares reserved for issuance under
the 1992 Stock Incentive Plan, as amended, shares reserved for issuance to
the Company's 401(k) Plan, or shares issuable upon exercise of Warrants.
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
The discussion of results of operations that follows is based upon the
Company's consolidated financial statements and quarterly information included
or incorporated by reference in this Prospectus. The discussion of liquidity and
capital resources is based upon the Company's current financial position. Upon
emergence from bankruptcy, the Company adopted the principles of fresh start
reporting as of October 3, 1992 (the "Effective Date") to reflect the impact of
the reorganization. As a result of the application of fresh start reporting, the
financial condition and results of operations of the Company for dates and
periods subsequent to the Effective Date are not necessarily comparable to those
prior to the Effective Date.
RESULTS OF OPERATIONS
Overview. The Company changed its fiscal year-end in 1991 and emerged from
bankruptcy in 1992, leading to another fiscal period-end as a result of
accounting for the effects of the bankruptcy reorganization at the Effective
Date. Consequently, the last four fiscal "years" of the Company consist of a
26-week transition period ended February 2, 1991, a 52-week period ended
February 1, 1992, a 35-week period ended October 3, 1992 and a 17-week period
ended January 30, 1993. There are inherent difficulties in comparing such
periods due to the application of fresh start reporting, although certain
prepetition and post-petition income and expense elements remain comparable.
13-Week and 39-Week Periods Ended October 30, 1993. The following table
summarizes the results of the 13-week and 39-week periods ended October 30, 1993
on a comparable period basis. During these periods, the Company incurred certain
one-time charges due to continued execution of the Company's business strategy.
These charges included inventory clearance markdowns, which are part of the
Company's inventory repositioning program. These markdowns were taken over and
above markdowns taken in the normal course of business. In the prior year
periods, markdowns of this nature were charged to previously established
inventory valuation reserves. The one-time charges also included a non-recurring
charge of $25 million for costs to implement a strategic plan to streamline the
Company's organizational structure and reduce administrative costs. Annualized
expense savings of approximately $40.0 million by 1995 have been identified from
this plan.
18
<PAGE> 20
This table illustrates reported EBIT as well as pro forma operating EBIT
which adds back the one-time charges described above.
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
----------------------------- -----------------------------
OCTOBER 30, OCTOBER 31, OCTOBER 30, OCTOBER 31,
1993 1992 1993 1992
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales.................................... $ 469.7 $ 490.4 $ 1,387.1 $ 1,405.3
Finance Charge Revenue................... 18.9 19.3 60.0 61.9
Cost of goods sold, including occupancy
and buying costs (on a proforma FIFO
basis)................................. 353.6 366.0 1,036.3 1,041.0
Selling, general and administrative
expenses............................... 133.8 135.0 393.3 397.6
------------ ------------ ------------ ------------
Pro forma operating FIFO EBIT(1)......... 1.2 8.7 17.5 28.6
Adjustments to arrive at reported EBIT:
LIFO charge............................ (.5) (5.1) (1.5) (7.1)
Realignment markdowns.................. (6.0) -- (12.0) --
Special period-end adjustments......... -- (17.5) -- (17.5)
Charge for non-recurring costs......... -- -- (25.0) --
------------ ------------ ------------ ------------
Reported EBIT............................ $ (5.3) $ (13.9) $ (21.0) $ 4.0
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
- ---------------
(1) The 1992 pre-and post-emergence reporting periods each required separate
year-end type closings. Accordingly, buying and occupancy costs totalling
$17.5 million, which would normally have been allocated to the fourth
quarter of fiscal 1992, were required to be expensed in September 1992. In
addition, the LIFO charge for the 35 week period ended October 3, 1992 was
computed on a discrete period basis and was unusually high for the 1992
third quarter (approximately $4 million higher than usual).
For the current quarter and year-to-date periods ended October 30, 1993,
sales were $469.7 million and $1,387.1 million, respectively, compared to sales
of $490.4 million and $1,405.3 million in the comparable prior periods. Included
in the prior year periods were the results for three Utah stores and the
Anaheim, California store which were closed in January 1993. On a comparative
store basis sales decreased 0.8 percent in the current quarter, but were up 1.8
percent for the thirty-nine week year-to-date period.
On the pro forma basis shown above, cost of goods sold of $353.6 million,
75.3 percent of sales, in the current quarter and $1,036.3 million, 74.7 percent
of sales in the year-to-date period, compare to $366.0 million, 74.6 percent of
sales, and $1,041.0 million, 74.1 percent of sales in the comparable prior year
periods. The 0.7 percent and 0.6 percent increases as a percent to sales reflect
a reduction in markup rate resulting primarily from a movement to everyday low
pricing strategies and reflect the impact of competitive pricing pressures.
Selling, general and administrative expenses ("SG&A") of $133.8 million,
28.5 percent of sales, in the current quarter and $393.3 million, 28.4 percent
of sales in the year-to-date period, compared to $135.0 million, 27.5 percent of
sales, and $397.6 million, 28.3 percent of sales in the comparable prior year
periods. The impact of tighter expense controls during the current year was
negated on a percent to sales basis as a result of lower sales in the current
year.
Finance charge revenue of $18.9 million, 4.0 percent of sales, and $60.0
million, 4.3 percent of sales in the current quarter and year-to-date periods,
compares to $19.3 million, 3.9 percent of sales, and $61.9 million, 4.4 percent
of sales in the comparable prior year periods.
Interest expense of $19.8 million and $63.8 million in the current quarter
and year-to-date periods compare to $22.4 million and $67.3 million in the
comparable prior year periods. The decrease in current year interest expense
results primarily from lower average borrowing rates under the Company's
Receivables Facility subsequent to the Emergence Date and the utilization of
19
<PAGE> 21
the proceeds from the equity offering to lower borrowings under these facilities
subsequent to July 1993.
Limitations on the Company's ability to record income tax benefits for net
operating loss carryforwards for financial statement purposes is expected to
result in an effective income tax rate in the current year that is substantially
below the statutory rate and results in no income tax benefit being recorded for
the current quarter. The $6.8 million tax benefit recognized in the prior year
reflects the release of tax reserves on favorable resolution of income tax
audits for tax years through July 1990.
Due to the seasonal nature of the retail business wherein a significant
portion of sales for the year are generated in the fourth quarter, the Company
follows the practice of allocating certain fixed buying and occupancy costs
among quarters within the fiscal year to match these costs with the associated
seasonal sales revenue. Operating results, on a net of tax basis, reflect the
allocation of such buying and occupancy costs that were less than those incurred
by $7.5 million and $16.1 million in the current quarter and year-to-date
periods. The application of fresh start reporting required the recognition at
October 3, 1992 of $17.5 million of such deferred buying and occupancy costs.
The expense allocation method had no significant impact on the results for the
four weeks ended October 31, 1992.
The seasonal nature of the retail business also results in a significant
portion of the earnings from operations for the year being generated in the
fourth quarter. Interim operating results are thus not necessarily indicative of
results from operations that will be realized for the full fiscal year.
20
<PAGE> 22
Thirty-six months ended January 30, 1993. The following table summarizes
the results of operations for certain periods in the 36 months ended January 30,
1993, presented on a comparable period basis (dollar amounts in millions).
<TABLE>
<CAPTION>
JANUARY 30, FEBRUARY 1, JANUARY 30, FEBRUARY 1, FEBRUARY 2,
1993 1992 1993 1992 1991
Period end date -------------- ------------ ----------- ------------ ------------
Number of weeks reported 17(1) 17(1) 52 52 52
-------------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
(pro forma)(2)
SALES.............................. $889.8 $859.6 $ 2,137.8 $2,127.9 $2,532.7(3)
FINANCE CHARGE REVENUE............. 27.3 30.7 82.7 94.0 110.7
COST OF GOODS SOLD
Cost of merchandise and other.... 571.1 548.2 1,374.5 1,358.9 1,647.2
Buying and occupancy costs....... 84.6 88.7 202.5 222.2 237.9
-------------- ------------ ----------- ------------ ------------
Total cost of goods
sold................... 655.7 636.9 1,577.0 1,581.1 1,885.1
-------------- ------------ ----------- ------------ ------------
SG&A
Sales promotion.................. 48.3 45.3 123.2 107.4 124.6
Selling payroll.................. 70.3 69.1 195.5 190.5 246.9
Other............................ 91.4 97.9 253.9 272.6 310.1
-------------- ------------ ----------- ------------ ------------
Total SG&A............... 210.0 212.3 572.6 570.5 681.6
-------------- ------------ ----------- ------------ ------------
OTHER COSTS, NET................... -- -- -- -- 17.6
-------------- ------------ ----------- ------------ ------------
EBIT............................... $ 51.4 $ 41.1 $ 70.9 $ 70.3 $ 59.1
-------------- ------------ ----------- ------------ ------------
-------------- ------------ ----------- ------------ ------------
SALES.............................. 100.0% 100.0% 100.0% 100.0% 100.0%
FINANCE CHARGE REVENUE............. 3.1 3.6 3.9 4.4 4.3
COST OF GOODS SOLD
Cost of merchandise and other.... 64.2 63.8 64.3 63.9 65.0
Buying and occupancy costs....... 9.5 10.3 9.5 10.4 9.4
-------------- ------------ ----------- ------------ ------------
Total cost of goods
sold................... 73.7 74.1 73.8 74.3 74.4
-------------- ------------ ----------- ------------ ------------
SG&A
Sales promotion.................. 5.4 5.3 5.8 5.0 4.9
Selling payroll.................. 7.9 8.0 9.1 9.0 9.8
Other............................ 10.3 11.4 11.9 12.8 12.2
-------------- ------------ ----------- ------------ ------------
Total SG&A............... 23.6 24.7 26.8 26.8 26.9
-------------- ------------ ----------- ------------ ------------
OTHER COSTS, NET................... -- -- -- -- 0.7
-------------- ------------ ----------- ------------ ------------
EBIT............................... 5.8% 4.8% 3.3% 3.3% 2.3%
-------------- ------------ ----------- ------------ ------------
-------------- ------------ ----------- ------------ ------------
</TABLE>
- ---------------
(1) Interim period results are affected by the Company's practice of allocating
certain fixed buying and occupancy costs among periods within the fiscal
year to match these costs with the associated seasonal sales revenue. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality."
(2) Reported costs of goods sold for the 17-week period ended January 30, 1993
was $638.2 million and reported EBIT was $68.9 million. The pro forma column
reflects the addition of $17.5 million of allocated fixed buying and
occupancy costs into the 17-week period ended January 30, 1993, which were
recognized at October 3, 1992 as a result of the application of fresh start
reporting.
(3) Includes Thalhimers sales of $183.6 million.
17-Week Period Ended January 30, 1993 ("Post-reorganization
Period"). Sales increased 3.5 percent to $889.8 million in the
Post-reorganization Period from $859.6 million in the comparable prior-year
17-week period ended February 1, 1992. On a comparable store basis, the sales
increase was also 3.5 percent. For the 13-week period ended January 30, 1993,
comparable store sales increased 5.5 percent over the same period last year,
reflecting a generally strong holiday selling season and positive responses to
the Company's sales and credit promotional activities.
21
<PAGE> 23
Pro forma EBIT increased to $51.4 million, 5.8 percent of sales, in the
Post-reorganization Period from $41.1 million, 4.8 percent of sales, in the
comparable prior-year period. Pro forma EBIT reflects the reversal of the
cost-of-goods-sold adjustment described in note 2 to the table above. The
improvement reflects the increased sales base and the realization of the
benefits of cost reduction programs. Reported EBIT increased to $68.9 million,
7.7 percent of sales, in the Post-reorganization period.
Pro forma cost of goods sold decreased to 73.7 percent of sales, $655.7
million, in the Post-reorganization Period from 74.1 percent, $636.9 million, in
the comparable prior-year period. Cost of goods sold as a percentage of sales
decreased 0.4 percent as a result of higher sales and lower buying and occupancy
costs partially offset by lower merchandise gross margins due to competitive
pressures. The LIFO credit of $1.9 million for the Post-reorganization Period
compares to a charge of $3.2 million in the comparable prior-year period. Actual
cost of goods sold increased $1.3 million.
SG&A decreased to $210.0 million, 23.6 percent of sales, in the
Post-reorganization Period from $212.3 million, 24.7 percent of sales, in the
comparable prior-year period. This decrease is comprised of a $6.5 million
decrease in other SG&A primarily reflecting reduced fixed costs resulting from
the Company's consolidation programs, partially offset by a $4.2 million
increase in sales promotion and selling expenses in response to competitive
pressures during the holiday season.
Finance charge revenue decreased to $27.3 million, 3.1 percent of sales, in
the Post-reorganization Period from $30.7 million, 3.6 percent of sales, in the
comparable prior-year period, reflecting the conservative approach to credit
purchases generally, including proprietary credit card purchases, taken by
customers prior to the holiday season, and the continuation of the trends
discussed under "Business -- Proprietary Credit Card Operations." In addition,
during the past two years, including the Post-reorganization Period, the Company
has experienced an accelerated collection rate on proprietary credit card
accounts resulting in lower overall outstanding customer receivables.
Interest expense decreased to $29.6 million in the Post-reorganization
Period from $32.1 million in the comparable prior-year period. This reduction
was largely due to lower average interest rates.
Net earnings of $22.7 million in the Post-reorganization Period are net of
taxes at statutory rates and reflect an effective tax rate of 42.2 percent.
The seasonal nature of the retail business results in a significant portion
of the earnings from operations for the year being generated in the 17-week
period. Interim operating results are thus not necessarily indicative of
earnings from operations that will be realized for the full fiscal year.
52-Week Period Ended January 30, 1993 ("1992"). Although the adoption of
fresh start reporting significantly affected comparability, certain income and
expense elements for the Post-reorganization Period and the 35-week period ended
October 3, 1992 (the "Pre-reorganization Period") remain comparable and are
addressed in the following analysis of results of operations for 1992.
Sales for both 1992 and the prior fiscal year ended February 1, 1992
("1991") were $2.1 billion. Sales growth during the first three quarters of 1992
was significantly limited by the weakness in the California economy from which
approximately 90 percent of the Company's business is generated. On a comparable
store basis, sales for 1992 increased 0.9 percent as compared to the prior year.
Sales per square foot increased to $137 in 1992 and $133 in the prior year as a
result of the corresponding increase in sales.
EBIT increased to $70.9 million, 3.3 percent of sales, in 1992 from $70.3
million, 3.3 percent of sales, in 1991. While EBIT was essentially unchanged,
1992 reflects the effect of overhead reductions resulting from the Company's
consolidation programs substantially offset by increased promotional and selling
expenses in response to current economic and competitive factors particularly
during the first three quarters of 1992.
22
<PAGE> 24
Cost of goods decreased to $1,577.0 million, 73.8 percent of sales, in 1992
from $1,581.1 million, 74.3 percent of sales, in 1991. The improvement reflects
a 0.9 percent increase in gross margin representing the impact of reductions in
fixed buying and occupancy costs partially offset by a 0.4 percent decline in
gross margin resulting from lower purchase mark-up. The LIFO method of inventory
accounting resulted in a charge of $5.2 million in both periods.
SG&A increased to $572.6 million in 1992 from $570.5 million in 1991.
However, as a percentage of sales, SG&A was 26.8 percent in both years. Although
there was no net improvement in SG&A as a percent of sales, 1992 reflects an
$18.7 million decrease in other SG&A reflecting the impact on fixed costs of the
Company's consolidation programs offset by a $20.8 million increase in
promotional expenses and selling and support services in order to stimulate
business in the difficult California retail environment.
Finance charge revenue decreased to $82.7 million, 3.9 percent of sales, in
1992 from $94.0 million, 4.4 percent of sales, in 1991. The reduction reflects
the impact of lower levels of consumer confidence in the California economy
manifested by a decrease in credit purchases and an acceleration in the paydown
of outstanding credit card balances.
Interest expense decreased to $89.8 million in 1992 from $102.3 million in
1991. This decline was largely due to lower average interest rates.
Net earnings of $1,178.6 million in 1992 reflect reorganization and debt
discharge related gains of $1,188.5 million and a benefit of $18.8 million from
the adoption of Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes." The change in accounting reflects the elimination of existing
deferred income taxes through the recognition of net operating loss
carryforwards for which no benefit could be recognized under the previous
accounting standard. The $6.8 million tax benefit recognized in the
Pre-reorganization Period reflects the reversal of existing tax reserves on the
favorable resolution of income tax audits for tax years through July 1990. The
tax provision of $16.6 million for the Post-reorganization Period reflects state
and federal taxes at statutory rates on pre-tax earnings for that period.
52-Week Period Ended February 1, 1992 ("1991"). Sales for 1991 decreased
16.0 percent to $2.1 billion from $2.5 billion for the comparable 52-week period
ended February 2, 1991 ("1990"). The decrease was attributable to the disruption
of inventory flows surrounding the date the Company filed for bankruptcy, the
recessionary retail environment experienced in the Company's primary markets,
and the sale of Thalhimers, whose sales were included in the sales data for the
first six months of the comparable prior-year period. On a comparable store
basis, sales for 1991 decreased 9.9 percent compared to 1990. Sales per square
foot decreased to $133 in 1991 from $145 in the prior year as a result of the
corresponding decrease in sales.
EBIT increased to $70.3 million, 3.3 percent of sales, in 1991 from $59.1
million, 2.3 percent of sales, in 1990. EBIT for 1991 was affected by the
substantial reduction in the sales base. EBIT in 1990 includes a $47.0 million
charge for costs associated with certain functional consolidations and the
consolidation of the administrative functions of the Company's Emporium and
Weinstocks divisions. These charges were partially offset by a gain of $30.0
million related to the November 1990 sale of Thalhimers.
Cost of goods sold decreased to $1,581.1 million, 74.3 percent of sales, in
1991 from $1,885.1 million, 74.4 percent of sales, in 1990. Although cost of
goods sold as a percentage of sales remained relatively unchanged, 1991 reflects
the impact of a $19.7 million reduction in the LIFO charge and reductions in
fixed buying and occupancy costs resulting from the sale of Thalhimers and the
effects of cost reduction programs undertaken subsequent to October 1990.
SG&A decreased to $570.5 million, 26.8 percent of sales, in 1991 from
$681.6 million, 26.9 percent of sales, in 1990. This decrease reflects the
impact of the cost reduction programs initiated in 1990 and the sale of
Thalhimers.
23
<PAGE> 25
Finance charge revenue decreased to $94.0 million, 4.4 percent of sales, in
1991 from $110.7 million, 4.3 percent of sales, in 1990. This decrease
principally resulted from reduced proprietary credit sales during 1991 and the
elimination of finance charge revenue relating to Thalhimers, which had been
included in six months of the prior-year period.
Interest expense decreased to $102.3 million in 1991 from $145.0 million in
1990. This reduction principally comprises interest expense and amortization of
debt issue costs on $350.0 million of subordinated debt, for which no interest
was recognized subsequent to the date the Company filed for bankruptcy. As a
result of the claims relating to the subordinated debt being allowed pursuant to
the provisions of the Bankruptcy Code, unamortized subordinated debt issue costs
totaling $9.7 million were charged to reorganization costs in the fourth quarter
of 1991.
The net loss of $217.0 million in 1991 includes a charge of $138.1 million
for reorganization costs comprised of a $65.0 million provision for the
consolidation of the Company into a single operating entity, a $34.0 million
charge for settlement of certain disputed prepetition trade claims and valuation
adjustments to reflect the effect of the chapter 11 proceedings on the amounts
to be realized for certain assets, a $29.4 million charge for professional fees
and other costs directly related to the proceedings, and a $9.7 million charge
to write-off unamortized debt issue costs related to the Company's subordinated
debt. In addition, the net loss reflects an extraordinary net-of-tax charge of
$16.9 million on the early extinguishment of an interim receivables facility
entered into as a result of the filing for bankruptcy and a net-of-tax charge of
$30.0 million resulting from a change in the method of accounting for
post-retirement medical and other benefits as a result of the adoption of
Statement of Financial Accounting Standards No. 106, "Employers Accounting for
Post-retirement Benefits Other Than Pensions."
26-Week Period Ended February 2, 1991 (the "Transition Period"). Effective
as of February 2, 1991, the Company changed its fiscal year from the Saturday
closest to July 31, to the Saturday closest to January 31. As a result, the
results of operations for the Transition Period were separately reported.
Sales for the Transition Period decreased 19.8 percent to $1.3 billion as
compared to $1.6 billion in the comparable prior-year period. The decrease was
largely attributable to Thalhimers' sales included in the prior year. In
addition, the prior-year period comprised 27 weeks compared with the 26 weeks
included in the Transition Period. On a comparable store and period basis,
Transition Period sales decreased 3.5 percent from the prior year's level,
reflecting the impact of the generally weak retail environment and the
disruption of inventory flows prior to the date the Company filed for
bankruptcy.
EBIT decreased to $24.3 million, 1.8 percent of sales, in the Transition
Period from $115.3 million, 7.0 percent of sales, in the comparable prior-year
period. The Transition Period reflects the generally weak holiday sales
performance, the absence of Thalhimers' results and a $47.0 million charge for
consolidation programs. The decreases were partially offset by the $30.0 million
gain on the sale of Thalhimers. The comparable prior-year period included a net
charge of $4.2 million relating to consolidation charges partially offset by
gains on asset sales.
Cost of goods sold decreased to $985.0 million, 74.7 percent of sales, in
the Transition Period from $1,185.2 million, 72.1 percent of sales, for the
comparable prior-year period. This increase in cost of goods sold as a
percentage of sales reflects a significant increase in markdowns in response to
the generally weak economic conditions and a highly competitive retail
environment during the 1990 fall season. The LIFO inventory method resulted in a
charge of $4.7 million in the Transition Period compared to $2.0 million in the
comparable prior-year period.
SG&A decreased to $341.5 million, 25.9 percent of sales, in the Transition
Period from $402.6 million, 24.5 percent of sales, in the comparable prior-year
period. This decrease reflects the sale of Thalhimers, the impact of cost
reduction programs initiated in 1990, and the inclusion of an
24
<PAGE> 26
additional week in the comparable prior-year period. The increase in SG&A as a
percentage of sales principally reflects the impact of the lower sales base
during the Transition Period.
Finance charge revenue decreased to $49.3 million, 3.7 percent of sales, in
the Transition Period from $63.6 million, 3.9 percent of sales, in the
comparable prior-year period. This decrease resulted from lower levels of credit
sales in the Transition Period and the sale of Thalhimers in 1990.
Interest expense for the Transition Period decreased to $71.0 million from
$87.6 million in the comparable prior-year period. The reduction reflects debt
retirements directly related to the sale of Thalhimers, the effect of other
reductions in borrowings, and generally lower interest rates.
The net loss of $87.6 million in the Transition Period includes a charge of
$40.0 million for estimated costs associated with certain store and facility
closings resulting from the Chapter 11 proceedings and an extraordinary charge
of $14.1 million resulting from the early extinguishment of debt. The $13.2
million income tax benefit for the Transition Period was based on a 15.2 percent
effective tax rate, reflecting limitations on the Company's ability to utilize
net operating loss carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
The chapter 11 proceedings significantly affected the Company's capital
structure, liquidity and capital resources.
Recapitalization and Deferral of Principal Amortization. Upon emergence
from bankruptcy, $600.0 million of subordinated debt and other liabilities were
converted into equity. In addition, $451.8 million of secured debt and $66.1
million of accrued interest was restructured to capitalize the accrued interest
and defer principal amortization. In the case of the $344 million of 10.67%
Notes, cash interest payments through October 8, 1994 were reduced as well. The
scheduled principal payments on real property secured debt for the next four
years are $4.4 million in 1994, $6.7 million in 1995, $5.6 million in 1996 and
$10.2 million in 1997. The Company made no principal payments on such debt in
1991. In 1992, the Company made principal payments on such debt of $1.7 million.
In addition, Management estimates that annual expenses under real estate and
equipment leases were reduced by approximately $15.0 million. The Company also
received a $50.0 million equity infusion. Concurrently with its emergence from
bankruptcy, the Company obtained three-year credit and accounts receivable
financing facilities. In July 1993, the Company raised net proceeds of $147.5
million through a public offering of Common Stock.
Credit Facilities. As of the Emergence Date, the Company obtained a new
three-year Credit Facility and a new three-year Receivables Facility. Subject to
collateral limitations, the new facilities provide for up to $225.0 million in
credit financing and up to $575.0 million to finance the Company's proprietary
credit card receivables portfolio. As of January 29, 1994, no advances and $48.3
million in letters of credit were outstanding under the Credit Facility and
$332.2 million of borrowings, $150.1 million less than the maximum available
based on the level of customer receivables, were outstanding under the
Receivables Facility.
A substantial portion of the Company's debt is variable rate debt. Assuming
that the average borrowings and all other variables would have remained
constant, an increase (or decrease) in the annual interest rates applicable to
the variable rate portion of the Company's debt throughout the 52-week period
ended January 30, 1993 of one percent would have increased (or decreased) the
Company's interest expense for such period by $5.8 million.
The Credit Facility contains a number of operating and financial covenants,
as well as significant negative covenants. The Credit Facility includes
covenants for material adverse changes, minimum aggregate net cash flow and
earnings before interest, taxes, depreciation and amortization ("EBITDA"). In
addition, the Credit Facility prohibits the Company from paying dividends on its
stock and places limitations on the Company's capital expenditures. The Credit
Agreement and the
25
<PAGE> 27
Company's agreements with its other principal secured creditors also contain
other covenants and requirements. See "Indebtedness of the Company."
Since July 1, 1993, the Company has had to amend its financial covenants in
the Credit Facility as a result of charges incurred with respect to
implementation of its business strategy, increased competitive pressure on sales
and margins and the weak California economy. The charges included a $25 million
charge in connection with the AVA program (which is expected to achieve $40
million in annual expense reductions by 1995) and $18 million of inventory
clearance markdowns designed to upgrade the Company's merchandise offerings ($6
million of which is expected to be incurred in the fourth quarter). In addition,
during fiscal 1993, the Company expended $60 million on its capital expenditure
program, $66 million on cash interest payments, $20 million on additional
working capital and $14 million to repay debt.
The Company is currently in compliance with all covenants under the credit
facility. For the 13-week period ended October 30, 1993, the Company had EBITDA
of $3.3 million, or $2.3 million more than the EBITDA minimum level required
under the Credit Facility. During this period, the Company had consolidated net
negative cash flows of $20.2 million, or $7.6 million less than the maximum
consolidated net negative cash flow allowed under the Credit Facility. At
October 30, 1993, the Company's net inventory ratio was 71.2%, or 4.0% less than
the maximum inventory ratio permitted under the Credit Facility. In addition,
the Company's inventory balance at October 30, 1993 was within the range
specified under the Credit Facility. Finally, the Company's capital expenditures
during the 22-week period ended October 30, 1993 were $28.1 million, compared to
the maximum capital expenditure allowed during such period of $84.5 million.
Capital Expenditures. In light of the bankruptcy proceedings, the
Company's capital expenditure programs were curtailed in 1992 and 1991. Capital
expenditures amounted to $38.2 million in 1992 and $34.9 million in 1991,
compared to $38.0 million in the 26-week Transition Period, and $83.2 million in
1990. The Company concentrated its capital expenditures in 1993 on store
modernization and selling space improvement in addition to ongoing required
maintenance expenditures. The Company spent $60.0 million for capital
expenditures during the 1993 fiscal year. Capital expenditures between 1994 and
1996 are expected to be approximately $336.0 million. During this period capital
expenditures for modernization and selling space improvements, including
capitalized interest, are expected to total approximately $276.0 million, and
maintenance capital expenditures are expected to total approximately $60.0
million. The following table sets forth Management's estimates of the amounts,
timing and allocation of capital expenditures for fiscal years 1993 through
1996. The capital expenditure program may be modified over time to accommodate
market factors and the Company's then existing financial condition. In addition,
from time to time the Company considers proposals to close existing stores or
open new stores.
CAPITAL EXPENDITURE PROGRAM
(DOLLAR AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
1993 1994 1995 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Modernization and Selling Space Improvements......... $ 44.7 $ 85.6 $ 89.1 $ 95.0
Maintenance Capital Expenditures..................... 13.5 22.4 14.9 23.0
Capitalized Interest................................. 1.8 2.0 2.0 2.0
------ ------ ------ ------
Total...................................... $ 60.0 $110.0 $106.0 $120.0
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
The Company's ability to fund its capital expenditure program and to
implement its business strategy will depend on cash flow from operations and the
continued availability of borrowings under the Credit Facility. Operating cash
flow will be affected by, among other things, the timing of results from the
Company's business strategy, sales during the holiday season, and general
competitive and economic conditions. The Company believes that operating cash
flow and amounts available under the Credit Facility, together with proceeds
from the Original Offering, will be sufficient to fund
26
<PAGE> 28
the major elements of the business strategy. However, the Company continuously
evaluates increasing or decreasing the number of stores, the terms of its Credit
Facility and Receivables Facility and other operating and financing
alternatives.
Other Matters. At January 30, 1993, the Company had an estimated federal
tax net operating loss ("NOL") carryforward of $360.0 million, which expires in
years 2005 through 2008. The Company's ability to utilize the NOL carryforward
is limited on an annual basis as a result of the change in control that occurred
at the emergence from bankruptcy. Notwithstanding this limitation, Management
does not currently anticipate that the Company will have any significant cash
requirements for income tax payments for the next several years based on the
availability of the NOLs.
If within a three-year period, however, 50% or more of the stock of the
Company changes ownership again, the future annual use of NOLs may be limited to
a greater extent by a new annual limit. The new annual limitation would be
calculated as the product of (i) the highest long-term tax-exempt rate for a
designated period prior to the ownership change and (ii) the market value of the
Company at such time. This annual limit would apply to any NOLs incurred prior
to the new change in control, but after the change in control that occurred at
the emergence from bankruptcy. Furthermore, if the new annual limit were lower
than the current annual limit, the new annual limit would apply to all NOLs of
the Company incurred prior to the new change in control and could increase cash
requirements for income tax payments.
INFLATION
The effect of inflation on the Company's sales and cost of sales is, in the
opinion of Management, most closely approximated by the available inflation
factors utilized in the computation of LIFO inventories. Commencing with the
17-week period ended January 30, 1993, the Company is utilizing an internally
developed inflation index based on an analysis of the Company's unique
merchandise assortment. For periods prior to the the Effective Date, the Company
utilized the Department Store Inventory Price Index published by the Bureau of
Labor Statistics (the "BLS Index"). For the 17-week period ended January 30,
1993, inflation as measured by the internally developed index was not
significantly different than that disclosed in the BLS Index. The inflationary
effect on SG&A is reflective of a variety of factors including the impact of
changes in the consumer price index and the state of the California economy. The
BLS Index increased 0.9 percent in the 52 week period ended October 30, 1993
compared to an increase of 0.6 percent in fiscal 1992.
27
<PAGE> 29
SEASONALITY
The department store business is seasonal in nature with a high proportion
of sales and earnings generated in November and December. Working capital
requirements fluctuate during the year, increasing somewhat in late Summer in
advance of the Fall merchandising season and increasing substantially at the
outset of the holiday season when the Company must carry significantly higher
inventory levels. Quarterly sales and EBIT for the twenty-four months ended
January 30, 1993 were as follows:
<TABLE>
<CAPTION>
SALES
-------------------------------
DOLLAR PERCENT OF
SALES ANNUAL SALES EBIT
------------- ------------- -----
(DOLLAR AMOUNTS IN MILLIONS)
<S> <C> <C> <C>
13 weeks ended January 30, 1993 (pro forma)............. $ 732.5 34.3% $49.4(1)
13 weeks ended October 31, 1992 (pro forma)............. 490.3 22.9 3.6(1)
13 weeks ended August 1, 1992........................... 481.4 22.5 12.3
13 weeks ended May 2, 1992.............................. 433.6 20.3 5.6
13 weeks ended February 1, 1992......................... 693.2 32.6 36.2
13 weeks ended November 2, 1991......................... 508.7 23.9 15.1
13 weeks ended August 3, 1991........................... 495.9 23.3 15.3
13 weeks ended May 4, 1991.............................. 430.1 20.2 3.7
</TABLE>
- ---------------
(1) Reported EBIT for the 13-week periods ended October 31, 1992 and January 30,
1993 were $(13.9) million and $66.9 million, respectively. Pro forma EBIT
reflects the allocation to the 13-week period ended January 30, 1993 of
$17.5 million of fixed buying and occupancy costs recognized at October 3,
1992 as a result of the application of fresh start reporting.
As a result of the seasonal nature of the Company's business, the Company
follows the practice of allocating certain fixed buying and occupancy costs
among quarters within the fiscal year in proportion to projected quarterly sales
results. This allocation of costs, therefore, results in a higher portion of
yearly fixed buying and occupancy costs being allocated to the fourth quarter.
28
<PAGE> 30
BUSINESS
INTRODUCTION
The Company is one of the leading operators of department stores in
California and the Southwestern United States. Organized in 1896, the Company
currently operates 83 department stores under the names The Broadway, Emporium
and Weinstocks with more than 15 million gross square feet of retail space. The
Company's 41 Southern California stores generate approximately 50% of the
Company's sales. Approximately 40% of the Company's sales are generated by its
Emporium and Weinstocks stores located in Northern California. The remainder of
the Company's sales are generated through stores located in Arizona, Nevada,
Colorado and New Mexico. The Company's stores are generally situated in prime
locations in popular malls and retail shopping centers.
Management believes the Company enjoys a number of significant strengths.
These include operating in convenient store locations, a loyal customer base and
an advanced management information system.
Locations and Demographics. During the bankruptcy proceedings, the Company
was able to close certain under-performing stores, and reduce lease and
common area maintenance charges at a number of locations. As a result,
Management believes the Company now has a focused portfolio of stores in
desirable locations at attractive costs although Management continues to
evaluate the profitability and strategic contribution of each store. See
"Business -- Property." While the recent national recession has affected
California to a greater extent than most other regions of the country,
Management believes the Company is well positioned to benefit from any
regional economic recovery.
Advanced Management Information System. The Company believes its
management information system ("MIS System") is among the most advanced and
efficient in the department store retailing industry. The MIS System
provides sophisticated inventory tracking and control, automatic inventory
replenishment of certain items through links to key vendors, price look-up
capability and a fully integrated voice and data communication network. See
"Business -- Management Information System."
During the last two years, the Company has implemented substantial
operating and financial changes which have significantly reshaped both its
business and capitalization.
Consolidation of Operations. The Company has also substantially completed
a consolidation of its operations, which resulted in a significant
reduction of administrative expenses. The Company consolidated its four
separate divisions into one, which also permitted the closure of two
warehouses in Northern California. Management believes these steps resulted
in cost savings of approximately $30.0 million per year. The Company
combined its proprietary credit and accounts payable operations into a
single administrative center, which Management believes has resulted in
annual cost savings of approximately $6.0 million compared to amounts paid
in the year prior to the filing of the chapter 11 petition. The Company
also downsized its data processing operation, which Management believes
reduced annual data processing costs by approximately $17.0 million. In
addition, the Company negotiated significant reductions in its annual
equipment and real estate lease and common area charge payments of $15
million compared to the amounts paid for the year prior to filing for
bankruptcy. See "Business -- Consolidation of Operations." In September
1993 the Company completed an AVA study to identify ways to reduce
administrative costs. Management believes the implementation of these
measures will yield annual cost-savings of approximately $40 million by
1995.
Restructured Balance Sheet. The Company has significantly restructured its
secured debt obligations by extending maturities and adjusting the
prospective interest and principal payment terms for such debt. During the
bankruptcy proceedings, the Company restructured its secured and unsecured
debt, obtained a $50.0 million cash equity infusion and put in place the
new
29
<PAGE> 31
three-year Credit Facility and the new three-year Receivables Facility. See
"Indebtedness of the Company." In connection with the Company's
reorganization and recapitalization, Zell/Chilmark acquired approximately
70% of the Common Stock. Additionally, the Company successfully completed a
public offering of Common Stock in July, 1993 which raised net proceeds of
approximately $147.5 million through the issuance of 11.45 million shares
of stock. The Company raised approximately $137.9 million through the
Original Offering in December, 1993. As of January 29, 1994, Zell/Chilmark
owned approximately 54.4% of the outstanding Common Stock.
NEW MANAGEMENT
David L. Dworkin joined the Company as its President and Chief Executive
Officer on March 24, 1993. Prior to joining the Company, he served as Chairman
and Chief Executive Officer of a London-based retailer, BhS, a division of
Storehouse, from November 1989 until July 1992, and as Group Chief Executive of
Storehouse from July 1992 until joining the Company in March of 1993. During the
time he was with BhS and Storehouse, BhS refocused its merchandise assortment,
strengthened its merchandising organization, remodeled 64 of its 137 stores and
substantially reduced its supplier base. Mr. Dworkin has in excess of 25 years
experience in the retail industry, including service as President and Chief
Executive Officer of Bonwit Teller and President and Chief Operating Officer of
Neiman Marcus, then a division of the Company.
David Dworkin has begun to change the management of the Company and intends
to reduce the number of management layers and increase the level of
communication within the organization. The Company hired Gerald Mathews from
Saks Fifth Avenue as Executive Vice President, Stores; Elayne M. Garofolo from
GFT USA Corp. as Executive Vice President, Marketing and Sales Promotion;
Patricia A. Warren from The Bon Marche as Executive Vice President,
Merchandising, Women's Apparel; and Robert J. Lambert from the Stride Rite
Corporation, as Executive Vice President, Human Resources. Robert M. Menar was
promoted from Senior Vice President, Information Services to Executive Vice
President, Logistics and Information Services. See "Management."
As a result of a leveraged recapitalization in 1987, significant asset
sales in 1990 and the bankruptcy proceedings, Management's attention was
diverted from the Company's core business. In addition, the Company has been
operating under significant capital constraints. With an improved balance sheet,
increased efficiency in its operations, the arrival of new leadership and
completion of the Original Offering, Management believes the Company is well
positioned to capitalize on its inherent strengths and to focus on its stores
and customers.
BUSINESS STRATEGY
David Dworkin and the other senior executives have begun to implement a
long-term plan to improve store sales productivity and profitability, further
reduce operating expenses and identify other opportunities to increase the
profitability of the Company's business. The Company's sales per gross square
foot ($137) in 1992 were significantly below the department store industry
average and below the level achieved by the Company in fiscal 1989 ($150 per
gross square foot). Similarly, the Company's operating profit margin (EBIT
margin) is well below the department store industry average. Management believes
an opportunity exists to improve financial performance with the implementation
of clear merchandising and operating strategies and the investment of capital in
its stores.
In mid 1993, the new management team developed a Mission Statement defining
the Company's target customer, merchandising focus and store identity.
Consistent with its Mission Statement, Management has developed specific
strategies that are intended to improve merchandise offerings, remodel the
stores, improve inventory management, refocus marketing efforts, improve the
selling culture and reduce costs.
Improve Merchandise Offerings. The Company plans to significantly
reallocate selling space towards faster turning, higher profit core merchandise
categories, which represent the primary merchandise which attracts customers to
the stores, and away from slower turning, low profit
30
<PAGE> 32
categories. Other initiatives being taken to improve the Company's merchandise
offerings are described below.
o Improve Merchandise Profitability. The Company will increase
private-label products across the merchandise spectrum. The Company will
also offer exclusive brand name product offerings by exploiting a
dramatically edited vendor base.
o Emphasize Value Pricing. Management will continue to refine its focused
pricing architecture which emphasizes value and quality. The Company
currently offers over 17% of its merchandise at every-day value pricing
and intends to merchandise 20% of its product offerings in this manner.
o Ensure Merchandise Freshness. The Company plans to provide fresh
merchandise by using a receipts-driven planning process (the retail
equivalent of just-in-time) which allows operation with lower stocks,
creating faster inventory turnover and obviating the need for excessive
markdowns to move dated merchandise.
To support the Company's new merchandising strategy, Management has
implemented a revised marketing and sales promotion strategy. This
new focused marketing strategy relies on the collection and usage of
demographic data on the Company's market areas obtained through the
proprietary credit card operations, the point-of-sale ("POS") data
base, independent data bases and both broad-based and focused market
research. The new sales promotion strategy focuses promotional
activity on key periods and specific events which complement, rather
than define, the core business.
Remodel Stores. The Company has developed several specific strategies to
improve presentation of merchandise assortments and to communicate with its
target customers.
o Reallocate and Remodel Selling Space. Management is developing, on a
store-by-store basis, a program to reallocate space away from non-core
merchandise categories in favor of core merchandise. Management plans to
remodel a number of stores to more effectively allocate selling space,
increase selling square footage, improve merchandise presentation and
general store appearance and facilitate better customer service.
The Company plans to spend approximately $336.0 million for store
modernization, selling space improvements and maintenance capital
expenditures through 1996. Over the next three years, the Company
intends to remodel/reallocate space within at least 40 of its 83
stores. The Company will first remodel those stores in which
Management believes capital expenditures can produce the greatest
return on investment through increases in sales productivity.
In fall 1993, the Company completed "quick win" improvements in 58
stores at a cost of $17.4 million and invested an additional $12.5
million on fixtures to enhance merchandising and displays. These
improvements involve low cost upgrades, reallocation of selling
space without significant relocations of fixtures and walls and
installation of additional vendor shops. The "quick win" strategy
was designed to allow the Company's sales and profits to benefit
from actions which involve relatively modest capital investment and
could be implemented prior to formal store remodels. See
"Business -- Store Remodeling."
The Company has created a model store space distribution floor plan
in concert with its merchandising strategy. This space
redistribution/remodel plan will be the foundation of the capital
expenditure program and will be implemented in the Company's stores
over the next three years.
Improve Inventory Management. The Company has begun to tailor merchandise
assortments to its stores and develop more effective partnerships with its
vendors. Management believes these actions will increase the freshness of
merchandise assortments, improve store sales and inventory turnover and reduce
markdowns.
31
<PAGE> 33
o Utilize Planner-Distributor Department. The Company's planner-distributor
department ("P&D Department") works closely with the Company's buying
organization to improve the allocation and distribution of inventory to
the Company's stores. The P&D Department analyzes demographic and market
research data, as well as data on customer buying patterns captured
through the Company's proprietary credit card system, to tailor
merchandise assortments for individual stores. Management believes the
P&D Department can provide the Company an advantage over large national
department store chains with standardized merchandising. The tailoring of
merchandise presents a particular marketing opportunity in California and
the Southwest given the ethnic diversity of these regions. See
"Business -- Merchandising and Planner-Distributor Organizations."
o Reduction of Vendors. The Company has reduced the vendor base by 40%,
with ongoing purchases consolidated in the remaining vendors. Management
believes this reduction will increase the Company's importance to its
remaining vendors.
o Inventory Level Reduction/Focus on Receipt Flow and Gross Margin Return
on Investment. The Company has increased vendor participation in its
quick response inventory replenishment program to reduce purchase lead
time, maintain a faster and more continuous merchandise flow and
facilitate automatic replenishment of staple items. Automatic
replenishment and cooperative supply arrangements enhance efficiency and
drive down both inventory levels and costs. By coupling this approach to
on-hand stock reduction with automatic markdown programs to clear-out
slow moving items, Management will be able to simultaneously cut the
investment in inventory and speed up the turnover of merchandise on the
selling floor. Management intends to improve the efficiency of inventory
through a new focus on receipt flow, gross margin return on investment
and timely markdowns. Management believes this focus has already resulted
in an improvement in the aging of the Company's inventory and a reduction
in the weeks of supply on hand.
Refocus Marketing Efforts. The Company has refocused its marketing efforts
to create a research based marketing strategy that is fully integrated with both
the merchandising and store operation functions. To implement this strategy, the
Company has created a customer database through the use of both proprietary
internal information and externally available information which enables the
Company to identify its customer base and to tailor its marketing and
merchandising strategy to reach its core customer. The Company is using its
market research to determine ways to communicate with the customer and enhance
the shopping environment. Additionally, the Company is pursuing a strategy of
marketing to the ethnically diverse population of California and the Southwest
through the use of targeted marketing programs and bilingual sale associates,
signage and advertising. The Company is redirecting its marketing to provide a
more focused image and communicate the changes underway.
Improve Store Selling Culture. The Company is revitalizing its selling
culture. This new customer-driven culture focuses on improving productivity by
reallocating store personnel and providing an enhanced shopping environment. In
order to accomplish these goals, the Company is recruiting talented store
personnel, improving customer service and sales training, and redesigning the
compensation structure to align more closely the sales associates' incentives
with the customer service goals.
Reduce Costs. The consolidation of operations to date has significantly
reduced the Company's expense infrastructure. In September 1993, the Company
completed an AVA program. This program was designed to evaluate the importance
and value of each of its areas of operation and identify duplicative and low
value-added functions, potential staff reductions and other actions which
improve efficiency. This review yielded more than 1,500 cost-saving ideas and
identified approximately $40.0 million of annual expense reductions. The Company
began implementing these measures earlier this year and expects to complete
their implementation in 1995. Management
32
<PAGE> 34
believes the implementation of these measures will result in incremental annual
savings of $7.0 million in 1993, $30.0 million in 1994 and $3.0 million in 1995.
COMPANY OPERATIONS
The Company's stores presently operate under the names The Broadway,
Emporium and Weinstocks. All support functions have been centralized, resulting
in the elimination of many duplicate support functions. Management, marketing
and sales promotion, merchandising and administrative functions (other than
accounts payable and proprietary credit card operations, which are consolidated
in Tempe, Arizona, and data processing operations, which are consolidated in
Anaheim, California) are all located at the Company's corporate offices in Los
Angeles, California.
Forty-one Broadway stores are spread over a seven-county area in Southern
California extending from Bakersfield and Santa Barbara in the North to San
Diego in the South. The Company's twenty-two Emporium stores are located
predominantly in the San Francisco Bay area. Of the Company's nine Weinstocks
stores, eight are located in the Sacramento and Central Valley region of
California, and one in Reno, Nevada. The eleven non-California Broadway stores
are located in Arizona, Colorado, Nevada and New Mexico.
<TABLE>
<CAPTION>
FISCAL
GROSS 1992
NUMBER SQUARE SALES SALES PER
STORE NAME GEOGRAPHIC REGION OF STORES FOOTAGE ($000) GROSS SQUARE FOOT
- ------------- --------------------------- --------- ---------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
The Broadway Southern California 41 7,096,500 $1,063,977 $ 150
Other Southwest 11 1,701,900 217,012 128
Emporium Greater San Francisco Bay 22 4,943,100 604,008 122
Area
Weinstocks California Central Valley 9 1,435,300 187,240 130
and Reno, Nevada
-- ---------- ----------
83 15,176,800 $2,072,237(1) $ 137
Totals
-- ---------- ----------
-- ---------- ----------
</TABLE>
- ---------------
(1) Excludes sales of $65.6 million relating to five stores closed during 1992.
During the past five years, one California Broadway store was opened and
three stores were closed. In addition, one store was opened and one store was
closed in Arizona. In January 1993, the Company closed three Weinstocks stores
located in Utah. No Emporium stores were opened or closed in the past five
years. The following table summarizes the number of stores opened and closed
during the period August 2, 1987 through January 30, 1993 (excluding Thalhimers
stores).
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
STORES OPEN STORES OPEN
AT BEGINNING STORES STORES AT END
OF PERIOD OPENED CLOSED OF PERIOD
------------ ------ ------ -----------
<S> <C> <C> <C> <C>
17-week period ended January 30, 1993.................. 87 -- 4 83
35-week period ended October 3, 1992................... 88 -- 1 87
52-week period ended February 1, 1992.................. 89 -- 1 88
26-week transition period ended February 2, 1991....... 89 1 1 89
53-week period ended August 4, 1990.................... 88 1 -- 89
52-week period ended July 29, 1989..................... 88 -- -- 88
52-week period ended July 30, 1988..................... 88 -- -- 88
</TABLE>
The Company intends to aggressively manage its portfolio of stores by
identifying and closing, if necessary, underperforming stores, as well as
identifying opportunities to open new stores.
33
<PAGE> 35
CONSOLIDATION OF OPERATIONS
The Company has undertaken a significant series of programs over the past
few years to consolidate its operating divisions and reduce its expenses. In the
fall of 1990, the Company sold Thalhimers, its only East Coast retailing
subsidiary. As of January 1991, the Company operated its stores through four
separate divisions, each with separate management, administrative, marketing and
sales promotion functions. In April of 1991, the Company consolidated its
Weinstocks and Emporium divisions. In January of 1992, the Company consolidated
the Broadway-Southwest division into the Broadway-Southern California division.
Finally, in April of 1992, the Company consolidated its Emporium-Weinstocks
division into its Broadway division, forming a single operating unit based in
Southern California. Management believes that the divisional consolidations have
resulted in cost savings of approximately $30.0 million per year.
With the consolidation of the Company's store operations, the Company
consolidated its proprietary credit card and accounts payable operations into a
single administrative center located in Tempe, Arizona, which the Company
estimates will result in an estimated annual cost savings of approximately $6.0
million compared to the costs incurred in the year prior to the filing of the
chapter 11 petition. Over the last three years, the Company has downsized its
Anaheim, California data processing operation, reducing employment from
approximately 530 full-time employee equivalents to approximately 330 full-time
employee equivalents. Management estimates that this downsizing has reduced
annual data processing costs by approximately $17.0 million. The consolidation
of its operating divisions described above also reduced the requirements for
separate distribution and warehouse facilities, permitting the closure of two
warehouses in the San Francisco and Sacramento areas. As of April 1993, the
Company began operating its Broadway Southern California and Broadway Southwest
stores under the name "The Broadway."
In connection with the chapter 11 proceedings, the Company negotiated
reductions in rental rates and common area charges under many of its real
property leases and related agreements, which the Company estimates will result
in an annual cost savings of approximately $6.0 million compared to the amounts
paid for the year prior to the bankruptcy filing. The Company also renegotiated
many of its equipment leases. As a result, rental charges under the Company's
equipment leases have been reduced by approximately one-third, which the Company
estimates will yield an annualized cost savings of approximately $9.0 million
compared to the amounts paid for the year prior to filing for bankruptcy.
34
<PAGE> 36
MERCHANDISE ASSORTMENT
The Company's stores carry a broad merchandise assortment of apparel,
shoes, cosmetics, accessories and home products such as tabletop and housewares,
domestic items, furniture and floor coverings and electronics. The following
table summarizes the Company's sales for the year ended January 30, 1993 by
merchandise category (including leased categories except leased automotive
centers) as a percentage of sales.
<TABLE>
<CAPTION>
PERCENT OF
PERCENT OF NET SELLING
SALES(1) SPACE(2)
----------- -------------
<S> <C> <C>
APPAREL AND SOFT GOODS
Women's Apparel................................................. 28.0% 28.6%
Men's Apparel................................................... 15.8 13.8
Cosmetics....................................................... 12.5 3.9
Accessories..................................................... 7.5 6.0
Children's Apparel.............................................. 4.6 7.0
Shoes........................................................... 4.9 3.7
Fine Jewelry.................................................... 2.5 0.6
HOME STORE GOODS
Tabletop and Housewares......................................... 7.6 10.9
Domestic Items.................................................. 5.4 8.1
Furniture and Floor Coverings................................... 3.5 7.7
Electronics..................................................... 3.1 2.2
OTHER............................................................. 4.6 7.5
----------- -------------
Totals.................................................. 100.0% 100.0%
----------- -------------
----------- -------------
</TABLE>
- ---------------
(1) Excludes sales from clearance centers, closed stores and leased automotive
centers.
(2) Net selling space calculations are based on selling space existing as of the
last week of November 1992.
The Company intends to de-emphasize certain slow-turning or low margin
merchandise, such as furniture and electronics, and place more emphasis on
women's and men's apparel and accessories, cosmetics, women's shoes and soft
home goods (such as tabletop and housewares and domestic items), which
constitute the Company's core merchandise categories. See "Business -- Business
Strategy."
Approximately 9% of store retail space (other than space leased for
automotive centers) is leased to outside vendors operating stand-alone
departments within each store. Leased departments include the shoe and jewelry
departments in each store and the automotive departments at certain store
locations. The independent operators supply their own merchandise and sales
personnel, contribute to advertising and pay the Company a percentage of gross
sales as rent. These departments (including leased automotive departments)
accounted for approximately 10.7% of the Company's total sales for the year
ended January 30, 1993. In connection with the refocusing of the Company's
merchandise assortments, the Company intends to carefully review the merchandise
offerings of its leased-space vendors to ensure that they appeal to the
Company's target customers and are consistent in terms of price, quality,
assortment and fashion with the Company's merchandise offerings in its other
departments.
STORE REMODELING
The Company's store remodeling program is designed to increase the
available selling space within existing stores and make more productive use of
the existing selling space through the reallocation of space in favor of
apparel, accessories, cosmetics and soft home goods, categories of merchandise
which generally turn faster, have higher gross margins and constitute the Com-
35
<PAGE> 37
pany's core merchandise. The Company's store remodeling program has a "quick
win" component and a longer-term component.
"Quick Win" Remodeling. Management has completed "quick win" minor
adjustments in selling space allocation and appearance in 58 stores at a cost of
$17.4 million. These improvements involve low-cost upgrades and the favorable
reallocation of selling space to the extent possible without relocating
significant fixtures or walls. Many of these improvements also involved the
installation of vendor shops or updated fixtures, which are typically partially
paid for by the vendor but operated by the Company. A vendor shop is a custom
display area dedicated to a specific vendor. Such shops are generally jointly
designed by the vendor and the Company and create a physical identity for the
vendor in the store. In 1992, 212 such vendor shops were opened and 252
additional vendor shops have been opened during 1993.
Long-term Remodeling. The Company has targeted approximately 40 stores for
remodeling by 1996. Stores are being selected for remodeling based primarily on
sales potential, demographic trends and expected return on investment. Over the
next three years the Company plans to spend approximately $336.0 million on
capital expenditures, with spending on store modernization and selling space
improvements expected to be $276.0 million after contributions from developers
and landlords, and maintenance capital expenditures of $60.0 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Capital Expenditures."
The Company's long-term remodeling plan contemplates three different types
of remodeling: major remodeling, which involves the total refitting of a store,
including the reallocation of selling space, the relocation or replacement of
significant interior walls and fixtures and the realignment of selling
departments to place complimentary merchandise offerings in closer proximity
with each other so as to stimulate cross-shopping and cross-selling
opportunities; moderate remodeling, in which selling space would be reallocated,
selling departments would be realigned, significant interior walls and fixtures
would be relocated or replaced and signage, lighting, carpeting and wall
covering would be changed to upgrade the store's appearance; and minor
remodeling, in which signage, lighting, carpeting and wall covering changes
would be made to upgrade the store's appearance, but no space reallocation would
occur. In addition, the Company plans to expend money for vendor shops and
general upgrading and maintenance of fixtures and merchandise presentation in
its stores.
These store remodeling activities will generally be carried out over an
extended period between peak selling seasons. Management believes that the
Company will realize substantial long-term benefits from the remodeling program.
Moreover, Management believes that the remodeling program will be implemented in
a way that should avoid any material adverse impact on sales in the short term.
MERCHANDISING AND PLANNER-DISTRIBUTOR ORGANIZATIONS
With the consolidation of its divisions, buying activities were centralized
for the Company's 83 stores. The centralized buying organization facilitates the
editing of assortments and reduction in the number of vendors and increases the
importance of the Company to its key vendors. The centralized buying function
has enabled the Company to improve the overall quality of its buying staff,
increase the depth and specialization of buyers dedicated to its merchandise
categories, and improve the consistency and coordination of the buying process.
In 1992, in conjunction with the consolidation of the Company's operating
divisions, the Company established the P&D Department to work closely with its
buying organization and improve the allocation and distribution of inventory to
the Company's stores. The P&D Department synthesizes demographic and market
research along with data on current sales performance for each market served by
the Company. Using this information, the P&D Department works closely with the
buyers in the Company's merchandising department to determine the appropriate
merchandise mix
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<PAGE> 38
for each store, specifying the appropriate styles, colors and sizes to be
provided, the timing for delivery and the quantity of goods to be delivered. In
determining the merchandise mix for a particular store, the P&D Department takes
into account local differences in lifestyle and ethnic background, seasonal
differences and other factors.
Planner-Distributor departments have been used extensively in the specialty
store sector. The Company believes its P&D Department enables it to better
merchandise its stores, react effectively and quickly to local market
conditions, improve inventory turnover and reduce markdowns. Management believes
the P&D Department can provide the Company an advantage over large national
department store chains with standardized merchandising, particularly in
California and the Southwest given the ethnic diversity of these regions.
PURCHASING
Since 1992, the Company has reduced the number of vendors by 40% as it
continues to edit its merchandise assortment. By continuing to reduce the number
of vendors, the Company anticipates that it will become more important to its
remaining vendors. To facilitate this, the Company is increasing vendor
participation in the Company's quick response program and increasing the number
of strategic alliances with vendors. Management does not believe that reducing
the number of its vendors poses any material risk.
The Company has increased the number of strategic alliances from four, as
of July 1993, to 13, as of December 1993 (three of which represent separate
departments of the same vendor), and expects to have entered into a total of 60
such alliances over the next few years. Strategic alliances allow the Company
and the vendor to better direct merchandise to the Company's customers. Pursuant
to such alliances, the vendor and the Company cooperate with respect to
assortment, marketing issues, visual presentation, sales promotion and staffing.
In addition, strategic alliances better enable the Company to obtain the
vendor's merchandise in the size, color and style specifications desired for
each store, as directed by the P&D Department.
Management believes that the Company's quick response program and its
strategic alliances with vendors improve the Company's marketing decisions and
provide the Company with greater control over its merchandise assortments. In
addition, both programs reduce purchase order lead times, provide a faster and
more continuous flow of merchandise, increase sales and inventory turns and
reduce inventory investment and markdowns. The quick response program and the
strategic alliances improve the accuracy of the Company's inventory reporting
and reduce the Company's expenses.
The Company purchases merchandise from many suppliers, no one of which
accounted for more than 5% of the Company's net purchases during 1992. The
Company has no long-term purchase commitments or arrangements with any of its
suppliers, and believes that it is not dependent on any one supplier. The
Company considers its relations with its suppliers to be satisfactory.
MANAGEMENT INFORMATION SYSTEM
Management believes that its internally developed MIS System is among the
most advanced in the department store retailing industry. Management believes
its systems capability will play an important role in the implementation of its
business strategy. The MIS System provides detailed information that enables
Management to monitor the effectiveness of merchandise strategies, improve
merchandise assortments and reduce inventory costs. The MIS System capability
fully supports its efforts with vendors to shorten lead times and manage the
level of merchandise shipments received based on most recent sales trends.
The Company's information services facility provides data processing,
systems development and communication services to all of the Company's stores,
headquarters and distribution and
37
<PAGE> 39
support facilities. The MIS System provides fully integrated voice and data
communication links to its point-of-sale terminals, computer systems and
telephone system. The system currently provides sophisticated inventory tracking
and control for more than 800,000 stock-keeping units and has the capacity to
track 2 million units. The system also provides automatic inventory
replenishment of selected inventory items using computer-generated purchase
orders, and links the Company with more than 160 vendors through an interactive
electronic communications network. In addition, the MIS System's price
management system allows daily updating of merchandise prices (either store-
by-store or Company-wide) and provides on-line price-lookup capability at the
point-of-sale register. All of the major components of the MIS System are
protected from major systems failures through the MIS System's architecture, as
well as through an arrangement with a leading provider of back-up information
systems. Management believes that the Company's MIS System will continue to play
a central role in the execution of the Company's merchandising strategy and the
ongoing containment of inventory and operating costs.
PROPRIETARY CREDIT CARD OPERATIONS
Customers may purchase merchandise at any of the Company's stores for cash,
with certain common third-party credit or charge cards, or on credit in
accordance with revolving credit account terms provided by the Company through
its own proprietary credit card operations. In addition to providing a source of
credit that customers may use to make purchases at Company stores, these
programs generate a significant body of marketing data related to customers'
tastes and buying patterns. Demographic and purchasing information available as
a result of the proprietary credit card program provides Management with a
valuable tool to analyze customer demographics and shopping patterns. The
Company uses this information to provide specific customers with information
about merchandise or events that would be of particular interest to them based
on their historical shopping patterns.
In recent years, the Company's proprietary credit card sales have declined
while third-party credit card sales have been increasing. The Company believes
that this is due to the broader utility of third-party credit and stronger
marketing and expanded availability of third-party credit. The Company
continually evaluates the effectiveness of various credit-promotion programs to
maximize proprietary credit card sales volume consistent with the Company's
credit standards. For example, the Company developed a preferred proprietary
credit card. Under this preferred credit card program, customers are offered
special incentives designed to stimulate proprietary credit card purchases.
Effective October 1993, changes in the terms of the Company's revolving charge
accounts reduced the minimum monthly payment requirement on outstanding balances
from 10% to 5%. This change is expected to result in increases in customer
receivable balances outstanding and corresponding finance charge revenue gains.
In the year ended January 30, 1993 proprietary credit card sales accounted
for 52.3 percent of gross sales. As of January 30, 1993, short-term revolving
proprietary credit card charge accounts comprised approximately 85 percent and
long-term revolving proprietary credit card charge accounts comprised
approximately 15 percent of total customer receivables. The following tables
reflect selected proprietary credit operations data:
<TABLE>
<CAPTION>
AVERAGE
NUMBER OF CREDIT BALANCE
BILLED NUMBER OF DAYS CREDIT PER BILLED
AS OF ACCOUNTS SALES OUTSTANDING ACCOUNT
--------------------------- --------- ---------------------- --------------
<S> <C> <C> <C>
January 30, 1993........... 3,184,000 138 $168
February 1, 1992........... 3,660,000 146 157
February 2, 1991........... 3,830,000 141 168
</TABLE>
The Company's average accounts receivable balances during the years ended
January 30, 1993, February 1, 1992 and February 2, 1991 were $532.6 million,
$580.9 million and $632.2 million,
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<PAGE> 40
respectively (excluding Thalhimers data). During these periods, the Company's
finance charge revenue decreased from $99.4 million in 1990 (excluding
Thalhimers finance charge revenue) to $82.7 million in 1992. Management believes
that the decrease in the Company's finance charge revenue in recent years is due
to the decrease in the size of the Company's accounts receivable during the same
period attributable to lower proprietary credit sales and accelerated customer
repayments. Seasonal customer purchasing in November and December produces an
increase in credit purchases. As a result, customer receivable balances
outstanding and the number of accounts with unpaid balances normally reach their
highest levels in the months of December and January.
Customer receivables are generally written-off when the aggregate of
payments made in the last six months is less than one full scheduled monthly
payment, or when it is otherwise determined that the account is uncollectible.
Proprietary credit card sales, net write-offs with respect thereto, and customer
receivable balances for the periods indicated were as follows (excluding
Thalhimers' data):
<TABLE>
<CAPTION>
CREDIT SALES NET WRITE-OFFS
---------------------------- ----------------------- TOTAL
% OF % OF CUSTOMER
FISCAL YEAR ENDED AMOUNT GROSS SALES(1) AMOUNT CREDIT SALES RECEIVABLES
- ------------------------------ ---------- -------------- ------- ------------ -----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
January 30, 1993.............. $1,222,205 52.3% $36,687 3.0% $580,542
February 1, 1992.............. 1,252,843 53.8 38,503 3.1 598,562
February 2, 1991
(26 weeks ended)............ 812,424 56.3 17,719 2.2 673,478
August 4, 1990................ 1,497,508 56.7 35,186 2.3 589,705
July 29, 1989................. 1,527,104 58.6 20,809 1.4 596,364
</TABLE>
- ---------------
(1) Proprietary credit card sales as a percent of total sales inclusive of
related sales tax receipts.
The deterioration of general economic conditions in the Company's principal
markets, including a significant increase in personal bankruptcies, has
adversely affected the Company's net write-off experience during the last two
years. Management expects that the Company may realize an improvement in net
write-off experience as regional economic conditions improve.
In addition, the Company's proprietary credit cards are subject to federal
and state regulation, including consumer protection laws, that impose
restrictions on the making and collection of consumer loans and on other aspects
of credit card operations. During 1991, several legislative initiatives were
proposed to Congress which, had they been successful, would have had the effect
of imposing a ceiling on the interest rate that could be charged on credit card
accounts. There can be no assurance that the existing laws and regulations will
not be amended, or that new laws or regulations will not be adopted, in a manner
that could adversely affect the Company's proprietary credit card operations.
PROPERTY
As of January 30, 1993, 24 of the Company's stores were owned, 17 were
owned subject to ground leases and 42 were leased. Three of these leased stores
are subject to separate ground and improvement leases. As of January 30, 1993,
the total annual base rent due under the store leases is approximately $28.0
million. In addition to the base monthly rent, the Company is obligated under
many of the leases, or under related agreements discussed below, for a portion
of common area maintenance charges and real property taxes. Further, the Company
is lessee under eleven other leases relating to various offices, distribution
facilities, and parking facilities. As of January 30, 1993, the total annual
base rent due under these additional leases is approximately $2.0 million.
Leases are generally for periods of up to 30 years, with renewal options for
substantial periods. Such leases
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<PAGE> 41
are generally at fixed rental rates, except that certain leases provide for
additional rental payments based on sales in excess of predetermined levels.
Since many of the Company's stores are located in regional shopping
centers, the Company is also party to other agreements which are inextricably
tied to the Company's ground or improvement leases or its ownership of the
property. Anchor tenants such as the Company and shopping center developers
commonly enter into reciprocal easement agreements which, among other things,
establish certain operating covenants to which the anchor tenants are bound. In
addition, individual anchor tenants often enter into separate agreements with
the developers relating to, among other things, common area charges and
operating covenants.
The Company operates distribution facilities in Los Angeles and Union City,
California, and Tempe, Arizona. Information services and data processing support
are centralized in a facility located in Anaheim, California. Credit card and
accounts payable administrative functions are provided from an administrative
center located in Tempe, Arizona. All other management, marketing and sales
promotion, merchandising departments, and support functions are located at the
Company's corporate offices in Los Angeles, California.
At January 30, 1993, the square footage used in the Company's operations
was as follows:
<TABLE>
<CAPTION>
OWNED
SUBJECT
TO
GROUND
OWNED LEASE LEASED TOTAL
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Stores................................... 4,819,500 2,972,000 7,385,300 15,176,800
Distribution centers and other
facilities............................. 2,240,000 -- 97,500 2,337,500
</TABLE>
Thirty-one of the Company's stores and the Company's corporate offices and
distribution center are encumbered by deeds of trust in favor of the Company's
largest secured creditor. An additional nine of the Company's stores are
encumbered by deeds of trust in favor of certain banks under the Company's loan
agreements with such banks. Two other stores and two non-store facilities are
encumbered under individual mortgage agreements with other lenders.
COMPETITION
The retail industry, in general, and the retail department store business,
in particular, are intensely competitive with respect to the purchase and sale
of merchandise and the acquisition of desirable store locations. Significant
competitors of the Company include Robinsons-May, Bullock's, Macy's, Nordstrom,
Mervyn's, J.C. Penney, Dillard's and Gottschalks, though not all of these other
competitors have stores in each market in which the Company competes. Each store
competes not only with other traditional department stores, but also with
specialty stores, discount stores, off-price retailers and numerous other types
of local retail outlets selling apparel and accessories, electronics, furniture,
and home furnishings. The Company also competes with various retailers that
offer merchandise by mail order. Additionally, in the future, companies that
offer merchandise to consumers via television may become more significant
competitors of the Company. Many factors enter into the competition for
consumers' patronage, including service, price, quality, style, product mix,
convenience and credit availability. Each of the Company's stores has at least
one department store competitor nearby. Some of the retailers with which the
Company competes have substantially greater financial resources than the
Company.
EMPLOYEES
As of January 30, 1993, the Company employed approximately 23,000
associates, of whom approximately 12,000 were then employed on a full-time
basis, subject to seasonal increases in the number of sales associates during
the holiday season. The Company has union contracts covering approximately three
and one-half percent of the associates of the Company, primarily in two
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<PAGE> 42
Emporium stores located in San Francisco. The Company believes that it has good
relations with its associates.
SERVICE MARKS
The service marks "The Broadway," "Emporium," and "Weinstocks" have been
registered with the United States Patent and Trademark Office. The Company also
has rights to several other marks. The Company also uses several trademarks and
service marks in connection with certain of its private-label brand merchandise.
Except for the aforementioned service marks as applied to the retail
merchandising of goods and services, the Company does not believe that there are
any patents, licenses, trademarks and service marks that are material to its
business.
RECAPITALIZATION
On February 11, 1991, the Company filed a voluntary petition for relief
under chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in
the United States Bankruptcy Court for the Central District of California (the
"Bankruptcy Court"). During the bankruptcy proceedings, the Company managed its
affairs and operated its business as debtor in possession under the supervision
of the Bankruptcy Court while it developed a reorganization plan to restructure
the Company. On the Emergence Date, the Company emerged from bankruptcy under
the POR. Since the Emergence Date, the Company has operated independently,
although the Bankruptcy Court has retained jurisdiction over certain claims and
other matters relating to the POR. See "Business -- Legal Proceedings -- Chapter
11 Proceedings; Unresolved Claims."
Pursuant to the POR, as of the Emergence Date, the Company's largest
secured creditors and certain other secured creditors agreed to extend the
maturities and adjust the prospective interest and payment terms for loans
totaling $451.8 million and capitalize $66.1 million of interest accrued thereon
during the chapter 11 proceedings. See "Indebtedness of the Company." In
addition, the Company negotiated significant reductions in lease payments and
common area charges under its equipment and real property leases. See
"Business -- Property." While the bankruptcy proceedings were pending,
Zell/Chilmark acquired via tender offer approximately $461.0 of the $600.0
million in unsecured claims against the Company, making Zell/Chilmark the
Company's largest unsecured creditor. Pursuant to the POR, these unsecured
claims were converted into equity. In addition, Zell/Chilmark and First Plaza
were each issued 2,500,000 shares of Common Stock in exchange for a cash equity
infusion totaling $50.0 million. As a result, Zell/Chilmark held approximately
70% of the shares of Common Stock outstanding as of the Emergence Date.
Pursuant to the POR, holders of the Company's common stock, $.01 par value,
outstanding prior to the Emergence Date ("Old Common Stock") received .081
shares of Common Stock and .084 Warrants (or, in the case of participants in the
profit sharing plan in effect prior to the Emergence Date with respect to shares
of Old Common Stock held by such plan and other holders of Old Common Stock who
so elected, .081 shares of Common Stock and .084 shares of Preferred Stock). See
"Description of Capital Stock."
As of the Emergence Date, the existing debtor-in-possession working capital
facility and the receivables based financing arrangement were replaced with new
three-year facilities, the Credit Facility and the Receivables Facility. Subject
to collateral limitations, the new facilities provide for up to $225.0 million
under the Credit Facility and up to $575.0 million to finance the Company's
proprietary credit card receivables portfolio. See "Indebtedness of the
Company."
For additional information related to the financial obligations of the
Company and the financial impact of the bankruptcy proceedings on the operations
of the Company's business, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Indebtedness of the Company"
herein.
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<PAGE> 43
The Company does not, as a matter of policy, publish projections covering
future performance. However, in connection with the consummation of the POR, the
Company was required by law to include certain projections in its disclosure
statement to establish the viability of the POR. Those projections were prepared
in early 1992. With the Company's management transition and the implementation
of its business strategy, among other factors, the Company does not believe that
such projections are necessarily indicative of future performance.
LEGAL PROCEEDINGS
Chapter 11 Proceedings; Unresolved Claims. A discussion of the events
surrounding the Company's bankruptcy filing and an explanation of the material
terms of the Company's reorganization under the POR is set forth in the section
entitled "Business -- Recapitalization." None of the Company's subsidiaries
filed petitions for relief under the Bankruptcy Code. Notwithstanding the
confirmation and effectiveness of the POR, the Court continues to have
jurisdiction to, among other things, resolve disputed prepetition claims against
the Company and to resolve other matters that may arise in connection with or
relate to the POR.
Pursuant to the POR, the Company is required to distribute .046 shares of
Common Stock for each $1.00 of allowed general unsecured claims. The POR
estimated the total amount of such claims to be approximately $600.0 million,
against which the Company reserved 27.6 million shares of Common Stock. As of
January 29, 1994, approximately $52.9 million of disputed claims remained
outstanding. Management believes such claims will ultimately be allowed upon
settlement or litigation for approximately $19.0 million, for which the Company
has reserved approximately 1.0 million shares. Management believes that reserved
shares of Common Stock will be sufficient to meet the Company's obligations to
such claim holders. If all disputed claims were allowed in full, such claim
holders would be entitled to a total of 2.4 million shares of Common Stock,
compared to the 1.0 million shares reserved, resulting in a dilution to holders
of outstanding Common Stock of approximately 3%. Management regularly evaluates
the status of remaining disputed claims and claim settlement experience and
accordingly adjusts its estimate of the number of shares to be reserved for
issuance with respect to such claims. In addition, the Company has reserved
approximately 0.2 million shares for preconfirmation stockholders of the Company
who have not yet claimed the distribution of Common Stock to which they were
entitled under the POR. The total of 1.2 million shares is included in the
Company's calculation of its outstanding Common Stock. In addition, 0.2 million
Warrants will remain issuable to certain preconfirmation stockholders pursuant
to the POR. There are no contractual restrictions on the resale of these
securities. Such securities may be sold into a public market without restriction
at any time, potentially resulting in an adverse effect on the market for, or
the market price of, the Common Stock.
The Company is engaged in an ongoing effort to resolve these remaining
disputed claims. Because of the disputed nature of these claims and the delays
associated with litigation generally, Management anticipates that the settlement
of these claims is likely to occur over an extended period of time.
Other Legal Proceedings. The Company is involved in various other legal
proceedings incidental to the normal course of business. Management does not
expect that any of such other proceedings will have a material adverse effect on
the Company's financial position or results of operations.
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<PAGE> 44
MANAGEMENT
The following is a list of names and ages of all of the current executive
officers of the Company indicating all positions and offices with the Company
held by each such person, each such person's principal occupations or employment
during the past five years, and the expiration of each such person's term of
office.
<TABLE>
<CAPTION>
TERM
NAME AGE OFFICE EXPIRATION(1)
- ---------------------- --- ------------------------------------------- -----------------
<S> <C> <C> <C>
David L. Dworkin...... 50 President, Chief Executive Officer and March 23, 1996
Director
Gerald J. Mathews..... 53 Executive Vice President, Stores April 30, 1996
Elayne M. Garofolo.... 47 Executive Vice President, Marketing and May 23, 1996
Sales Promotion
Patricia A. Warren.... 46 Executive Vice President, Merchandising, May 23, 1996
Women's Apparel
William J. Podany..... 47 Executive Vice President, Merchandising, July 20, 1995
Home, Men's and Cosmetics
Robert J. Lambert..... 40 Executive Vice President, Human Resources December 1, 1996
Robert M. Menar....... 56 Executive Vice President, Logistics and July 20, 1995
Information Services
Brian L. Fleming...... 49 Senior Vice President, Accounting and Taxes July 20, 1995
Marc E. Bercoon....... 33 General Counsel and Corporate Secretary (2)
</TABLE>
- ---------------
(1) The Company has entered into employment contracts with those individuals
with term expirations indicated, except with respect to Mr. Mathews, Ms.
Garofolo and Ms. Warren, with whom the Company has entered into agreements
in principle with expiration terms as noted.
(2) Marc E. Bercoon serves at the pleasure of the Board of Directors.
David L. Dworkin joined the Company as its President and Chief Executive
Officer on March 24, 1993. He also became a Director at that time. Prior to
joining the Company, he served as Chairman and Chief Executive Officer of
London-based retailer BhS, a division of Storehouse, from November 1989 until
July 1992, and as Group Chief Executive of Storehouse from July 1992 until
joining the Company in March of 1993. He has in excess of 25 years experience in
the retail industry, including service as President and Chief Executive Officer
of Bonwit Teller, Inc. from 1988 through 1989, and President and Chief Operating
Officer of Neiman Marcus from 1984 through 1988, then a division of the Company.
Gerald J. Mathews was appointed Executive Vice President, Stores in May
1993. From 1976 through 1992, he served as Executive Vice President, Stores of
Saks Fifth Avenue.
Elayne M. Garofolo was appointed Executive Vice President, Marketing and
Sales Promotion in May 1993. From 1991 to 1993, she served as Senior Vice
President, Communications and Image of GFT USA. From 1981 to 1990, she served as
Senior Vice President of Marketing and Sales Promotion of Bonwit Teller, Inc.
Patricia A. Warren was appointed Executive Vice President, Merchandising,
Women's Apparel in May 1993. From 1989 to 1993, she served as Senior Vice
President, General Merchandising Manager of The Bon Marche. From 1986 to 1989,
she served as Executive Vice President of the Broadway Southwest.
William J. Podany was appointed Executive Vice President, Merchandising,
Home, Men's and Cosmetics in April 1993. From February 1992 to April 1993, he
served as Vice Chairman -- Merchandise. He served as Senior Vice President,
General Merchandise Manager -- Home of Thalhimers from 1989 to 1992. He served
as Senior Vice President, General Merchandise Manager of Sibley from 1987 to
1989.
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<PAGE> 45
Robert J. Lambert was appointed Executive Vice President, Human Resources
in January 1994. From 1990 to 1993 Mr. Lambert served as chief human resources
officer at The Stride Rite Corporation and from 1981 to 1990 he was with
Pepsico, Inc. most recently as director of personnel resources -- Pepsi-Cola
West.
Robert M. Menar was promoted to Executive Vice President, Logistics and
Information Services in October, 1993. Prior to that Mr. Menar served in various
positions since joining the Company in 1978, most recently serving as Senior
Vice President, Information Services.
Brian L. Fleming was appointed Senior Vice President, Accounting and Taxes
of the Company in October 1987. Prior to that time, he served as Vice President,
Accounting.
Marc E. Bercoon has served as General Counsel and Corporate Secretary of
the Company since February 9, 1993. He served as Legal Counsel and Assistant to
the Vice Chairman of the Company from October 1992 to February 1993. From
January 1990 to October 1992, he was Vice President and General Counsel of
Equity Properties and Development Company, a division of Equity Property
Management Corp. From July 1987 to January 1990, he was in private practice as a
corporate and real estate attorney at the firm of Rosenberg and Liebentritt,
P.C., a Chicago-based law firm.
The Company is currently seeking to fill the position of the Chief
Financial Officer.
EMPLOYMENT AGREEMENTS
In February of 1993, David Dworkin entered into an agreement with the
Company whereby he agreed to serve as the Company's President and Chief
Executive Officer for a term of three years and received a $1,000,000 bonus upon
commencing his duties and will receive an annual base salary of $1,000,000, and
subject to Board approval of a new annual incentive plan, a guaranteed bonus of
at least $400,000 for his first year of employment and at least $300,000 for his
second year. Mr. Dworkin also received $375,000 as compensation for the loss of
his bonus from his prior employer and was afforded the opportunity to invest
$250,000 in Zell/Chilmark on the same terms as its general partners at any time
on or before August 15, 1993. This agreement closely aligns David Dworkin's
interest with that of the Company's stockholders by providing Mr. Dworkin with
options to purchase 1,000,000 shares of Common Stock under the Company's 1992
Stock Incentive Plan, as amended. Options with respect to 333,333 shares of
Common Stock became vested on March 24, 1993. The remaining options will vest in
increments of 333,333 and 333,334 on March 24, 1994 and March 24, 1995,
respectively. The exercise price of all options granted is $10.22 per share with
an expiration date of March 24, 2003. If David Dworkin is involuntarily
terminated without cause, these options will become immediately exercisable. A
"change in control" may be deemed by Mr. Dworkin to constitute such an
involuntary termination. A "change in control" occurs if (i) the nominees or
designees of Zell/Chilmark cease to compose a majority of the Board of
Directors, (ii) changes in the Company's senior management occur by action of
Zell/Chilmark or the Board of Directors that are not approved by Mr. Dworkin,
(iii) Zell/Chilmark ceases to own that percentage of the outstanding shares of
the Company's voting stock which Zell/Chilmark owned immediately after the
Original Offering assuming all outstanding securities of the Company which are
exchangeable or convertible to Common Stock were so converted or exchanged and
all Common Stock currently reserved for issuance, pursuant to the POR was
issued, or (iv) some other person or entity, including affiliates thereof,
acquires as much as or more than the number of outstanding voting shares of the
Company then held by Zell/Chilmark. If Mr. Dworkin serves as President and Chief
Executive Officer of the Company for at least one year, upon retirement he is
guaranteed retirement benefits under the Company's retirement plans. The amount
to which he would be entitled is determined based on the number of years that he
actually serves. If he is involuntarily terminated during his first year of
employ, Mr. Dworkin would receive the balance of three years' salary as a
termination benefit. If such an event occurred at any time after his first year
of employ, he would receive two years' salary as a termination benefit. This two
years' salary termination benefit continues beyond the term of the agreement
except to the extent the Company provides two years'
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<PAGE> 46
notice of termination. The Company's obligations under Mr. Dworkin's agreement
in principle are guaranteed by Zell/Chilmark.
Several other key senior executives of the Company have entered three-year
employment agreements with the Company and have received option grants under the
Company's 1992 Stock Incentive Plan, as amended.
SECURITY OWNERSHIP OF CERTAIN PERSONS
During the bankruptcy proceedings, Zell/Chilmark acquired an aggregate of
$461 million of unsecured claims against the Company, for which it paid
$216,963,174. Pursuant to the POR, Zell/Chilmark's unsecured claims against the
Company were converted into 21,204,840 shares of Common Stock. Also pursuant to
the POR and a Postpetition Store Modernization Facility Conversion Agreement
dated as of August 18, 1992 between the Company and Zell/Chilmark (the
"Conversion Agreement"), Zell/Chilmark purchased 2,500,000 shares of Common
Stock from the Company on the Emergence Date at a price of $10.00 per share. As
of January 29, 1994, Zell/Chilmark had acquired 24,800,866 shares of Common
Stock, or approximately 54.4% of the then outstanding Common Stock, at a total
cost of $256,268,891. All funds used in acquiring such shares were obtained from
partnership capital contributions from the general and limited partners of
Zell/Chilmark.
The Conversion Agreement provided for the purchase, in connection with the
consummation of the POR, of 5,000,000 shares of Common Stock from the Company at
a price of $10.00 per share. On October 8, 1992, Zell/Chilmark assigned to First
Plaza, a limited partner of Zell/Chilmark, Zell/Chilmark's rights and
obligations under the Conversion Agreement with respect to the acquisition of
2,500,000 shares of Common Stock. First Plaza thus acquired its 2,500,000 shares
of Common Stock from the Company at a price of $10.00 per share.
The Company and First Plaza entered into a Stockholder's Agreement, dated
as of January 25, 1993, under which the Company granted First Plaza certain
registration rights with respect to First Plaza's shares of Common Stock in
exchange for First Plaza's agreement not to engage in any proxy solicitation,
acquire any additional shares of Common Stock or seek to control or influence
the Board of Directors, Management or policies of the Company. First Plaza has
agreed not to exercise its registration rights in connection with the Original
Offering.
Zell/Chilmark has agreed with First Plaza that in the event it agrees to
sell all or a portion of its shares of Common Stock (other than to an affiliate
of Zell/Chilmark or in a market transaction permitted by Rule 144 promulgated
under the Securities Act), if so requested by First Plaza, Zell/Chilmark shall
cause such prospective purchaser to purchase an equal proportion of First
Plaza's shares of Common Stock.
In accordance with the Securities Act, Zell/Chilmark, if deemed an
affiliate of the Company, may sell its Common Stock pursuant to a registration
statement filed with the Commission or pursuant to an exemption from
registration under the Securities Act. Accordingly, after the expiration of the
90-day lock-up period, Zell/Chilmark will be eligible to sell its shares in
compliance with Rule 144.
In general, under Rule 144, an affiliate of the Company that has satisfied
any required holding period may sell in any three-month period a number of
shares that does not exceed the greater of (i) one percent of the then
outstanding shares of the Company's Common Stock, or (ii) the average weekly
trading volume during the four calendar weeks immediately preceding the date on
which notice of the sale is filed with the Commission. Sales pursuant to Rule
144 are also subject to certain requirements relating to manner of sale, notice
and availability of current public information about the Company. A person (or
persons whose shares are aggregated) who is not deemed to have been an affiliate
of the Company at any time during the 90 days preceding the sale and who has
beneficially owned restricted shares for at least three years is entitled to
sell such shares pursuant to Rule 144(k) without regard to the limitations
described above. Shares of Common Stock distributed pursuant to the POR are not
restricted securities and do not have any required
45
<PAGE> 47
holding period under Rule 144, although sales of such Common Stock by affiliates
of the Company are subject to the limitations described in the first sentence of
this paragraph.
The table below reflects the security ownership of Zell/Chilmark and First
Plaza as of January 29, 1994.
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE PERCENT
OF BENEFICIAL OWNER OF BENEFICIAL OWNERSHIP OF CLASS
------------------- ----------------------- --------
<S> <C> <C>
Zell/Chilmark Fund, L.P.
Two North Riverside Plaza, Suite 1500
Chicago, IL 60606....................... 24,800,866(1) 54.4%
Mellon Bank, N.A.,
as Trustee for
First Plaza Group Trust
One Mellon Center
Pittsburgh, PA 15258.................... 2,500,000(2) 5.5%
</TABLE>
- ---------------
(1) The sole general partner of Zell/Chilmark is ZC Limited Partnership, an
Illinois limited partnership ("ZC Limited"). The sole general partner of ZC
Limited is ZC Partnership, a Delaware general partnership ("ZC"). The
general partners of ZC are ZC, Inc., an Illinois corporation ("ZCI"), and CZ
Inc., a Delaware corporation ("CZI"). The Samuel Zell Revocable Trust dated
January 17, 1990 (the "SZ Trust") is the sole stockholder of ZCI. Mr. Samuel
Zell is trustee and the beneficiary of the SZ Trust. Mr. David M. Schulte is
the sole stockholder of CZI. One of the limited partners of ZC Limited is
COP General Partnership, an Illinois general partnership ("COP"). One of the
general partners of COP is COP Seniors General Partnership, an Illinois
general partnership ("COP Seniors"). One of the general partners of COP
Seniors is Sanford Shkolnik. Messrs. Zell, Schulte and Shkolnik, each of
whom are directors of the Company, may each be deemed to share beneficial
ownership of the shares referenced, but each disclaims beneficial ownership
of such shares.
(2) Mellon Bank, N.A., acts as the trustee (the "Trustee") of First Plaza, a
trust under and for the benefit of certain employee benefit plans of General
Motors Corporation ("GM") and its subsidiaries. First Plaza may be deemed to
beneficially own the shares referenced. Additionally, General Motors
Investment Management Corporation, a Delaware corporation and a wholly-owned
subsidiary of GM, may be deemed to beneficially own these shares because it
serves as investment manager for First Plaza with respect to such shares and
has the power to direct the Trustee as to voting and disposition of such
shares. The Pension Investment Committee of GM may also be deemed to
beneficially own such shares by virtue of its authority to select the
investment manager of such shares.
INDEBTEDNESS OF THE COMPANY
The following summaries of certain provisions of certain indebtedness of
the Company are generalized, do not purport to be complete, and are qualified in
their entirety by reference to the provisions of the various agreements related
thereto, which may be obtained from the Company upon request.
GENERAL
As of January 29, 1994, the Company's principal indebtedness (other than
the Notes) consisted of (i) $412.5 million in loans secured by deeds of trust
and other documents with respect to 31 of the Company's stores and its Los
Angeles distribution center (the "Group One Loans"), (ii) $89.7 million of loans
secured by deeds of trust and other documents with respect to nine of the
Company's stores (the "Group Two Loans"), (iii) advances under the Receivables
Facility, which are secured by the Company's accounts receivable, and (iv)
advances under the Credit Facility, which are secured by the Company's remaining
personal property. This indebtedness is described
46
<PAGE> 48
below. In addition, the Company has $15.7 million of other indebtedness
outstanding secured by deeds of trust and certain other documents on certain
other properties of the Company. Substantially all of the Company's assets are
encumbered to secure the Company's indebtedness. The Receivables Facility and
the Credit Facility are both provided through a commercial lending institution,
as agent for itself and other commercial lending institutions (the "Lender").
CREDIT FACILITY
Borrowing Availability and Termination Date. The Credit Facility is a
revolving credit and letter of credit facility. Borrowings under the Credit
Facility are repayable on or before October 31, 1995. The aggregate amount of
advances available under the Credit Facility, including the aggregate face
amount of all letters of credit issuable under the Credit Facility ("LCs"), is
limited to an amount equal to the Borrowing Base. The term "Borrowing Base"
means the lesser of (i) $225,000,000, or (ii) up to 50-55%, depending on the
time of year, of the value of the Company's inventory and other merchandise and
personal property ("Eligible Inventory") less certain reserves for the
Receivables Securitization Agreement and as required by the Lender. The
aggregate face amount of LCs available under the Credit Facility shall not
exceed the lesser of (i) $65,000,000 and (ii) the Borrowing Base less
outstanding advances. As of January 29, 1994, no advances and $48.3 million in
letters of credit were outstanding under the Credit Facility.
Interest and Fees. Amounts outstanding under the Credit Facility bear
interest at a floating rate equal to the Index Rate (as defined below) plus
1.50% per annum, payable monthly in arrears. The term "Index Rate" means the
higher of (a) the highest of the prime rates as announced by certain banks, or
(b) the latest annualized yield (or midpoint if more than one yield is
published) on 90-day directly-placed commercial paper. The weighted average
annual interest rate on borrowings under the Credit Facility was 7.5% in 1992
(not including certain additional fees payable by the Company as described
below). Upon the occurrence of and during the continuation of an Event of
Default (as defined below), the interest rate otherwise applicable will be
increased by 2% per annum and interest will be payable upon demand. The Company
pays certain fees and commissions to the Lender, including a fee for non-use of
the facility of 1/2 of 1% per annum of the average unused daily balance of the
maximum amount of the facility (or a lesser amount if the Borrowing Base is less
than $200 million), a quarterly administrative fee of $62,499 and an obligation
fee equal to 2.375% per annum of the actual daily face amount of outstanding LCs
for the actual number of days during which such LCs are outstanding.
Collateral. Advances under the Credit Facility are secured on a first
priority basis by security interests in and liens on substantially all of the
Company's tangible and intangible personal property, including the Company's
accounts, equipment and inventory, other than certain interests subject to deeds
of trust in favor of the lenders under the Group One Loan and the Group Two Loan
and certain others. In addition, the Company's obligations under the Credit
Facility are secured by a pledge of the shares of each subsidiary of the
Company.
Other Provisions. The Company may prepay the loans under and terminate the
Credit Facility at any time without premium or penalty, provided (i) no LCs are
outstanding (or, if outstanding, have been cash collateralized), and (ii) the
Receivables Facility has been or is simultaneously terminated. Financial
reporting requirements include delivery of unaudited financial statements on a
monthly and quarterly basis and audited consolidated financial statements on a
yearly basis. Affirmative covenants include the obligation to maintain corporate
existence and the timely payment of obligations, fees and certain expenses as
provided in the Credit Facility.
Restrictive Covenants. In general, the Credit Facility prohibits the
Company and its subsidiaries from, among other things: (i) merging or
consolidating or otherwise combining with, or acquiring substantially all of the
capital stock or assets of, any person or entity (except for mergers or
liquidations between the Company and its subsidiaries); (ii) making investments
in, or loans or advances to, any person or entity, except as expressly permitted
and except for investments not
47
<PAGE> 49
exceeding $5.0 million in the aggregate in short-term government securities,
commercial paper having the highest rating obtainable, and certificates of
deposit, time deposits and demand deposits issued by or placed with commercial
banks, (iii) making any material change in its capital structure, except for the
issuance of shares in connection with the POR, certain employee stock and option
plans, the Warrants, Common Stock of the Company that is by its terms not
redeemable prior to December 31, 1995 and warrants to purchase stock or
instruments convertible into stock; (iv) as to the Company, engaging in any line
of business other than its current line of business and as to subsidiaries of
the Company, owning assets in excess of applicable requirements or conducting
any business (except for CHH Receivables, in connection with Receivables
Facility); (v) except for transactions in the ordinary course of business with
officers and directors and transactions pursuant to the Receivables Facility,
entering into transactions with affiliates on other than an arm's length basis;
(vi) creating or permitting any lien on their respective assets or properties,
other than (x) liens that are expressly permitted, (y) liens granted pursuant to
the Receivables Facility, and (z) liens which do not encumber or adversely
affect collateral securing obligations under the Credit Facility and which
secure aggregate indebtedness of the Company not in excess of $7.5 million;
(vii) making use of any "hazardous materials" (as defined under applicable
environmental laws) in a manner that would violate any such environmental laws;
(viii) selling, transferring, conveying or otherwise disposing of any assets or
properties, except as expressly permitted; (ix) cancelling any claim or debt
owing to it, except for reasonable consideration and in the ordinary course of
business; (x) taking or omitting to take any action, which act or omission would
constitute (1) a default or event of default under (A) the Credit Facility or
the Receivables Facility or other documents and instruments entered into with
respect to each, or (2) a default or event of default under any other contract
where such defaults in the aggregate would exceed $7.5 million or have a
material adverse effect; (xi) engaging in any interest rate hedging or similar
transaction, except with respect to advances under the Credit Facility or, to
the extent permitted by the terms of the Receivables Facility, certain other
unsecured interest rate hedging transactions; (xii) (a) declaring any dividend
or incurring any liability to make any other payment or distribution in respect
of its capital stock (other than stock splits or dividends payable solely in
additional shares of stock) (b) making any payment on account of the purchase,
redemption or other retirement of its capital stock or any other payment or
distribution made in respect thereof, or except as scheduled, any payment, loan,
contribution or other transfer of funds or other property to any of its
respective stockholders or subsidiaries; (xiii) creating, incurring, assuming or
permitting to exist or otherwise become or be liable in respect of any
indebtedness, other than indebtedness as specified in the Credit Facility and
other indebtedness not in excess of $7.5 million outstanding at one time; (xiv)
incurring certain liabilities or obligations in respect of pension plans
established under the Employee Retirement and Income Security Act of 1974, as
amended ("ERISA"); and (xv) consenting to any amendment, supplement or other
modification of any of the terms or provisions contained in, or applicable to,
(a) the POR or the Receivables Facility or (b) certain settlement agreements
entered into with other secured creditors in connection with the implementation
of the POR, if such amendment, supplement or modification would (1) increase the
principal amount of, or the rate or amount of interest payable on such
obligation, (2) accelerate any date fixed for any payment of principal of, or
interest on such obligation, or (3) otherwise materially increase any such
obligation.
Financial Covenants. The Credit Facility contains financial covenants that
require the Company to maintain its Consolidated EBITDA, Consolidated Net Cash
Flow, Capital Expenditures, consolidated net inventory ratio and consolidated
inventory balance (as such initially capitalized terms are defined below) within
certain parameters set forth in the Credit Facility.
For purposes of the description of financial covenants set forth below, the
following terms shall have the indicated meanings:
"Accounts" shall mean all accounts, accounts receivable, other receivables,
contract rights, chattel paper, instruments, documents and notes, whether now
owned or hereafter acquired by the Company and whether or not earned by
performance.
48
<PAGE> 50
"Capital Expenditures" means all payments for any fixed assets or
improvements or for replacements, substitutions or additions thereto, that have
a useful life of more than one year and which are required to be capitalized
under generally accepted accounting principles ("GAAP"), other than capital
lease obligations.
"Consolidated EBITDA" means for any period the sum of consolidated net
income of the Company and its subsidiaries for such period plus consolidated
interest charges (including any capitalized interest payable to certain lenders)
plus consolidated taxes deducted in arriving at consolidated net income plus
consolidated non-cash charges (including depreciation, amortization and LIFO
reserve charges) plus extraordinary losses less extraordinary gains.
"Consolidated Net Cash Flow" means for any period the sum of consolidated
earnings before taxes of the Company and its subsidiaries for such period plus
consolidated non-cash charges (including depreciation, amortization and LIFO
reserve charges) less principal payments in respect of capital lease obligations
less reductions in the restructuring reserve liability account less consolidated
taxes actually paid less extraordinary losses plus extraordinary gains, plus all
net cash proceeds (after deducting all fees and expenses, including, without
limitation, underwriting and brokerage commissions, fees and discounts) received
by the Company from the sale of Common Stock, the Company's preferred stock or,
subject to the prior written approval of General Electric Capital Corporation,
unsecured subordinated obligations of the Company having terms and conditions
satisfactory to General Electric Capital Corporation plus, subject to the prior
written approval of General Electric Capital Corporation, all net cash proceeds
(after deducting all fees and expenses (including, without limitation,
underwriting and brokerage commissions, fees and discounts) from any sale by the
Company of all or a substantial portion of the Company's Accounts on terms and
conditions satisfactory to General Electric Capital Corporation (other than
sales of the Company's Accounts to CHH Receivables, Inc. in accordance with the
terms of the Credit Facility).
"Effective Advance Rate" means, at any time, the ratio (expressed as a
percentage) determined by dividing the Borrowing Base by the aggregate amount
owed by the obligors with respect to the accounts receivable purchased from the
Company by the Receivables Borrower (as defined below under the heading
"Receivables Facility").
"Fiscal Month" means each of the three four-week or five-week accounting
periods comprising a quarterly accounting period within a Fiscal Year.
"Fiscal Year" means a fiscal year of the Company ending on the Saturday
closest to January 31, unless subsequently changed by the Company with the
Lender's consent.
The Company has covenanted in the Credit Facility that it will not permit
aggregated Consolidated EBITDA during any period set forth below to be less than
the amount set forth below opposite
49
<PAGE> 51
such period (except that any amount set forth below in parentheses shall be the
maximum amount of permitted Consolidated EBITDA deficit for the period set forth
opposite such amount):
<TABLE>
<CAPTION>
PERIOD (FISCAL MONTHS) AMOUNT
------------------------------------------------------------- ------------
<S> <C>
February 1994................................................ $(20,100,000)
February 1994 -- March 1994.................................. $(16,300,000)
February 1994 -- April 1994.................................. $(13,300,000)
February 1994 -- May 1994.................................... $(6,300,,000)
February 1994 -- June 1994................................... $ 3,200,000
February 1994 -- July 1994................................... $ 3,500,000
February 1994 -- August 1994................................. $ 5,300,000
February 1994 -- September 1994.............................. $ 9,600,000
February 1994 -- October 1994................................ $ 12,800,000
February 1994 -- November 1994............................... $ 22,000,000
February 1994 -- December 1994............................... $ 78,100,000
February 1994 -- January 1995................................ $ 73,200,000
March 1994 -- February 1995.................................. $ 78,800,000
April 1994 -- March 1995..................................... $ 82,000,000
May 1994 -- April 1995....................................... $ 85,600,000
June 1994 -- May 1995........................................ $ 88,800,000
July 1994 -- June 1995....................................... $ 92,600,000
August 1994 -- July 1995..................................... $ 96,600,000
September 1994 -- August 1995................................ $100,500,000
October 1994 -- September 1995............................... $104,000,000
</TABLE>
The Company has covenanted in the Credit Facility that it will not permit
Consolidated Net Cash Flow for any period set forth below to be less than the
amount set forth below opposite such period (except that any amount set forth
below in parentheses shall be the maximum amount of permitted Consolidated Net
Cash Flow deficit for the period set forth opposite such amount):
<TABLE>
<CAPTION>
FISCAL MONTH AMOUNT
------------------------------------------------------------- ------------
<S> <C>
February 1994................................................ $(27,800,000)
February 1994 -- March 1994.................................. $(32,100,000)
February 1994 -- April 1994.................................. $(36,100,000)
February 1994 -- May 1994.................................... $(35,700,000)
February 1994 -- June 1994................................... $(33,600,000)
February 1994 -- July 1994................................... $(40,200,000)
February 1994 -- August 1994................................. $(44,800,000)
February 1994 -- September 1994.............................. $(47,900,000)
February 1994 -- October 1994................................ $(51,100,000)
February 1994 -- November 1994............................... $(48,200,000)
February 1994 -- December 1994............................... $ 800,000
February 1994 -- January 1995................................ $(10,400,000)
February 1994 -- February 1995............................... $(31,600,000)
February 1994 -- March 1995.................................. $(32,300,000)
February 1994 -- April 1995.................................. $(32,500,000)
February 1994 -- May 1995.................................... $(16,500,000)
February 1994 -- June 1995................................... $ 2,000,000
February 1994 -- July 1995................................... $ 12,300,000
February 1994 -- August 1995................................. $ 24,000,000
February 1994 -- September 1995.............................. $ 24,300,000
</TABLE>
50
<PAGE> 52
The Company has covenanted in the Credit Facility that it will not permit
the aggregate amount of all Capital Expenditures of the Company and its
subsidiaries to exceed, during any period set forth below, the amount set forth
below opposite such period:
<TABLE>
<CAPTION>
PERIOD (FISCAL MONTHS)
-----------------------------------
THROUGH
FROM (AND INCLUDING) AMOUNT
-------------- -------------------------------------------- ------------
<S> <C> <C>
Feb. 1994 January 1995................................ $110,000,000
February 1995 September 1995.............................. $ 62,000,000
</TABLE>
provided, however, that the aggregate amount of Capital Expenditures otherwise
permitted pursuant to Section 7.1(e) of the Credit Facility during the period
from the February 1995 through and including the September 1995 Fiscal Months
shall be increased (i) by an amount equal to the lesser of $20,000,000 or the
unused portion of the allowance for Capital Expenditures for the period from
February 1994 through January 1995 and (ii) by an amount equal to the lesser of
$16,000,000 or 75% of the excess, if any, of Consolidated EBITDA as of the end
of any Fiscal Month after February 1994 through January 1995 over the
Consolidated EBITDA required to be achieved by the Company pursuant to Section
7.1(a) of the Credit Facility as of the end of such Fiscal Month.
Notwithstanding anything to the contrary set forth in Section 7.1(e) of the
Credit Facility, in no event shall the aggregate amount of Capital Expenditures
of the Company and its subsidiaries exceed $25,000,000 during any Fiscal Month.
51
<PAGE> 53
The Company has also covenanted in the Credit Facility that it will not
permit its net inventory ratio on the last day of any two consecutive Fiscal
Months to exceed percentages specified in the Credit Facility for each month
during the term of the Credit Facility. In addition, the Credit Facility
requires the Company to maintain the aggregate amount of all inventory of the
Company and its subsidiaries (determined on the lower of a first-in, first-out
or market basis) on the last day of any two consecutive Fiscal Months within
certain minimum and maximum amounts specified in the Credit Facility for each
month during the term of the Credit Facility. As is the case with the
Consolidated EBITDA and Net Cash Flow covenants, the monthly thresholds
specified in the Credit Facility for the inventory ratio and inventory balance
covenants vary during the term of the Credit Facility to coincide with seasonal
fluctuations in the Company's business.
Events of Default. The Credit Facility provides for various events of
default (the "Events of Default"), including, in general, the following events:
(i) the Company shall fail to make any payment of principal of, interest on, or
any other amount owing in respect of any obligation when due and payable or
declared due and payable, except with respect to interest and fees such failure
shall have remained unremedied for two business days; (ii) the Company shall
fail or neglect to perform, keep or observe certain reporting covenants or any
of the restrictive covenants contained in the Credit Facility (except with
respect to defaults under the Credit Facility); (iii) the Company shall fail or
neglect to perform, keep or observe any other provision of the Credit Facility
(including defaults under the Credit Facility) or of any of the other loan
documents (subject to the Company's right to cure); (iv) a default shall occur
under any other agreement, document or instrument to which the Company or any of
its subsidiaries is a party or by which their respective properties are bound,
or under any agreement, document or instrument evidencing or applicable to any
indebtedness secured in whole or in part by any shares of Common Stock owned by
Zell/Chilmark ("Z/C Indebtedness"), and such default continues beyond any
applicable grace period provided in the instrument governing such indebtedness
and (i) is (a) in respect of any indebtedness of the Company or any of its
subsidiaries in excess of $7,500,000, or (b) in respect of any Z/C Indebtedness
or (ii) causes or permits the acceleration of any such indebtedness; (v) any
event of default shall occur under the Receivables Facility or related
documents, or the Receivables Facility shall for any reason cease to be in full
force and effect; (vi) any representation or warranty in the Credit Facility, in
any related loan document or in any written statement, report or other document
delivered thereto shall be untrue or incorrect in any material respect; (vii)
certain events of bankruptcy or insolvency (including the attachment of any
assets of the Company or its subsidiaries and any similar proceeding); (viii)
the modification, issuance, repeal or rescission of any order of the bankruptcy
court in the POR which adversely affects the Credit Facility and the rights of
the Lender; (ix) final judgments against the Company and its subsidiaries
aggregating in excess of $7,500,000 (to the extent not covered by insurance)
that are not discharged or stayed within 10 days of entry of such judgment; (x)
any provision of any document evidencing rights in the collateral or the
confirmation order shall for any reason cease to be valid or enforceable in
accordance with its terms or any lien created under any collateral document
shall cease to be a valid and perfected first priority lien; (xi) any "Changes
in Control" (as defined below) shall occur; (xii) any other event shall have
occurred which has a material adverse effect of which the Company receives at
least ten days' notice; and (xiii) certain events relating to pension plans
under ERISA. As used in the Credit Facility, the term "Change in Control" means
(a) individuals who are nominees or designees of Zell/Chilmark shall for any
reason cease to constitute a majority of the
members of the Company's Board of Directors; (b) any change in the senior
management of the Company which is not acceptable to a majority of the lenders;
(c) the failure of Zell/Chilmark to continue to own, directly or indirectly, at
least the percentage of outstanding shares of voting stock of the Company on a
fully diluted basis that Zell/Chilmark owned immediately after giving effect to
the issuance of the Notes and any stock options issued by the Company under its
existing stock option plan; or (d) any "Acquiring Person", as such term is
defined in the Indenture for the Notes, shall become the beneficial owner of
shares of Common Stock of the Company having more than 45% of the total number
of votes that may be cast for the election of directors of the Company; or
52
<PAGE> 54
(e) the failure of the Company to own, directly and free and clear of all liens
or other encumbrances (other than the lien imposed pursuant to the Credit
Facility), all of the outstanding shares of stock of CHH Receivables, Inc.
RECEIVABLES FACILITY
Structure of Financing. The Receivables Facility is an accounts receivable
revolving credit facility. The Receivables Facility is provided through a
special purpose corporation not affiliated with the Company (although its
accounts are stated on a consolidated basis with the Company's accounts) (the
"SPC"). The SPC raises money through the issuance and sale of commercial paper
or through liquidity loans from the Lender and lends such funds to CHH
Receivables, Inc., a wholly-owned subsidiary of the Company (the "Receivables
Borrower"). The Receivables Borrower in turn purchases and holds accounts
receivable originated by the Company. The Lender provides the structure, credit
support and liquidity support for and provides for the administration of the
SPC, which is an A-1/P-1 rated entity. The liquidity line is a revolving credit
provided by the Lender to the SPC to provide funding when the SPC is unable to
issue sufficient commercial paper to meet its obligations.
Borrowing Availability and Termination Date. Advances under the
Receivables Facility are limited to an amount equal to the lesser of (i)
$575,000,000, and (ii) the Base Advance Rate, as described below, of the
Company's eligible accounts receivable (i.e., accounts receivable that meet
certain criteria specified in the Receivables Facility Credit Agreement) less
certain amounts purchased from the Company by the Receivables Borrower. The
Company may permanently reduce in part the unused portion of the Receivables
Facility, but in no event may it reduce such amount below $425 million. The
"Base Advance Rate" is 84.5% of eligible accounts receivable subject to certain
adjustments upward or downward as set forth in the definitive documentation for
the Receivables Facility (but in no event shall such adjustments result in an
advance rate in excess of 88% of eligible accounts receivable). All amounts
under the Receivables Facility are due on October 8, 1995. As of January 29,
1994, borrowings of $332.2 million of commercial paper, $150.1 million less than
the maximum available under the Receivables Facility based on the level of
customers receivables, were outstanding under the Receivables Facility.
Interest. Amounts outstanding under the Receivables Facility will bear
interest in an amount equal to the interest expense attributable to the SPC's
borrowings in the commercial paper market and/or under its liquidity line.
Amounts provided by the Lender under its liquidity line to the SPC will bear
interest at an annual rate equal to the Base Rate. The term "Base Rate" means
the higher of (a) the highest prime rate as announced by certain banks, and (b)
the rate for certain commercial paper having a maturity of one month as
published by the Federal Reserve System. Interest is payable monthly in arrears.
Following the maturity of loans under the liquidity line, all outstanding
principal and interest will bear interest at an annual rate equal to 2% plus the
Base Rate, and interest shall be payable on demand. At January 29, 1994, the
interest rate under the Receivables Facility was 4.3%.
Collateral. The Receivables Facility is secured by a first priority
security interest in all of the existing and after-acquired accounts receivable
sold by the Company to the Receivables Borrower and certain other property of
the Receivables Borrower. Certain repurchase obligations of the Company in
connection with accounts receivable sold to the Receivables Borrower are secured
by a second priority security interest of up to $15,000,000 in the collateral
securing advances under the Credit Facility (excluding the outstanding capital
stock of the Receivables Borrower and indebtedness of the Receivables Borrower
to the Company).
Financial Covenants. In addition to other restrictive covenants, the
Receivables Facility requires the Receivables Borrower to maintain a minimum
interest coverage ratio, amount of capitalization and a minimum receivables
advance rate.
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Events of Default. The Receivables Facility provides for various events of
default, including, among other events, the occurrence of an Event of Default
under the Credit Facility and a failure by the Receivables Borrower or the
Company to pay any principal of or premium or interest on any debt when due if
such failure continues after any applicable grace period.
Fees. Ongoing fees payable in connection with the Receivables Facility
include (i) an administration fee during the term of each facility equal to
$28,125 per fiscal quarter, (ii) a program fee equal to 1.10% per annum of the
average daily aggregate outstanding amount, and (iii) a non-use fee equal to
1/2 of 1% per annum of the average unused daily balance of the maximum amount
of the facility. All costs and expenses incurred in connection with the
facility, including all out-of-pocket costs and expenses of the Lender and the
SPC, are borne by the Receivables Borrower.
GROUP ONE MORTGAGE LOAN
Pursuant to a settlement agreement with the Group One Loan lender (the
"Group One Settlement Agreement") and in connection with the implementation of
the POR, the Company restructured indebtedness of $344.0 million to defer
maturity from August 26, 1997 until October 7, 2002 (the "Existing Notes"). The
blended interest rate payable on the Existing Notes is 10.67% per annum. In
addition, previously accrued and unpaid interest and other charges were
capitalized into an accrued interest note in the principal amount of $53.4
million (the "Accrued Interest Note" and the Existing Notes are collectively
referred to as the "Group One Notes") bearing interest at a rate of 9% per
annum. The Company is required to pay interest on the Group One Notes at the
rate of 7.5% during the two year period following the Emergence Date. The
difference between the lower rate and the blended contract rate, amounting to
$23.8 million (the "Deferral Amount"), will be capitalized into the principal
amount of the Accrued Interest Note. The Existing Notes will be amortized on the
basis of a 276-month period commencing October 1, 1997. The entire outstanding
balance will be due and payable under the Existing Notes on December 7, 2002.
The principal amount of the Accrued Interest Note (as increased by the Deferral
Amount, as provided above) will be amortized on the basis of a 60-month period
commencing October 1, 1997 and mature on October 7, 2002. No principal payments
are required to be made on the Existing Notes or the Accrued Interest Note until
October 1, 1997.
The Group One Notes are secured by first mortgages (the "Group One
Mortgages") on 31 of the Company's stores and its corporate offices and
distribution facility (collectively, the "Group One Stores"). The Group One
Notes and the Group One Mortgages are cross-defaulted and cross-collateralized
(with the exception of one store that is not cross-collateralized). The Company
may obtain the release of a Group One Mortgage from one or more of the stores by
prepaying the loan amount allocated to such Group One Store (each, an
"Allocation Amount"), together with any applicable prepayment premium. Certain
of the Existing Notes may be prepaid in full by the Company by prepaying the
aggregate Allocation Amount for Group One Stores in a division of the Company
(each, a "Division") that have been allocated to such Existing Note. In certain
cases the prepayment of Allocable Amounts for Group One Stores will trigger the
obligation to prepay the Allocation Amount for all stores in a Division. In the
event that the Company sells one or more of the Group One Stores (other than
certain specified stores), and the sale generates "Excess Net Proceeds" (defined
as gross proceeds received by the Company, less transfer taxes, the cost of
acquiring certain interests in connection with the sale, and other incidental
expenses), the Company is required to use such Excess Net Proceeds to renovate,
expand or improve one or more of the remaining Group One Stores within 12 months
of its receipt thereof. The loan document with respect to the Group One Notes
provides for a yield maintenance fee.
On the occurrence of certain events (including the cessation of operations
at any Group One Store, sale of an interest in any Group One Store or granting a
lien thereon), the Company may be required to provide additional security
acceptable to the Group One Loan Lender or prepay the entire Allocation Amount
applicable to the affected Group One Store or prepay the Allocation Amount for
all stores in a division if the event affects certain stores within a division.
In the event that
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any person or group other than Zell/Chilmark acquires more than 49% of the
outstanding voting stock of the Company, or the Company is merged or
consolidated into another corporation and such merger effects a change in
control, the Company may be required to prepay the Group One Notes in full,
together with any applicable prepayment premium. The loans evidenced by the
Group One Notes are without recourse to the Company, except in the event of
intentional misrepresentation or an intentional omission of a material fact by
the Company concerning the loan documents, or a misapplication of rents or
insurance or condemnation proceeds, in which event the loans will become full
recourse to the Company. In addition, certain covenants made by the Company
concerning hazardous materials at the Group One Stores are with full recourse to
the Company. Upon the occurrence of certain Events of Default, including the
failure to make a payment under the Group One Notes within three business days
from the due date, the failure to perform any monetary obligation under any of
the documents securing the Group One Notes which failure is not remedied for
three days after notice, or the failure to perform certain other obligations
within thirty days, the Group One lender would be permitted to accelerate
amounts due under the Group One Notes and exercise its remedies under the Group
One Mortgages.
GROUP TWO MORTGAGE LOAN
Pursuant to a settlement agreement with the Group Two Loan lender (the
"Group Two Settlement Agreement") and in connection with the implementation of
the POR, the Company restructured $89.7 million of indebtedness with a syndicate
of certain financial institutions (the "Group Two Lenders"). The Group Two
Settlement Agreement extended the maturities of the $89.7 million principal
amount outstanding under an existing note (the "Master Principal Note") for
approximately four years. The maturity date of the Master Principal Note is June
30, 1999. The Master Principal Note accrues interest at the rate of LIBOR plus
.625% for the period from the Emergence Date until June 30, 1995, and thereafter
until maturity at the rate of LIBOR plus 1.25%. As of January 29, 1994, interest
had accrued on the Master Principal Note at the rate of 3.875%. The Master
Principal Note is amortized on the basis of a 276-month period commencing July
1, 1995; prior to such date no principal payments are due. In addition,
previously accrued and unpaid interest on the original note, together with
related charges totalling $2.0 million, were capitalized into the Master
Capitalized Interest Note in the principal amount of approximately $10.75
million, (the Master Principal Note and the Master Capitalized Interest Note are
referred to as the "Group Two Notes"). Interest is payable on the Master
Capitalized Interest Note at the rate of 9% per annum from the Emergence Date,
and is amortized based on a 36-month period commencing November 2, 1992.
Principal is payable in equal monthly installments from such date until the
maturity date of October 30, 1995. Subject to certain restrictions, the Company
may prepay in whole or in part the outstanding principal balance without paying
a prepayment premium.
The Group Two Notes are secured by first mortgages on nine stores of the
Company (the "Group Two Stores"), and the Group Two Lenders hold certain other
interests relating to the Group Two Stores. With the exception of certain
indemnities among the Company and the Group Two Lenders relating to potential
environmental hazards and structural improvements at the Group Two Stores, the
loans evidenced by the Group Two Notes are non-recourse to the Company. The
Company may obtain the release of mortgages on one or more of the Group Two
Stores by prepayment of specified amounts established for each of the stores
(together with incidental costs and unpaid loan amounts), subject in certain
cases to obtaining the Group Two Lenders' consent. Covenants of the Company
include (a) the obligation to make capital expenditures or make payments under
the Credit Facility, with the proceeds of the issuance of any additional
preferred stock for cash, excluding Preferred Stock under the POR (the
"Additional Preferred"); (b) restriction on the payment of any dividends or
other distributions to any stockholder, other than the holders of Additional
Preferred, who may be paid dividends subject to certain limits; and (c) the
requirement to make capital improvements to five Group Two Stores within three
years of the Emergence Date, including capital expenditures for the Group Two
Stores of at least $700,000 by April 1, 1994. The loans evidenced by the Group
Two Notes are cross-defaulted in the event of
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breach of covenants in the Group Two Notes (including financial covenants
contained in the Group One Settlement Agreement and any other documents
evidencing subordinated indebtedness of the Company hereinafter entered into).
Events of default under the Group Two Notes include events of default under the
Credit Facility, Receivables Facility and the Group One Settlement Agreement. A
default will occur if any group or person other than Zell/Chilmark acquires more
than 48% of the voting stock of the Company, or the Company merges or
consolidates in a manner that effects a change in control. In connection with
the administration of the loans evidenced by the Group Two Notes, the Group Two
Lenders are entitled to receive an annual fee of $20,000.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 100 million shares
of Common Stock, par value $0.01 per share and 25 million shares of preferred
stock, par value $.01 per share. As of January 29, 1994, there were 45,583,251
shares of Common Stock and 870,988 shares of Preferred Stock outstanding.
COMMON STOCK
General. The holders of the Common Stock are entitled to one vote for each
share held of record, voting together with holders of Preferred Stock as one
class, on all matters submitted to a vote of stockholders. The Common Stock does
not have cumulative voting rights. Holders of Common Stock are entitled to
receive ratably such dividends as may be declared by the Board out of funds
legally available therefor. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, holders of Common Stock
will be entitled to share ratably in any assets remaining after satisfaction in
full of the prior rights of creditors of the Company and the aggregate
liquidation preference of any preferred stock of the Company. Holders of Common
Stock have no preemptive rights and have no rights to convert their Common Stock
into any other securities and there are no redemption provisions with respect to
such shares. There generally exist no restrictions on alienability of shares of
Common Stock other than those imposed by law on certain holders. See "Security
Ownership of Certain Persons."
Trading Market. The Common Stock is listed on the New York Stock Exchange
and the Pacific Stock Exchange under the trading symbol "CHH."
PREFERRED STOCK
The Company's Board of Directors has the authority to issue various classes
or series of preferred stock having such voting powers, and such preferences and
relative, participating, optional or other special rights and such
qualifications, limitations or restrictions thereof, as shall be determined by
the Board of Directors, all in accordance with the laws of the State of
Delaware. Each presently outstanding share of Preferred Stock entitles each
holder thereof to one vote per share, voting together with holders of Common
Stock as one class, and a liquidation preference (together with shares of
preferred stock which are entitled to a preference in liquidation but subsequent
to the satisfaction of liquidation preferences ranking senior thereto, if any)
of $0.25 per share in any assets remaining after the satisfaction in full of the
prior rights of creditors of the Company. Holders of presently outstanding
Preferred Stock will be entitled to a dividend of $0.05 per share per year on a
non-cumulative basis when, as and if declared by the Company Board of Directors
out of assets legally available therefor. The Company does not ever expect to
pay a dividend with respect to the Preferred Stock. In addition, restrictions on
the Company's ability to pay dividends are imposed pursuant to the terms of the
Credit Facility and the Group Two Loan documents and additional restrictions may
be imposed by the terms of any preferred stock which may be issued in the future
by the Company. The Preferred Stock will be redeemable by the Company at the
Company's option at $0.25 per share after the expiration of the Warrants as
described below. Until October 8, 1999 (subject to earlier termination under
certain circumstances), each share of Preferred Stock is
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exchangeable at the option of the holder for one Warrant. See "Description of
Capital Stock -- Warrants." The Preferred Stock is not listed for trading on any
national securities exchange or other national automated quotation system.
WARRANTS
Each Warrant entitles the holder to purchase one share of Common Stock at
any time during the period through and including 5:00 p.m. New York City time on
October 8, 1999 (the "Exercise Period") at a purchase price (the "Warrant
Price") equal to $17 per share, subject to adjustment from time to time. In the
event the market price of the Common Stock equals or exceeds $25.50 for thirty
consecutive trading days, the Board of Directors, after April 8, 1995, may, upon
75 days' notice, shorten the Exercise Period to end on a date earlier than
October 8, 1999.
The Warrant Price is subject to adjustment upon the occurrence of certain
events, including, among other things, the payment of a stock dividend with
respect to Common Stock, the subdivision, combination or reclassification of
Common Stock, the merger or consolidation of the Company and the issuance of
rights, options, or warrants (other than rights to purchase Common Stock issued
to stockholders generally) to acquire Common Stock. No adjustment need be made
unless such adjustment would require an increase or decrease of at least 1% in
the Warrant Price, provided that any such adjustment which is not made shall be
carried forward and taken into account in computing the next Warrant Price
adjustment. No holder of Warrants, as such, is entitled to any rights as a
stockholder of the Company, including the right to vote or to receive dividends
or other distributions with respect to the shares of Common Stock, until such
holder has properly exercised the Warrants. The Warrants are listed for trading
on the New York Stock Exchange and the Pacific Stock Exchange.
DESCRIPTION OF THE NOTES
The statements under this caption relating to the Notes, an indenture (the
"Indenture") dated as of December 21, 1993, between the Company and Continental
Bank, National Association, as trustee (the "Trustee") and a Registration
Agreement dated as of December 21, 1993 between the Company and the Initial
Purchaser for the benefit of holders of the Notes, are summaries and do not
purport to be complete. Such summaries make use of certain terms defined in the
Indenture or the Registration Agreement, as applicable and are qualified in
their entirety by express reference to the Indenture or Registration Agreement,
which are filed as Exhibits to the Registration Statement. As used under this
caption, the term "Company" refers only to Carter Hawley Hale Stores, Inc. and
not to its subsidiaries or affiliates.
GENERAL
The Notes were issued under the Indenture, and the terms of the Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939, as in effect on the date of the
Indenture (the "Trust Indenture Act"). The Notes are subject to all such terms,
and prospective investors are referred to the Indenture and the Trust Indenture
Act for a statement of them.
The Notes bear interest from the date of original issuance at the rate of
6 1/4% per annum (unless such rate has been temporarily or permanently increased
under the circumstances described in "Description of the Notes -- Registration
Rights" below), payable semi-annually on December 31 and June 30 of each year,
commencing June 30, 1994, to holders of record at the close of business on the
15th day of the month of such interest payment date (whether or not a business
day). The Notes are due on December 31, 2000 and will be issued only in
registered form, without coupons, in denominations of $1,000 and integral
multiples thereof.
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The Notes are unsecured obligations of the Company. The Indenture does not
contain any financial covenants or restrictions.
REGISTRATION RIGHTS
In connection with the Original Offering, the Company entered into a
Registration Agreement for the benefit of the holders of the Notes, which
provided that (i) the Company would, at its cost, within 45 days after the
closing of the sale of the Notes (the "Closing"), file a shelf registration
statement (the "Shelf Registration Statement") with the Commission with respect
to resales of the Notes and the Common Stock issuable upon conversion thereof,
(ii) within 90 days after the Closing, such Shelf Registration Statement would
be declared effective by the Commission and (iii) the Company would maintain
such Shelf Registration Statement continuously effective under the Securities
Act until the third anniversary of the date of the Closing or such earlier date
as of which all the Notes or the Common Stock issuable upon conversion thereof
have been sold pursuant to such Shelf Registration Statement. If the Company had
failed to comply with clause (i) above then, at such time, the per annum
interest rate on the Notes would have increased by 25 basis points. Such
increase would have remained in effect until the date on which such Shelf
Registration Statement was filed, on which date the interest rate on the Notes
would have reverted to the interest rate originally borne by the Notes plus any
increase in such interest rate pursuant to the following sentence. If the Shelf
Registration Statement had not been declared effective as provided in clause
(ii) above, then, at such time and on each date that would have been the
successive 30th day following such time, the per annum interest rate on the
Notes (which interest rate will be the original interest rate on the Notes plus
any increase or increases in such interest rate pursuant to the preceding
sentence and this sentence) would have increased by an additional 25 basis
points; provided that the interest rate would not have increased by more than 50
basis points pursuant to this sentence. Such increase or increases would have
remained in effect until the date on which such Shelf Registration Statement was
declared effective, on which date the interest rate on the Notes would have
reverted to the interest rate originally borne by the Notes. The Company has
satisfied its obligations under clauses (i) and (ii) by filing, and causing the
Commission to declare effective, the Registration Statement of which this
Prospectus is a part within the specified time periods. Pursuant to clause (iii)
above, however, if the Company fails to keep the Shelf Registration Statement
continuously effective for the period specified above, then at such time as the
Shelf Registration Statement is no longer effective and on each date thereafter
that is the successive 30th day subsequent to such time and until the earlier of
(i) the date that the Shelf Registration Statement is again deemed effective or
(ii) the date that is the third anniversary of the Closing or (iii) the date as
of which all of the Notes and/or the Common Stock issuable upon conversion
thereof are sold pursuant to the Shelf Registration Statement, the per annum
interest rate on the Notes will increase by an additional 25 basis points;
provided, however, that the interest rate will not increase by more than 50
basis points pursuant to this sentence.
CONVERSION
The holder of any Note has the right, exercisable at any time after 90 days
following the date of original issuance thereof and prior to maturity, to
convert the principal amount thereof (or any portion thereof that is an integral
multiple of $1,000) into shares of Common Stock at the conversion price set
forth on the cover page of this Prospectus, subject to adjustment as described
below (the "Conversion Price"), except that if a Note is called for redemption,
the conversion right will terminate at the close of business on the tenth
business day immediately preceding the date fixed for redemption. Upon
conversion, no adjustment or payment will be made for interest or dividends, but
if any holder surrenders a Note for conversion after the close of business on
the record date for the payment of an installment of interest and prior to the
opening of business on the next interest payment date, then, notwithstanding
such conversion, the interest payable on such interest payment date will be paid
to the registered holder of such Note on such record date. In such event, such
Note, when surrendered for conversion, must be accompanied by payment of an
amount equal to
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the interest payable on such interest payment date on the portion so converted.
No fractional shares will be issued upon conversion but a cash adjustment will
be made for any fractional interest.
The Conversion Price is subject to adjustment upon the occurrence of
certain events, including (i) the issuance of shares of Common Stock as a
dividend or distribution on the Common Stock; (ii) the subdivision or
combination of the outstanding Common Stock; (iii) the issuance to substantially
all holders of Common Stock of rights or warrants to subscribe for or purchase
Common Stock (or securities convertible into Common Stock) at a price per share
less than the then current market price per share, as defined; (iv) the
distribution of shares of capital stock of the Company (other than Common Stock)
to all holders of Common Stock, evidences of indebtedness or other assets
(excluding dividends in cash); and (v) the distribution to substantially all
holders of Common Stock of rights or warrants to subscribe for securities (other
than those referred to in clause (iii) above). In the event of a distribution to
substantially all holders of Common Stock of rights to subscribe for additional
shares of the Company's capital stock (other than those referred to in clause
(iii) above), the Company may, instead of making any adjustment in the
Conversion Price, make proper provision so that each holder of a Note who
converts such Note after the record date for such distribution and prior to the
expiration or redemption of such rights shall be entitled to receive upon such
conversion, in addition to shares of Common Stock, an appropriate number of such
rights. No adjustment of the Conversion Price will be made until cumulative
adjustments amount to one percent or more of the Conversion Price as last
adjusted. No adjustment of the Conversion Price will be made for cash dividends.
If the Company reclassifies or changes its outstanding Common Stock, or
consolidates with or merges into or transfers or leases all or substantially all
its assets to any person, or is a party to a merger that reclassifies or changes
its outstanding Common Stock, the Notes will become convertible into the kind
and amount of securities, cash or other assets which the holders of the Notes
would have owned immediately after the transaction if the holders had converted
the Notes immediately before the effective date of the transaction.
OPTIONAL REDEMPTION
The Notes may be redeemed at the option of the Company, in whole or from
time to time in part, on and after December 31, 1998, on not less than 15 nor
more than 60 days' notice by first class mail, at a redemption price of 100% of
the principal amount thereof together with accrued and unpaid interest. If less
than all the Notes are to be redeemed, the Trustee will select Notes for
redemption pro rata or by lot. If any Note is to be redeemed in part only, a new
Note or Notes in principal amount equal to the unredeemed principal portion
thereof will be issued.
CHANGE IN CONTROL
In the event of a Change in Control (as defined below), each holder of
Notes will have the right, at the holder's option, subject to the terms and
conditions of the Indenture, to require the Company to purchase all or any part
(provided that the principal amount must be $1,000 or an integral multiple
thereof) of the holder's Notes on the date that is the later of (i) 20 business
days after the date of mailing of the notice referred to below, and (ii) 40
business days after the occurrence of such Change in Control (the "Purchase
Date") for a purchase price equal to the principal amount thereof, plus accrued
and unpaid interest to the Purchase Date.
Within 20 business days after the occurrence of the Change in Control, the
Company shall mail to the Trustee and to each holder (and to beneficial owners
as required by law) a notice of the occurrence of the Change in Control, setting
forth, among other things, the terms and conditions of, and the procedures
required for exercise of the holder's right to require the purchase of such
holder's Notes. The Company shall cause a copy of such notice to be published in
a daily newspaper of national circulation, which shall be The Wall Street
Journal unless it is not then so circulated.
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To exercise the purchase right, a holder must deliver written notice of
such exercise to the Paying Agent prior to the close of business on the Purchase
Date, specifying the Notes with respect to which the right of purchase is being
exercised. Such notice of exercise may be withdrawn by the holder by a written
notice of withdrawal delivered to the Paying Agent at any time prior to the
close of business on the Purchase Date.
Under the Indenture, a "Change in Control" means any event by which (i) an
Acquiring Person has become such or (ii) Continuing Directors cease to comprise
a majority of the Board of Directors, provided that a Change in Control shall
not be deemed to have occurred if either (i) the last sale price of the Common
Stock for any five trading days during the ten trading days immediately
preceding the Change in Control is at least equal to 105% of the Conversion
Price in effect on such day or (ii) the consideration, in the transaction giving
rise to such Change in Control, to the holders of Common Stock consists of cash,
securities that are, or immediately upon issuance will be, listed on a national
securities exchange or quoted on the NASDAQ National Market System, or a
combination of cash and such securities, and the aggregate fair market value of
such consideration (which, in the case of such securities, shall be equal to the
average of the last sale prices of such securities during the ten consecutive
trading days commencing with the sixth trading day following consummation of
such transaction) is at least 105% of the Conversion Price in effect on the date
immediately preceding the closing date of such transaction.
For purposes of the Indenture, certain defined terms have the following
meanings:
"Acquiring Person" means any Person or group (as defined in Section
13(d)(3) of the Exchange Act) who or which, together with all affiliates and
associates (as defined in Rule 12b-2 under the Exchange Act), becomes the
beneficial owner of shares of Common Stock of the Company having more than 50%
of the total number of votes that may be cast for the election of directors of
the Company; provided, however, that an Acquiring Person shall not include (i)
the Company, (ii) any Subsidiary of the Company, (iii) any employee benefit plan
of the Company or any Subsidiary of the Company or any entity holding Common
Stock of the Company for or pursuant to the terms of any such plan; (iv)
Zell/Chilmark Fund, L.P., or (v) any limited partner or Affiliate of
Zell/Chilmark Fund, L.P. Notwithstanding the foregoing, no Person shall become
an "Acquiring Person" as the result of an acquisition of Common Stock by the
Company which, by reducing the number of shares outstanding, increases the
proportionate number of shares beneficially owned by such Person to 50% or more
of the Common Stock of the Company then outstanding; provided, however, that if
a Person shall become the beneficial owner of 50% or more of the Common Stock of
the Company then outstanding by reason of share purchases by the Company and
shall, after such share purchases by the Company, become the beneficial owner of
any additional shares of Common Stock of the Company, then such Person shall be
deemed to be an "Acquiring Person."
"Affiliate of Zell/Chilmark Fund, L.P." means (i) any person which,
directly or indirectly, is in control of, is controlled by or is under common
control with Zell/Chilmark Fund, L.P. or (ii) any other person who is a director
or officer (A) of Zell/Chilmark Fund, L.P., (B) of any subsidiary of
Zell/Chilmark Fund, L.P., or (C) of any person described in clause (i) above.
For purposes of this definition, control of a person means the power, direct or
indirect, to direct or cause the direction of the management and policies of
such person whether by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Continuing Director" means any member of the Board of Directors, while
such person is a member of such Board of Directors, who is not an Acquiring
Person, or an affiliate or associate of an Acquiring Person or a representative
of an Acquiring Person or of any such affiliate or associate and who (a) was a
member of the Board of Directors prior to the date of the Indenture, or (b)
subsequently becomes a member of such Board of Directors and whose nomination
for election or election to such Board of Directors is recommended or approved
by resolution of a majority of the Continuing Directors or who is included as a
nominee in a proxy statement of the Company distributed when a majority of such
Board of Directors consists of Continuing Directors.
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The Company will comply with the provisions of Rule 13e-4, Rule 14e-1 and
any other tender offer rules under the Exchange Act which may then be
applicable, and will file Schedule 13E-4 or any other schedule required
thereunder in connection with any offer by the Company to purchase Notes at the
option of the holders upon a Change in Control.
The Change in Control purchase feature of the Notes may in certain
circumstances make more difficult or discourage a takeover of the Company and,
thus, the removal of incumbent management. The Change in Control purchase
feature, however, is not the result of Management's knowledge of any specific
effort to accumulate shares of Common Stock or to obtain control of the Company
by means of a merger, tender offer, solicitation or otherwise, or part of a plan
by Management to adopt a series of anti-takeover provisions. Instead, the Change
in Control purchase feature is a standard term contained in other similar debt
offerings and the terms of such feature result from negotiations between the
Company and the Initial Purchaser of the Notes. Change in control provisions are
also contained in the Credit Facility.
If a Change in Control were to occur, there can be no assurance that the
Company would have sufficient funds to pay the required purchase price for all
Notes tendered by the holders thereof. The Company's ability to purchase Notes
tendered upon a Change in Control may be limited by the terms of its
then-existing borrowing and other agreements. No Notes may be purchased if there
has occurred and is continuing an Event of Default described below under "Events
of Default and Notice Thereof" (other than a default in the payment of the
purchase price with respect to such Notes).
SUBORDINATION OF NOTES
The Notes are (i) subordinate in right of payment to all existing and
future Senior Debt, including the indebtedness under the Credit Facility, the
Group One Loans, the Group Two Loans, and advances under the Receivables
Facility, and (ii) pari passu in right of payment to all existing and future
Senior Subordinated Indebtedness. The Indenture does not restrict the amount of
Senior Debt or other indebtedness of the Company or any subsidiary of the
Company. On January 29, 1994 the Company had approximately $897.6 million of
Senior Debt outstanding. The Indenture prohibits the Company from incurring any
debt subsequent to the date of the Indenture which is subordinate in right of
payment to Senior Indebtedness of the Company and which is not expressly made by
the terms of the instrument creating such Indebtedness pari passu with, or
subordinate and junior in right of payment to, the Notes.
The payment of the principal of, interest on or any other amounts due on
the Notes is subordinated in right of payment to the prior payment in full of
all Senior Debt of the Company. No payment on account of principal of,
redemption of, interest on or any other amounts due on the Notes and no
redemption, purchase or other acquisition of the Notes may be made unless (i)
full payment of amounts then due on all Senior Debt has been made or duly
provided for pursuant to the terms of the instrument governing such Senior Debt,
and (ii) at the time for, or immediately after giving effect to, any such
payment, redemption, purchase or other acquisition, there shall not exist under
any Senior Debt or any agreement pursuant to which any Senior Debt has been
issued, any default which shall not have been cured or waived and which shall
have resulted in the full amount of such Senior Debt being declared due and
payable. In addition, the Indenture will provide that if the holders of any
Senior Debt notify the Company and the Trustee that a default has occurred
giving the holders of such Senior Debt the right to accelerate the maturity
thereof, no payment on account of principal, redemption, interest or any other
amounts due on the Notes and no purchase, redemption or other acquisition of the
Notes will be made for the period (the "Payment Blockage Period") commencing on
the date notice is received and ending on the earlier of (A) the date on which
such event of default shall have been cured or waived or (B) 180 days from the
date notice is received. Notwithstanding the foregoing, only one payment
blockage notice with respect to the same event of default or any other events of
default existing and known to the person giving such notice at the time of such
notice on the same issue of Senior Debt may be given during any period of 360
consecutive days. No new Payment Blockage Period may be commenced by the holders
of
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Senior Debt during any period of 360 consecutive days unless all events of
default which triggered the preceding Payment Blockage Period have been cured or
waived. Upon any distribution of its assets in connection with any dissolution,
winding-up, liquidation or reorganization of the Company or acceleration of the
principal amount due on the Notes because of an Event of Default, all Senior
Debt must be paid in full before the holders of the Notes are entitled to any
payments whatsoever.
As a result of these subordination provisions, in the event of the
Company's insolvency, holders of the Notes may recover ratably less than general
creditors of the Company.
The payment of the principal of, interest on or any other amounts due on
Junior Subordinated Indebtedness is subordinated in right of payment to the
prior payment in full of the Notes.
For purposes of this Prospectus, certain defined terms have the following
meanings:
"Senior Debt" means the principal of, interest on and other amounts due on
(i) Indebtedness of the Company, whether outstanding on the date of the
Indenture or thereafter created, incurred, assumed or guaranteed by the Company
in compliance with the Indenture, for money borrowed from banks or other
financial institutions, including, without limitation, money borrowed under the
Credit Facility and any refinancings or refundings thereof; (ii) Indebtedness of
the Company, whether outstanding on the date of the Indenture or thereafter
created, incurred, assumed or guaranteed by the Company in compliance with the
Indenture, which is not Senior Subordinated Indebtedness or Junior Subordinated
Indebtedness; and (iii) Indebtedness of the Company under interest rate swaps,
caps or similar hedging agreements and foreign exchange contracts, currency
swaps or similar agreements. Notwithstanding anything to the contrary in the
foregoing, Senior Debt shall not include: (a) Indebtedness of or amounts owed by
the Company for compensation to employees, or for goods or materials purchased
in the ordinary course of business, or for services; or (b) Indebtedness of the
Company to a subsidiary of the Company.
"Indebtedness" means, with respect to any person, (i) any obligation of
such person to pay the principal of, premium of, if any, interest on (including
interest accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to the Company, whether or not a claim for such
post-petition interest is allowed in such proceeding), penalties, reimbursement
or indemnification amounts, fees, expenses or other amounts relating to any
indebtedness and any other liability, contingent or otherwise, of such person
(A) for borrowed money (including instances where the recourse of the lender is
to the whole of the assets of such person or to a portion thereof), (B)
evidenced by a note, debenture or similar instrument (including a purchase money
obligation), including securities, (C) for any letter of credit or performance
bond in favor of such person, or (D) for the payment of money relating to a
Capitalized Lease Obligation; (ii) any liability of others of the kind described
in the preceding clause (i), which the person has guaranteed or which is
otherwise its legal liability; (iii) any obligation secured by a Lien to which
the property or assets of such person are subject, whether or not the
obligations secured thereby shall have been assumed by or shall otherwise be
such person's legal liability; and (iv) any and all deferrals, renewals,
extensions and refunding of, or amendments, modifications or supplements to, any
liability of the kind described in any of the preceding clauses (i), (ii) or
(iii). The amount of Indebtedness of any person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above, plus the maximum amount of any contingent obligations as described above,
in each case at such date.
"Senior Subordinated Indebtedness" means Indebtedness of the Company
(whether outstanding on the date of the Indenture or thereafter created,
incurred, assumed or guaranteed by the Company) which, pursuant to the terms of
the instrument creating or evidencing the same, is subordinate to the Senior
Debt and senior in right of payment to the Junior Subordinated Indebtedness in
right of payment or in rights upon liquidation.
"Junior Subordinated Indebtedness" means Indebtedness of the Company
(whether outstanding on the date of the Indenture or thereafter created,
incurred, assumed or guaranteed by the
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<PAGE> 64
Company), which, pursuant to the terms of the instrument creating or evidencing
the same, is subordinate to the Senior Debt and the Senior Subordinated
Indebtedness in right of payment or in rights upon liquidation.
EVENTS OF DEFAULT AND NOTICE THEREOF
The term "Event of Default" when used in the Indenture means any one of the
following: (i) failure of the Company to pay interest for 30 days or principal
when due; (ii) failure of the Company to perform any other covenant in the
Indenture for 60 days after notice; (iii) default by the Company with respect to
its obligation to pay within any applicable grace period principal of or
interest on certain other Indebtedness aggregating more than $10,000,000, or the
acceleration of such Indebtedness under the terms of the instruments evidencing
such Indebtedness; (iv) one or more judgements or decrees are entered against
the Company invoking, individually or in the aggregate, a liability of
$10,000,000 or more and such judgements or decrees are not vacated, discharged,
satisfied or stayed pending appeal within 60 days so as to bring the aggregate
liability in respect thereof below the $10,000,000 threshhold; and (v) certain
events of bankruptcy or reorganization of the Company or any subsidiary.
The Indenture provides that the Trustee shall, within 90 days after the
occurrence of any default (the term "default" to include the events specified
above without grace or notice) known to it, give to the holders of Notes notice
of such default; provided that, except in the case of a default in the payment
of principal of or interest on any of the Notes, the Trustee shall be protected
in withholding such notice if it in good faith determines that the withholding
of such notice is in the interest of the holders of Notes. The Indenture
requires the Company to certify to the Trustee annually as to whether any
default occurred during such year.
In case an Event of Default (other than an Event of Default resulting from
bankruptcy, insolvency or reorganization) shall occur and be continuing, the
Trustee or the holders of at least 25% in aggregate principal amount of the
Notes then outstanding, by notice in writing to the Company (and to the Trustee
if given by the holders of the Notes), may, and the Trustee shall, upon the
request of such holders, declare all unpaid principal and accrued interest on
the Notes then outstanding to be due and payable immediately. In case an Event
of Default resulting from certain events of bankruptcy, insolvency or
reorganization shall occur, all unpaid principal of and accrued interest on the
Notes then outstanding shall be due and payable immediately without declaration
or other act on the part of the Trustee or the holders of Notes. Such
acceleration may be annulled and past defaults (except, unless theretofore
cured, a default in payment of principal of or interest on the Notes) may be
waived by the holders of a majority in principal amount of the Notes then
outstanding, upon the conditions provided in the Indenture.
The Indenture provides that no holder of a Note may pursue any remedy under
the Indenture unless the Trustee shall have failed to act after notice of an
Event of Default and request by holders of at least 25% in principal amount of
the Notes and the offer to the Trustee of indemnity satisfactory to it;
provided, however, that such provision does not affect the right to sue for
enforcement of any overdue payment on the Notes.
MODIFICATION AND WAIVER
The Indenture (including the terms and conditions of the Notes) may be
modified or amended by the Company and the Trustee, without the consent of the
holder of any Notes, for the purposes of (i) adding to the covenants of the
Company for the benefit of the holders of Notes; (ii) surrendering any right or
power conferred upon the Company; (iii) providing for conversion rights of
holders of Notes in the event of consolidation, merger or sale of all or
substantially all of the assets of the Company; (iv) evidencing the succession
of another corporation to the Company and the assumption by such successor of
the covenants and obligations of the Company thereunder and in the Notes as
permitted by the Indenture; (v) reducing the Conversion Price, provided that
such
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<PAGE> 65
reduction will not adversely affect the interests of holders of Notes in any
material respect; or (vi) curing any ambiguity or correcting or supplementing
any defective provision contained in the Indenture, or making any other
provisions which the Company and the Trustee may deem necessary or desirable and
which will not adversely affect the interests of the holders of Notes in any
material respect.
Modification and amendment of the Indenture may be made by the Company and
the Trustee with the consent of the holders of not less than a majority in
principal amount of the outstanding Notes, provided that no such modification or
amendment may, without the consent of the holder of each Note affected thereby,
(i) change the stated maturity of the principal of or any installment of
interest on, or alter the redemption provisions with respect to, any Note, (ii)
reduce the principal of, or rate of interest on, any Note, (iv) impair the right
to institute suit for the enforcement of any payment on or with respect to any
Note, (v) modify the conversion or subordination provisions of the Indenture in
a manner adverse to the holders of the Notes, (vi) reduce the above-stated
percentage of holders of Notes necessary to modify or amend the Indenture or
(vii) modify any of the foregoing provisions or reduce the percentage of
outstanding Notes necessary to waive any covenant or past default. Holders of
not less than a majority in principal amount of the outstanding Notes may waive
certain past defaults. See "Events of Default and Notice Thereof." An amendment
to the Indenture may not adversely affect the rights under the subordination
provisions of the holders of any issue of Senior Debt without the consent of
such holders.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and cancelled upon payment of all the
Notes. The Company may terminate all of its obligations under the Indenture,
other than its obligation to pay the principal of and interest on the Notes and
certain other obligations (including its obligation to deliver shares of Common
Stock upon conversion of Notes), at any time, by depositing with the Trustee or
a paying agent other than the Company, money or noncallable U.S. Government
Obligations (as defined in the Indenture) sufficient to pay all remaining
indebtedness on the Notes.
MERGER AND CONSOLIDATION
The Company may consolidate or merge with any other corporation and the
Company may transfer its property and assets substantially as an entirety to any
person; provided that (i) the Company is the resulting or surviving corporation,
or the successor corporation is a domestic corporation and it assumes, by
supplemental indenture, payment of the principal of and interest on the Notes
and performance and observance of every covenant of the Indenture, and (ii)
immediately before and immediately after giving effect to such transaction, no
default or Event of Default shall have occurred and be continuing. Thereafter,
all obligations of the Company under the Indenture and the Notes will terminate.
BOOK-ENTRY PROCEDURES
The Notes may be represented by one or more fully registered notes in
global form ("Global Notes") as well as Notes in definitive form registered in
the name of individual purchasers or their nominees. Each such Global Note will
be deposited with The Depository Trust Company, as Depositary (the
"Depositary"), and registered in the name of Cede & Co., as nominee of the
Depositary. The following are summaries of certain rules and operating
procedures of the Depositary which affect the payment of principal and interest
and transfers of interests in the Global Notes.
The interest of investors in the Notes they elect to hold through the
Depositary will be represented through financial institutions acting on their
behalf as direct or indirect participants ("Participants") in the Depositary.
Upon the issuance of a Global Note, the Depositary will credit, on its
book-entry registration and transfer system, the respective principal amounts of
the Notes represented by such Global Note to
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<PAGE> 66
the accounts of institutions that have accounts with such Depositary or its
nominee. Ownership of interests in such Global Note will be shown on, and the
transfer of those ownership interests will be only through, records maintained
by the Depositary (with respect to Participants' interests) and such
Participants (with respect to the owners of beneficial interests in such Global
Note). The laws of some jurisdictions may require that certain persons take
physical delivery of securities in definitive form. Consequently, the ability to
transfer beneficial ownership in the Global Notes may be limited.
So long as the Depositary or its nominee is the registered holder of a
Global Note, the Depositary or such nominee, as the case may be, will be
considered the sole owner or holder of the Notes represented by such Global Note
for all purposes under the Indenture. Except under certain circumstances, owners
of beneficial interests in a Global Note will not be entitled to have Notes
represented by such Global Note registered in their names, will not receive or
be entitled to receive physical delivery of Notes in definitive form and will
not be considered the owners or holders thereof under the Indenture.
Accordingly, each investor owning a beneficial interest in a Global Note
must rely on the procedures of the Depositary and, if such investor is not a
Participant, on the procedures of the Participant through which such investor
owns its interest, to exercise any rights of a holder under the Indenture or
such Global Note.
Payments of principal and interest on the Notes represented by a Global
Note registered in the name of the Depositary or its nominee will be made to the
Depositary or its nominee, as the case may be, as the registered owner of the
Global Note representing such Notes.
Resales or other transfers between investors holding Notes through the
Depositary will be conducted according to the Depositary's rules and procedures
applicable to U.S. corporate debt obligations and will settle in next-day funds.
CONCERNING THE TRUSTEE
Continental Bank, National Association is the Trustee under the Indenture.
The Indenture contains certain 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 in respect of any such
claim as security or otherwise. The Trustee is permitted to engage in other
transactions; provided, however, if it acquires any conflicting interest (as
defined) and there exists a default with respect to the Notes, it must eliminate
such conflict or resign.
The holders of a majority in principal amount of all outstanding Notes have
the right to direct the time, method and place of conducting any proceeding for
exercising any remedy or power available to the Trustee, provided that such
direction does not conflict with any rule of law or with the Indenture.
In case an Event of Default shall occur (and shall not be cured) and
holders have notified the Trustee, the Trustee will be required to exercise its
powers with the degree of care and skill of a prudent person in the conduct of
his own affairs. Subject to such provisions, the Trustee is under no obligation
to exercise any of its rights or powers under the Indenture at the request of
any of the holders of Notes, unless they shall have offered to the Trustee
security and indemnity satisfactory to it.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the principal United States federal
income tax consequences, under the Internal Revenue Code of 1986, as amended
(the "Code"), and the regulations, judicial decisions and administrative rulings
promulgated thereunder, all as currently in effect, of the purchase, ownership
and disposition of the Notes, but does not purport to be a complete analysis of
all potential tax consequences thereof. There can be no assurance that future
changes in applicable
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<PAGE> 67
law or administrative and judicial interpretations thereof would not alter the
tax consequences described herein or that the Internal Revenue Service (the
"IRS") would agree with the description of the tax consequences set forth
herein. No ruling from the IRS has been or is currently intended to be sought by
the Company concerning matters discussed herein. The following discussion is for
general information only. The following discussion addresses tax considerations
relevant to beneficial owners of Notes that will own Notes as capital assets,
and does not address tax considerations relevant to persons or entities in
special tax purposes, or any persons or entities subject to special tax rules
such as foreign persons or entities, tax exempt entities, insurance companies
and financial institutions. PERSONS CONSIDERING PURCHASING NOTES SHOULD CONSULT
THEIR OWN TAX ADVISORS CONCERNING THE PARTICULAR TAX CONSEQUENCES OF THEIR
ACQUISITION, OWNERSHIP AND DISPOSITION OF THE NOTES, INCLUDING THE APPLICABILITY
AND EFFECT OF ANY FEDERAL, STATE, LOCAL OR FOREIGN TAX LAWS AND ANY PROPOSED
CHANGES IN APPLICABLE TAX LAWS.
For purposes of the discussion under "Certain Federal Income Tax
Considerations," the term "Holder" refers to the beneficial owner of a Note.
GENERAL
Interest. Interest on a Note will be taxable to a Holder as ordinary
interest income in accordance with the Holder's method of accounting for federal
income tax purposes.
Sale, Exchange or Redemption. A Holder generally will recognize gain or
loss on the sale, exchange, redemption or retirement of a Note in an amount
equal to the difference between (i) the amount realized from such sale,
exchange, redemption or retirement and (ii) the Holder's adjusted tax basis in
such Note. To the extent the amount received from such sale, exchange,
redemption or retirement is attributable to accrued interest not previously
included in income, such amount will not be taken into account in computing the
amount of gain or loss, but such amount will be taxable as interest income.
Subject to the following discussion of market discount, gain or loss recognized
on the sale, exchange, redemption or retirement of a Note will be a capital gain
or loss, and will be long-term capital gain or loss if the Holder's holding
period is more than one year.
Market Discount. If a Holder acquires a Note subsequent to its original
issuance and the Note's stated redemption price at maturity (in general, its
outstanding principal amount) exceeds by more than a de minimis amount the
Holder's initial tax basis in the Note, the Holder will be treated as having
acquired the Note at a "market discount" equal to such excess. In general, any
gain recognized by a Holder upon the disposition of a Note having market
discount will be treated as ordinary income to the extent of the market discount
that accrued through the date of disposition. Market discount generally accrues
on a straight-line basis over the remaining term of a Note except that, at the
election of the Holder, market discount will accrue on a constant yield basis. A
Holder may elect to include any market discount in income currently as it
accrues (either on a straight-line basis or, if the Holder so elects, on a
constant yield basis) rather than upon disposition of the Notes, and any amounts
so included would increase the Holder's adjusted tax basis in the Note.
It is anticipated that U.S. Treasury regulations will be issued that will
provide that, upon the conversion of a Note having market discount, a Holder
will not be required to include any amount in income with respect to accrued
market discount not previously included in income as of the date of conversion
(except to the extent attributable to cash received in lieu of fractional
shares, as described in "Conversion of the Notes" below) but such accrued market
discount will carry over to the Common Stock received on conversion and will be
treated as ordinary income to the Holder upon the subsequent disposition of the
Common Stock.
A Holder who acquires a Note at a market discount may be required to defer
the deduction of all or a portion of any interest paid or accrued on any
indebtedness incurred or continued to purchase or carry the Note until the
market discount is recognized upon a subsequent disposition of the Note.
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<PAGE> 68
Such deferral is not required, however, if the Holder elects to include accrued
market discount in income currently (as described above).
Bond Premium. If a Holder's initial tax basis in a Note exceeds the stated
redemption price at maturity of the Note, the Holder will be treated as having
acquired the Note with "bond premium" equal to such excess. In no case, however,
shall bond premium include any amount attributable to the conversion feature of
a Note. In general, the Holder may elect to amortize any bond premium, using a
constant yield method, over the remaining term of the Note. However, because the
Notes may be redeemed at the option of the Company at a price in excess of their
principal amount, a Holder may in certain cases be required to amortize any bond
premium based on the earlier call date and the call price payable at that time
and thus defer a portion of the amortization.
The amount of bond premium amortized by an electing Holder during a year
will generally reduce the amount required to be included in the Holder's income
during that year with respect to interest on the Note and will reduce the
Holder's adjusted tax basis in the Note. An election to amortize bond premium
will apply to all bonds (other than bonds the interest on which is excludable
from gross income) held by the Holder at the beginning of the first taxable year
to which the election applies or thereafter acquired by the Holder, and is
irrevocable without the consent of the IRS.
Conversion of the Notes. Generally, no gain or loss will be recognized by a
Holder on the conversion of a Note into Common Stock, except to the extent of
cash received in lieu of fractional shares of Common Stock. Cash received in
lieu of a fractional share of Common Stock should generally be treated as
payment in exchange for such fractional share, and should result in capital gain
or loss measured by the difference between the cash received and the Holder's
tax basis in the fractional share. A Holder's adjusted tax basis in shares of
Common Stock received upon conversion will be the same as the basis of the Notes
exchanged at the time of conversion (reduced by the adjusted tax basis of any
fractional share for which the Holder receives a cash payment from the Company),
and the holding period of the Common Stock received in the conversion will
include the holding period of the Notes converted.
Adjustments to Conversion Price. Adjustments in the conversion price of the
Notes made pursuant to the provisions thereof may result in constructive
distributions to Holders of Notes that could be taxable to such Holders as
dividends pursuant to Section 305 of the Code.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Under current federal income tax laws, "backup" withholding and information
reporting requirements may apply to payments of principal, premium, if any, and
interest on the Notes and dividends on the Common Stock and to payments of
proceeds of the sale or redemption of the Notes and Common Stock. The Company,
its agent, a broker or any paying agent, as the case may be, will be required to
withhold from any payment that is subject to backup withholding a tax equal to
31% of such payment if the Holder (i) fails to furnish his or her taxpayer
identification number ("TIN"), which, for an individual, is his or her social
security number; (ii) furnishes an incorrect TIN; (iii) under certain
circumstances, is notified by the IRS that such Holder has failed to properly
report payments of interest or dividends; or (iv) under certain circumstances,
fails to certify, under penalty of perjury, that such Holder has furnished a
correct TIN and has not been notified by the IRS that such Holder is subject to
backup withholding for failure to report interest and dividend payments.
Furthermore, a Holder that does not provide the Company, its agent, a broker or
any paying agent, as the case may be, with the Holder's current TIN may be
subject to penalties imposed by the IRS. Certain Holders (including, among
others, corporations, tax-exempt organizations and individual retirement
accounts) are not subject to the backup withholding and information reporting
requirements. Any amount withheld from a payment to a Holder pursuant to the
backup withholding rules is allowable as a credit against such Holder's federal
income tax liability provided that the required information is provided to the
IRS.
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HOLDERS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THEIR QUALIFICATION FOR
EXEMPTION FROM BACKUP WITHHOLDING AND THE PROCEDURE FOR OBTAINING SUCH AN
EXEMPTION IF APPLICABLE.
SELLING HOLDERS
The Notes were originally issued and sold by the initial purchaser thereof,
in a transaction exempt from the registration requirements of the Securities
Act, to persons reasonably believed by such initial purchaser to be "qualified
institutional buyers" (as defined in Rule 144A under the Securities Act), other
institutional "accredited investors" (as defined in Rule 501(a)(1), (2), (3) or
(7) under the Securities Act) or in transactions complying with the provisions
of Regulation S under the Securities Act. The Selling Holders (which term
includes the original holders of the Notes and their transferees, pledgees,
donees or their successors) may from time to time offer and sell pursuant to
this Prospectus any or all of the Notes and Common Stock issued upon conversion
of the Notes.
The Company has been informed that the following table sets forth, as of
the original issuance of the Notes, the Selling Holders and the respective
principal amounts of Notes beneficially owned by each Selling Holder that may be
offered pursuant to this Prospectus. None of the Selling Holders has, or within
the past three years has had, any position, office or other material
relationship with the Company or any of its predecessors or affiliates, except
as noted below. Because the Selling Holders may offer all or some portion of the
Notes or the Common Stock issuable upon conversion thereof pursuant to this
Prospectus, no estimate can be given as to the amount of the Notes or the Common
Stock issuable upon conversion thereof that will be held by the Selling Holders
upon termination of any such sales. In addition, the Selling Holders identified
below may have sold, transferred or otherwise disposed of all or a portion of
their Notes since the original issuance of the Notes in transactions exempt from
the registration requirements of the Securities Act.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
SELLING HOLDER OF THE NOTES
--------------- ----------------
<S> <C>
Fidelity Management & Research............................... $ 21,950
Franklin Family of Funds..................................... 19,250
Trust Co. of the West........................................ 11,100
Capital Guardian Trust....................................... 9,000
Massachusetts Financial Services............................. 7,500
Oppenheimer Management Corp.................................. 7,000
The President & Fellows of Harvard........................... 7,000
IDS.......................................................... 6,000
RAS Trading.................................................. 5,500
Keystone Company of Boston................................... 5,000
Magten Asset Management Corp. ............................... 5,000
Froley, Revy Inv. Co......................................... 4,000
Strong Capital Management Inc................................ 3,500
Jem Capital Management....................................... 3,500
Dean Witter Reynolds......................................... 3,000
Cargill Financial Markets PLC................................ 2,500
McGlinn Capital Management Inc............................... 2,250
Bankers Trust Portfolio...................................... 2,000
AON Advisors Inc............................................. 2,000
Glickenhaus & Co............................................. 1,750
Delaware Management Company.................................. 1,500
JP Morgan Management Co. .................................... 1,500
</TABLE>
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<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
SELLING HOLDER OF THE NOTES
--------------- ----------------
<S> <C>
Highbridge Capital........................................... $ 1,500
Cambridge Capital Fund....................................... 1,000
Columbia Management Company.................................. 1,000
Harris Bank Investment Management Inc. ...................... 1,000
Pacific Mutual Life Insurance................................ 1,000
Wellington/Thorndike......................................... 1,000
Hamilton Partners............................................ 1,000
Conseco Inc.................................................. 1,000
Longfellow Investment Management............................. 500
Alexander Group Inc.......................................... 500
First Boston Asset Management................................ 500
Palladin Group LP............................................ 500
Zazove Associates Inc. ...................................... 500
Lord Abbett & Co............................................. 250
Firebird Limited Partners.................................... 150
Salomon Brothers Inc. ....................................... 150
Nichido Fire and Marine...................................... 100
Paresco Pari Capital......................................... 100
South Port Associates........................................ 100
S.C. Investments............................................. 50
RGP Holdings................................................. 50
----------------
Total................................................... $143,750,000
----------------
----------------
</TABLE>
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<PAGE> 71
PLAN OF DISTRIBUTION
The Notes and Common Stock offered hereby may be sold from time to time to
purchasers directly by the Selling Holders. Alternatively, the Selling Holders
may from time to time offer the Notes and Common Stock to or through
underwriters, broker/dealers or agents, who may receive compensation in the form
of underwriting discounts, concessions or commissions from the Selling Holders
or the purchasers of Notes and Common Stock for whom they may act as agent. The
Selling Holders and any underwriters, broker/dealers or agents that participate
in the distribution of Notes and Common Stock may be deemed to be "underwriters"
within the meaning of the Securities Act and any profit on the sale of Notes and
Common Stock by them and any discounts, commissions, concessions or other
compensation received by any such underwriter, broker/dealer or agent may be
deemed to be underwriting discounts and commissions under the Securities Act.
The Notes and Common Stock offered hereby may be sold from time to time in
one or more transactions at fixed prices, at prevailing market prices at the
time of sale, at varying prices determined at the time of sale or at negotiated
prices. The sale of the Notes and the Common Stock issuable upon conversion
thereof may be effected in transactions (which may involve crosses or block
transactions) (i) on any national securities exchange or quotation service on
which the Notes or the Common Stock may be listed or quoted at the time of sale,
(ii) in the over-the-counter market, (iii) in transactions otherwise than on
such exchanges or in the over-the-counter market or (iv) through the writing of
options. At the time a particular offering of the Notes and the Common Stock is
made, a Prospectus Supplement, if required, will be distributed which will set
forth the aggregate amount and type of Notes and Common Stock being offered and
the terms of the offering, including the name or names of any underwriters,
broker/dealers or agents, any discounts, commissions and other terms
constituting compensation from the Selling Holders and any discounts,
commissions or concessions allowed or reallowed or paid to broker/dealers.
To comply with the securities laws of certain jurisdictions, if applicable,
the Notes and Common Stock will be offered or sold in such jurisdictions only
through registered or licensed brokers or dealers. In addition, in certain
jurisdictions the Notes and Common Stock may not be offered or sold unless they
have been registered or qualified for sale in such jurisdictions or any
exemption from registration or qualification is available and is complied with.
The Selling Holders will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, which provisions may
limit the timing of purchases and sales of any of the Notes and Common Stock by
the Selling Holders. The foregoing may affect the marketability of the Notes and
the Common Stock.
Pursuant to the Registration Agreement, all expenses of the registration of
the Notes and Common Stock will be paid by the Company, including, without
limitation, Commission filing fees and expenses of compliance with state
securities or "blue sky" laws; provided, however, that the Selling Holders will
pay all underwriting discounts and selling commissions, if any. The Selling
Holders will be indemnified by the Company against certain civil liabilities,
including certain liabilities under the Securities Act, or will be entitled to
contribution in connection therewith.
LEGAL MATTERS
The validity of the Notes and the shares of Common Stock issuable upon
conversion thereof will be passed upon for the Company by Milbank, Tweed, Hadley
& McCloy, Los Angeles, California, counsel to the Company.
EXPERTS
The financial statements incorporated in this Prospectus by reference to
the Annual Report on Form 10-K for the fifty-two week period ended January 30,
1993, have been so incorporated in reliance on the reports of Price Waterhouse,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
70
<PAGE> 72
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF ITS AGENTS. 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 HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION.
------------------------
TABLE OF CONTENTS
PAGE
----
<TABLE>
<S> <C> <C>
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
Prospectus Summary.................... 3
Investment Considerations............. 9
Use of Proceeds....................... 12
Price Range of Common Stock........... 12
Dividend Policy....................... 13
Capitalization........................ 14
Selected Consolidated Financial $143,750,000
Data................................ 15
Management's Discussion and Analysis CARTER HAWLEY HALE
of Financial Condition and Results STORES, INC.
of Operations....................... 18
Business.............................. 29 6 1/4% CONVERTIBLE SENIOR
Management............................ 43 SUBORDINATED NOTES
Security Ownership of Certain DUE 2000
Persons............................. 45
Indebtedness of the Company........... 46 [LOGO]
Description of Capital Stock.......... 56
Description of the Notes.............. 57 PROSPECTUS
Certain Federal Income Tax
Considerations...................... 65 DATED , 1994
Selling Holders....................... 68
Plan of Distribution.................. 70
Legal Matters......................... 70
Experts............................... 70
</TABLE>
[LOGO] PRINTED ON RECYCLED PAPER
<PAGE> 73
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all expenses (subject to future
contingencies) incurred or expected to be incurred by the Company in connection
with the Offering.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 49,569
Legal fees and expenses.......................................... 300,000
Accounting fees and expenses..................................... 175,000
NYSE filing fee.................................................. 42,000
Blue Sky fees and expenses (including counsel fees).............. 10,000
Printing and engraving fees...................................... 200,000
Miscellaneous expenses........................................... 23,431
--------
Total.................................................. $800,000
--------
--------
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 102 of the Delaware General Corporation Law (the
"DGCL"), the Company's certificate of incorporation eliminates a director's
personal liability for monetary damages to the Company and its stockholders
arising from a breach or alleged breach of a director's fiduciary duty except
for liability under Section 174 of the DGCL or liability for any breach of the
director's duty of loyalty to the Company or its stockholders, for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law or for any transaction in which the director derived an
improper personal benefit. The effect of this provision in the certificate of
incorporation is to eliminate the rights of the Company and its stockholders
(through stockholders' derivative suits on behalf of the Company) to recover
monetary damages against a director for breach of fiduciary duty as a director
(including breaches resulting from negligent or grossly negligent behavior)
except in the situations described above.
As permitted by Section 145 of the DGCL, the Company's bylaws provide for
indemnification of officers and directors and the Company has entered into an
indemnification agreement ("Indemnification Agreement") with each officer and
director of the Company (an "Indemnitee"). Under the bylaws and these
Indemnification Agreements, the Company must indemnify an Indemnitee to the
fullest extent permitted by Delaware Law for losses and expenses incurred in
connection with actions in which the Indemnitee is involved by reason of having
been a director or officer of the Company. The Company is also obligated to
advance expenses an Indemnitee may incur in connection with such actions before
any resolution of the action, and the Indemnitee may sue to enforce his or her
right to indemnification or advancement of expenses.
The Company also maintains insurance for its officers and directors against
certain liabilities under the Securities Act under an insurance policy, the
premiums for which are paid by the Company.
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<PAGE> 74
ITEM 16. EXHIBITS
A list of exhibits included as part of this Registration Statement is set
forth in the Exhibit Index which immediately precedes such exhibits and is
hereby incorporated by reference herein.
ITEM 17. UNDERTAKINGS
(A) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(B) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(C) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(D) The undersigned registrant hereby undertakes that:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(A)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement;
II-2
<PAGE> 75
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) If the registrant is a foreign private issuer, to file a post-effective
amendment to the registration statement to include any financial statements
required by Rule 3-19 of Regulation S-X at the start of any delayed offering or
throughout a continuous offering.
(E) The undersigned registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of section 310 of the Trust Indenture Act in accordance with the
rules and regulations prescribed by the Commission under section 305(b)(2) of
the Trust Indenture Act.
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<PAGE> 76
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Los Angeles, State of
California, on this 10th day of March, 1994.
CARTER HAWLEY HALE STORES, INC.
By: /s/ MARC E. BERCOON
Name: Marc E. Bercoon
Title:Senior Vice President,
General Counsel and
Corporate Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ----------------------------- ----------------
<S> <C> <C>
* Chairman of the Board March 10, 1994
Samuel Zell and Director
* President, Chief Executive March 10, 1994
David L. Dworkin Officer and Director
(Principal Executive Officer)
* Senior Vice President, March 10, 1994
Brian L. Fleming Accounting and Taxes
(Principal Accounting Officer
and Principal Financial
Officer)
* Director March 10, 1994
Dr. Leobardo F. Estrada
* Director March 10, 1994
Sidney R. Petersen
* Director March 10, 1994
Dennis C. Stanfill
* Director March 10, 1994
Terry Savage
* Director March 10, 1994
David M. Schulte
</TABLE>
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<PAGE> 77
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director March 10, 1994
- -------------------------------
Sanford Shkolnik
* Director March 10, 1994
- -------------------------------
Dr. Robert M. Solow
* Director March 10, 1994
- -------------------------------
James D. Woods
*By /s/ MARC E. BERCOON
- -------------------------------
Attorney-in-Fact
Marc E. Bercoon
</TABLE>
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<PAGE> 78
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION NUMBERED PAGE
- ------- ----------- -------------
<C> <S> <C>
1.1** Purchase Agreement, dated as of December 14, 1993, between Carter
Hawley Hale Stores, Inc. and Salomon Brothers Inc..................
4.1** Indenture dated as of December 21, 1993, between Carter Hawley Hale
Stores, Inc. and Continental Bank, National Association, as
Trustee, relating to Carter Hawley Hale Stores, Inc.'s 6 1/4%
Convertible Senior Subordinated Notes due 2000.....................
4.2** Form of Convertible Senior Subordinated Notes (included in Exhibit
4.1 to the Registration Statement on Form S-3 filed on January 7,
1994)..............................................................
4.3** Registration Agreement, dated December 21, 1993, between Carter
Hawley Hale Stores, Inc. and Salomon Brothers Inc..................
4.4** Amended and Restated Certificate of Incorporation of Carter Hawley
Hale Stores, Inc.; incorporated by reference to Exhibit 4.2 to Form
S-8 filed February 17, 1993........................................
4.5** Bylaws of Carter Hawley Hale Stores, Inc.; incorporated by
reference to Exhibit 3.2 to Form 10-K for the year ended January
30, 1993...........................................................
5.1** Opinion of Milbank, Tweed, Hadley & McCloy.........................
10.1** Sixth Amendment to the Credit Agreement dated as of October 8,
1992, among Carter Hawley Hale Stores, Inc., as the borrower,
Certain Commercial Lending Institutions, as the Lenders, and
General Electric Capital Corporation, as the Agent for the Lenders;
incorporated by reference to Exhibit 10 to Form 8-K filed on March
9, 1994............................................................
23.1* Consent of Price Waterhouse........................................
23.2** Consent of Milbank, Tweed, Hadley & McCloy (included in Exhibit 5.1
to the Registration Statement on Form S-3 filed on January 7,
1994)..............................................................
25.2** Statement of Eligibility and Qualification under the Trust
Indenture Act of 1939 of Continental Bank, National Association, as
Trustee............................................................
28.1** Waiver Agreement, dated as of December 8, 1993 by and between
Carter Hawley Hale Stores, Inc. and First Plaza Group Trust, by its
trustee Mellon Bank, N.A. .........................................
</TABLE>
* Exhibit filed with this amendment
** Previously filed
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Amendment No. 1 to Registration Statement on Form S-3
of our reports dated March 12, 1993 appearing on pages 30 and 31 of Carter
Hawley Hale Stores, Inc.'s Annual Report on Form 10-K for the fifty-two week
period ended January 30, 1993, as amended by the Company's Amended Annual Report
on Form 10-K/A No. 1 dated May 14, 1993. We also consent to the reference to us
under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE
Los Angeles, California
March 10, 1994
