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Filed Pursuant to Rule 424(b)(3)
Registration Statement No. 333-29919
PROSPECTUS
$125,000,000
[PROFFITT'S INC. LOGO]
OFFER TO EXCHANGE ITS
8 1/8% SENIOR NOTES DUE 2004, SERIES B
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OUTSTANDING
8 1/8% SENIOR NOTES DUE 2004, SERIES A
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THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., EASTERN TIME, ON AUGUST 8,
1997, UNLESS EXTENDED BY THE COMPANY IN ITS SOLE DISCRETION (THE "EXPIRATION
DATE").
Proffitt's, Inc., a Tennessee corporation (the "Company"), hereby offers
(the "Exchange Offer"), upon the terms and subject to the conditions set forth
in this Prospectus (the "Prospectus") and the accompanying Letter of Transmittal
(the "Letter of Transmittal"), to exchange up to $125,000,000 aggregate
principal amount of its 8 1/8% Senior Notes due 2004, Series B (the "Exchange
Notes") for an equal principal amount of its outstanding 8 1/8% Senior Notes due
2004, Series A (the "Series A Notes", and collectively with the Exchange Notes,
the "Notes"). The Exchange Notes are substantially identical (including
principal amount, interest rate, maturity, redemption rights and guarantees) to
the Series A Notes for which they may be exchanged pursuant to this offer,
except that (i) the Exchange Notes have been registered under the Securities Act
of 1933, as amended (the "Securities Act"), and (ii) holders of Exchange Notes
will no longer be entitled to certain rights of registration provided to
eligible holders of the Series A Notes under a Registration Rights Agreement by
and among the Company, the Subsidiary Guarantors (as defined herein), and the
Initial Purchasers (as defined herein), dated as of May 21, 1997 (the
"Registration Rights Agreement"). The Series A Notes have been, and the Exchange
Notes will be, issued under an Indenture dated as of May 21, 1997 (the
"Indenture"), by and among the Company, the Subsidiary Guarantors, and The First
National Bank of Chicago, as trustee (the "Trustee"). The Company will not
receive any proceeds from this Exchange Offer; however, pursuant to the
Registration Rights Agreement, the Company will bear certain offering expenses.
See "Description of the Notes."
The Exchange Notes will bear interest at the same rate and on the same terms
as the Series A Notes. Consequently, interest on the Exchange Notes will be
payable semi-annually in arrears on May 15 and November 15 of each year,
commencing November 15, 1997, including interest accrued but unpaid since the
Series A Notes were originally issued. The Exchange Notes will mature on May 15,
2004 and will not be subject to redemption, at the option of the Company, at any
time. Following the occurrence of a Change of Control Triggering Event (as
defined herein), each holder of Notes will have the right to require the Company
to purchase all or a portion of such holder's Notes at a purchase price equal to
101% of the principal amount thereof, plus accrued and unpaid interest thereon,
if any, to the date of purchase. See "Description of the Notes."
The Notes rank pari passu in right of payment with all existing and future
unsecured and unsubordinated indebtedness of the Company and senior in right of
payment to all existing and future subordinated indebtedness of the Company. The
Notes are fully and unconditionally guaranteed on a senior basis (the
"Guarantees") by substantially all of the Company's existing and future
subsidiaries (other than Accounts Receivable Subsidiaries and any Foreign
Subsidiaries) (the "Subsidiary Guarantors"). The Guarantees are subject to
release under certain circumstances specified in the Indenture, and rank pari
passu in right of payment with all existing and future unsecured and
unsubordinated indebtedness of the Subsidiary Guarantors and senior in right of
payment to all existing and future subordinated indebtedness of the Company and
the Subsidiary Guarantors. The Notes and the Guarantees will be effectively
subordinated to all secured indebtedness of the Company and the Subsidiary
Guarantors to the extent of the value of the assets securing such indebtedness.
As of May 3, 1997, on a pro forma basis after giving effect to the issuance of
the Series A Notes and the application of the net proceeds therefrom, the
Company and the Subsidiary Guarantors would have had approximately $521.2
million of indebtedness outstanding, of which approximately $295.3 million would
have been senior indebtedness and approximately $60.3 million would have been
secured indebtedness. See "Description of the Notes -- Guarantees."
The Series A Notes have not been listed on any securities exchange and are
not traded on the National Association of Securities Dealers Automated Quotation
System, Inc. ("Nasdaq"). The Series A Notes have been designated eligible for
trading through the National Association of Securities Dealers, Inc.'s ("NASD")
PORTAL trading system. The Company does not intend to apply for listing of the
Exchange Notes on any securities exchange or for quotation through Nasdaq.
Although the Initial Purchasers (as defined herein) have informed the Company
that they currently intend to make a market in the Notes, they are not obligated
to do so, and any such market making may be discontinued at any time without
notice. Accordingly, there can be no assurance as to the development or
liquidity of any market for the Notes. The Company's Common Stock was traded on
the Nasdaq National Market under the symbol "PRFT" through July 3, 1997. The
Company's Common Stock began trading on The New York Stock Exchange on July 7,
1997 under the symbol "PFT."
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY HOLDERS WHO TENDER SERIES A NOTES IN THE EXCHANGE
OFFER.
The Company will accept for exchange any and all Series A Notes validly
tendered by eligible holders and not withdrawn prior to 5:00 p.m. New York City
time on August 8, 1997, unless extended by the Company in its sole discretion
(the "Expiration Date"). Tenders of Notes may be withdrawn at any time prior to
the Expiration Date. The Exchange Offer is subject to certain customary
conditions. The Notes may be tendered only in integral multiples of $1,000. See
"The Exchange Offer."
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is July 9, 1997.
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EXPLANATORY NOTE
This Registration Statement covers $125,000,000 aggregate principal amount
of the Exchange Notes and the related guarantees thereof to be offered in
exchanged for equal principal amounts of the Series A Notes and the related
guarantees thereof in the Exchange Offer. This Registration Statement is being
filed to satisfy certain requirements of the Registration Rights Agreement.
Based on interpretations by the staff of the Securities and Exchange
Commission (the "SEC" or the "Commission") set forth in no-action letters issued
to unrelated third parties, the Company believes that Exchange Notes issued
pursuant to the Exchange Offer in exchange for Series A Notes may be offered for
resale, resold and otherwise transferred by any holder thereof (other than any
such holder which is a broker-dealer that holds Notes acquired for its own
account as a result of market-making or other trading activities or any holder
which is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act of 1933, as amended (the "Securities Act")) without compliance
with the registration and prospectus delivery provisions of the Securities Act,
provided that such Exchange Notes are acquired in the ordinary course of such
holder's business and such holder is not engaged in, and does not intend to
participate, and has no arrangement or understanding with any person to
participate in, a distribution of such Exchange Notes. In the event that any
holder of Series A Notes is prohibited by law or any policy of the Commission
from participating in the Exchange Offer, or any holder of Exchange Notes may
not resell such Exchange Notes without delivering a prospectus and this
Prospectus is inappropriate or unavailable for such resales, or if a holder is a
broker-dealer and holds Notes acquired directly from the Company or one of its
affiliates, and in each case such holder satisfies certain other requirements,
including timely notice to the Company, the Company has agreed, pursuant to the
Registration Rights Agreement, to file a shelf registration statement (the
"Shelf Registration Statement") in respect of any such Notes pursuant to Rule
415 under the Securities Act.
Any Series A Notes not tendered and accepted in the Exchange Offer will
remain outstanding. To the extent Series A Notes are tendered and accepted in
the Exchange Offer, a holder's ability to sell untendered and unregistered
Series A Notes could be adversely affected. Following consummation of the
Exchange Offer, the holders of Series A Notes will continue to be subject to the
existing restrictions upon transfer thereof and the Company will have fulfilled
one of its obligations under the Registration Rights Agreement. Holders of Notes
who do not tender their Notes generally will not have any further registration
rights under the Registration Rights Agreement or otherwise. See "The Exchange
Offer -- Termination of Certain Rights" and " -- Consequences of Failure To
Exchange."
The Company expects that the Exchange Notes will be issued only in the form
of a Global Note (as defined herein), which will be deposited with, or on behalf
of, The Depository Trust Company ("DTC") and registered in its name or in the
name of DTC's nominee, Cede & Co. ("Cede"). Beneficial interests in the Global
Note representing the Exchange Notes will be shown on, and transfers thereof
will be effected through, records maintained by DTC and its participants. After
the initial issuance of the Global Note, Exchange Notes in certificated form may
be issued in exchange for the Global Note on the terms and conditions set forth
in the Indenture. See "Description of Exchange Notes -- Book-Entry; Delivery and
Form."
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). So long as any Notes are
outstanding, or the Company is subject to the periodic reporting requirements of
the Exchange Act, it is required to furnish the information required to be filed
with the Commission to the Trustee and the holders of the Notes. The Company has
agreed that, even if it is not required under the Exchange Act to furnish such
information to the Commission, it will nonetheless continue to furnish
information that would be required to be furnished by the Company pursuant to
Sections 13 and 15(d) of the Exchange Act, to the Trustee and the holders of the
Notes as if it were subject to such periodic reporting requirements. See
"Available Information."
In addition, the Company has agreed that in the event the Company is no
longer subject to Sections 13 or 15(d) under the Exchange Act, and for so long
as any of the Series A Notes remain outstanding, it will make available to any
prospective purchaser of the Series A Notes or beneficial owner of the Series A
Notes in connection with any sale thereof the information required by Rule
144A(d)(4) under the Securities Act, until
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such time as either (i) the Company has exchanged the Series A Notes for the
Exchange Notes or (ii) the holders thereof have disposed of such Series A Notes
pursuant to an effective registration statement filed by the Company.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission a
registration statement on Form S-1 (together with all amendments and exhibits
thereto, the "Registration Statement") under the Securities Act with respect to
the securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto, as permitted by the rules and regulations of the Commission.
For further information with respect to the Company and the Exchange Notes,
reference is hereby made to the Registration Statement, including the exhibits
and schedules filed or incorporated as a part thereof. Statements contained
herein concerning the provisions of any document are not necessarily complete
and in each instance reference is made to the copy of the document filed as an
exhibit or schedule to the Registration Statement. Each such statement is
qualified in its entirety by reference to the copy of the applicable document
filed with the Commission. In addition, the Company files periodic reports and
other information with the Commission under the Exchange Act, relating to the
Company's business, financial statements and other matters. The Registration
Statement, including the exhibits and schedules thereto, and the periodic
reports and other information filed in connection therewith, may be inspected 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
following Regional Offices of the Commission: 7 World Trade Center, Suite 1300,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies may be obtained at the prescribed
rates from the Public Reference Section of the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 or on the Internet at
http://www.sec.gov.
CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain of the matters discussed in this Prospectus may constitute
forward-looking statements for purposes of the Securities Act and the Exchange
Act. Such forward-looking statements may involve uncertainties and other factors
that may cause the actual results and performance of the Company to be
materially different from future results or performance expressed or implied by
such statements. Cautionary statements regarding the risks associated with such
forward-looking statements, include, without limitation, those statements
included under "Risk Factors," "Summary -- Business Strategy" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere herein. Among others, factors that could adversely affect actual
results and performance include local and regional economic conditions in the
areas served by the Company, the level of consumer spending for apparel and
other consumer goods, the effects of weather conditions on seasonal sales in the
Company's market areas, competition among department and specialty stores,
changes in merchandise mixes, site selection and related traffic and demographic
patterns, best practices and merchandising, inventory management and turnover
levels, realization of planned synergies and cost savings, and the Company's
success in integrating recent and potential future acquisitions. See "Risk
Factors -- Forward-Looking Statements."
All written or oral forward-looking statements attributable to the Company
are expressly qualified in their entirety by the foregoing cautionary statement.
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PROSPECTUS SUMMARY
The following is a summary of certain information contained elsewhere in
this Prospectus. Reference is made to, and this summary is qualified in its
entirety by, the more detailed information contained in this Prospectus. As used
herein, unless the context otherwise requires, "Company" means Proffitt's, Inc.
and its subsidiaries, and the terms "Proffitt's," "McRae's," "Younkers,"
"Parisian" and "Herberger's" refer to the Company's five department store
chains, and the existing and predecessor entities that conduct or conducted
business under such names. Reference in this Prospectus to the Company's fiscal
year means the fiscal year ended on the Saturday nearest January 31 of the
following calendar year (e.g., "fiscal 1995" means the fiscal year ended
February 3, 1996). Unless the context otherwise requires, references in this
Prospectus to "pro forma" financial information reflect the acquisition by the
Company of Parisian as if the acquisition had occurred on February 4, 1996.
Historical financial information presented in this Prospectus includes the
results of Parisian from and after October 11, 1996, the date of its acquisition
by the Company.
THE EXCHANGE OFFER
The Exchange Offer......... The Exchange Offer consists of this Prospectus and
the related Letter of Transmittal, and is being
made solely to eligible holders of Series A Notes.
Upon the terms and subject to the conditions of the
Exchange Offer, the Company is offering eligible
holders of Series A Notes the opportunity to
exchange its Series A Notes that have not been
registered under the Securities Act for the
Exchange Notes that have been registered under the
Securities Act.
Exchange Offer Expiration
Date..................... The Exchange Offer expires at 5:00 P.M., Eastern
Time on August 8, 1997 unless extended by the
Company in its sole discretion.
Exchange Notes Offered..... The Exchange Notes consist of $125,000,000
aggregate principal amount of 8 1/8% Senior Notes
due 2004, Series B.
Procedures for Tendering
Series A Notes........... Brokers, dealers, commercial banks, trust companies
and other nominees who hold Series A Notes through
DTC (as defined herein) may effect tenders by
book-entry transfer in accordance with DTC's
Automated Tender Offer Program ("ATOP"). Holders of
such Series A Notes registered in the name of a
broker, dealer, commercial bank, trust company or
other nominee are urged to contact such person
promptly if they wish to tender Series A Notes. In
order for Series A Notes to be tendered by a means
other than by book-entry transfer, a Letter of
Transmittal must be completed and signed in
accordance with the instructions contained herein.
The Letter of Transmittal and any other documents
required by the Letter of Transmittal must be
delivered to the Exchange Agent by mail, facsimile,
hand delivery or overnight carrier, and either such
Series A Notes must be delivered to the Exchange
Agent or specified procedures for guaranteed
delivery must be complied with. See "The Exchange
Offer -- Procedures for Tendering."
Letters of Transmittal and certificates
representing Series A Notes should not be sent to
the Company. Such documents should only be sent to
the Exchange Agent. See "The Exchange
Offer -- Exchange Agent."
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THE NOTES
Maturity Date of the
Notes.................... May 15, 2004.
Interest Payment Dates..... May 15 and November 15 of each year, commencing
November 15, 1997.
Limited Nature of
Guarantees............... The Notes are fully and unconditionally guaranteed
on a senior basis by the Subsidiary Guarantors.
Under certain circumstances, future subsidiaries
(other than Accounts Receivables Subsidiaries and
Foreign Subsidiaries) of the Company may be
requested to guarantee the Notes. In addition, the
Guarantees are subject to release under certain
circumstances. See "Description of the
Notes -- Exchange Note Guarantees" and "Description
of the Exchange Notes -- Limitations on Guarantees
by Restricted Subsidiaries."
Ranking.................... The Notes rank pari passu in right of payment with
all existing and future unsecured and
unsubordinated indebtedness of the Company and
senior in right of payment to all existing and
future subordinated indebtedness of the Company.
The Guarantees rank pari passu in right of payment
with all existing and future unsecured and
unsubordinated indebtedness of the Subsidiary
Guarantors and senior in right of payment to all
existing and future subordinated indebtedness of
the Subsidiary Guarantors. The Notes and the
Guarantees will be effectively subordinated to all
secured indebtedness of the Company and the
Subsidiary Guarantors to the extent of the value of
the assets securing such indebtedness. As of May 3,
1997, on a pro forma basis after giving effect to
the issuance of the Notes and the application of
the net proceeds therefrom, the Company and the
Subsidiary Guarantors would have had an aggregate
of approximately $521.2 million of indebtedness
outstanding, of which approximately $295.3 million
would have been senior indebtedness and
approximately $60.3 million would have been secured
indebtedness. See "Description of the Exchange
Notes."
Change of Control.......... Following the occurrence of a Change of Control
Triggering Event (as defined in the Indenture), the
Company will be required to make an offer to
purchase all outstanding Notes at a price equal to
101% of the principal amount thereof plus accrued
and unpaid interest, if any, to the date of
purchase. See "Description of the Notes -- Change
of Control."
Certain Covenants.......... The Indenture under which the Notes are issued
contains certain covenants that, among other
things, limit (i) the incurrence of additional
indebtedness, (ii) certain restricted payments,
(iii) certain asset sales, (iv) transactions with
affiliates, (v) consolidations, mergers and
dispositions of assets on a consolidated basis, and
(vi) the Company's restricted subsidiaries from
guaranteeing certain other indebtedness of the
Company unless such restricted subsidiaries also
guarantee the Notes. The Indenture also prohibits
certain restrictions on distributions from
restricted subsidiaries of the Company. These
covenants are subject to important exceptions and
qualifications.
The Indenture provides that after the Notes achieve
an investment grade rating from both Standard &
Poor's Ratings Services, a Division of the
McGraw-Hill Companies, Inc., and Moody's Investors
Service, Inc., the Company's obligation to comply
with certain of the restrictive covenants described
herein will be terminated. See "Description of the
Notes -- Certain Covenants."
Use of Proceeds............ The Company will not receive any proceeds from the
issuance of the Exchange Notes pursuant to the
Exchange Offer. The net proceeds to the Company
from the sale of the Series A Notes are being used
to repay
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certain outstanding mortgage and other indebtedness
of the Company, to reduce certain borrowings under
the Credit Facility and for general corporate
purposes. See "Use of Proceeds."
Shelf Registration
Statement................ If (i) the Exchange Offer is not permitted by
applicable law or (ii) any holder of Transfer
Restricted Notes (as defined herein) notifies the
Company within 20 business days of the commencement
of the Exchange Offer that (A) it is prohibited by
law or Commission policy from participating in the
Exchange Offer, (B) that it may not resell the
Exchange Notes acquired by it in the Exchange Offer
to the public without delivering a prospectus and
the Prospectus contained in the Exchange Offer
Registration Statement is not appropriate or
available for such resales or (C) that it is a
broker-dealer and holds Series A Notes acquired
directly from the Company or an affiliate of the
Company, the Company will be required to provide
the Shelf Registration Statement to cover resales
of the Notes by such holders thereof. If the
Company fails to satisfy these registration
obligations, it will be required to pay Additional
Interest (as defined herein) to the holders of
Notes under certain circumstances. See "The
Exchange Offer."
Absence of an Established
Trading Market for the
Notes.................... The Series A Notes are new securities that were
issued on May 21, 1997 (the "Issue Date" or
"Closing Date"). There is currently no established
trading market for the Notes or the Exchange Notes.
Although Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Goldman, Sachs & Co. and Smith Barney
Inc. (the "Initial Purchasers") have informed the
Company that they currently intend to make a market
in the Series A Notes and, upon issuance, the
Exchange Notes, they are not obligated to do so and
any such market making may be discontinued at any
time without notice. Accordingly, there can be no
assurance as to the development or liquidity of any
market for the Notes. To the extent Series A Notes
are exchanged in this Exchange Offer, the liquidity
of the market for the remaining Series A Notes may
be reduced. The Series A Notes have been designated
eligible for trading in the Private Offerings,
Resale and Trading through Automatic Linkages
(PORTAL) market. The Company does not intend to
apply for listing of the Exchange Notes on any
securities exchange or for quotation through
Nasdaq. See "Risk Factors -- Absence of a Public
Market."
THE COMPANY
The Company is a leading regional department store chain operating 175
stores in 24 states, primarily in the Southeast and Midwest. The Company
operates its stores under five chain names: Proffitt's (19 stores), McRae's (29
stores), Younkers (48 stores), Parisian (40 stores) and Herberger's (39 stores).
Each chain operates primarily as a leading branded traditional department store
in its communities, with Parisian serving as a better branded specialty
department store. Most of the stores are located in premier regional malls in
the respective trade areas served. The Company's stores offer a wide selection
of fashion apparel, accessories, cosmetics and decorative home furnishings,
featuring assortments of premier brands, private brands and specialty
merchandise. Each of the Company's chains operates with its own merchandising,
marketing and store operations team in order to tailor regional assortments to
the local customer. At the same time, the Company coordinates merchandising
among the chains and consolidates administrative and support functions to
realize scale economies, to promote a competitive cost structure and to increase
margins.
Under the leadership of R. Brad Martin and an experienced senior management
team, the Company has executed a disciplined acquisition strategy and strategic
approach to new store openings, growing from 11 stores and net sales of $94.8
million in fiscal 1989 to 175 stores and pro forma net sales of $2.3 billion in
fiscal
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1996. In addition, the Company has increased EBITDA from $8.9 million in fiscal
1989 to $167.2 million in fiscal 1996, on a pro forma basis.
Members of the Company's senior management have substantial investments in
the Company. As of April 25, 1997, Mr. Martin beneficially owned approximately
4.7% of the Company's Common Stock and all directors and executive officers of
the Company as a group beneficially owned approximately 13.2% of the Company's
Common Stock.
The Company was incorporated under the laws of the State of Tennessee in
1919. The principal executive offices of the Company are located at 3455 Highway
80 West, Jackson, Mississippi 39209, and its telephone number is (601) 968-4400.
BUSINESS STRENGTHS
The Company believes that it is well-positioned to build upon its
historical success by capitalizing on its competitive strengths, including the
following:
Strong Regional Focus. The Company places a high priority on being a
market leader in each of the markets in which it operates. In smaller
communities, the Company's stores are frequently the only branded name
department store catering to middle and upper income customers and offering an
array of brands that frequently are not otherwise available to shoppers in such
markets. In most larger metropolitan markets, the Company seeks to maximize its
market share by operating multiple stores in prime locations. While the Company
has grown through the acquisition of regional chains, its philosophy has been to
(i) maintain existing trade names and retain merchandising and store personnel
and (ii) utilize previously developed regional expertise and knowledge of the
local customer base by allowing each chain to tailor merchandise assortments to
the local customer. The Company believes that the increased sales and gross
margins resulting from a coordinated but decentralized merchandising effort
outweigh any incremental operating cost savings associated with a completely
centralized strategy.
Scale Economies. With pro forma sales of approximately $2.3 billion in
fiscal 1996, the Company realizes scale economies in purchasing and
distribution, administrative areas such as accounting, proprietary credit card
administration, management information systems, and other infrastructure-related
areas. Although the Company's chains control regional merchandising, the
Proffitt's Merchandising Group coordinates merchandising, planning and
execution, visual presentation, marketing and advertising activities among the
chains. The Proffitt's Merchandising Group manages strategic relationships with
the Company's top vendors to ensure that each chain is afforded the purchasing
leverage of the Company as a whole. In addition to seeking economies of scale in
purchasing, the Proffitt's Merchandising Group will continue to capitalize on
corporate level marketing synergies, such as the coordination of media buying
and direct mail programs, the establishment of preferred advertising rates, and
the production of store catalogs.
Proven Track Record of Integrating Acquisitions. In recent years, the
Company has grown primarily through the acquisition of strong, regional
department store chains at valuations believed to be attractive by management.
The following table sets forth certain information concerning the Company's
significant acquisitions:
<TABLE>
<CAPTION>
TRANSACTION VALUE(A)
EQUITY AS A % AS A MULTIPLE OF:
DATE OF NUMBER TRANSACTION OF TRANSACTION ----------------------------
COMPANY ACQUIRED ACQUISITION OF STORES VALUE(A) VALUE(A) LTM SALES(B) LTM EBITDA(B)
- ---------------- ----------- --------- ----------- -------------- ------------ -------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
McRae's, Inc.................... March 31, 1994 28 $264.8 5% 0.6x 5.3x
Younkers, Inc................... February 3, 1996 51 321.6 79 0.5 6.5
Parisian, Inc................... October 11, 1996 38 375.0 28 0.5 8.7
G.R. Herberger's, Inc........... February 1, 1997 39 176.9 88 0.5 7.4
</TABLE>
- ---------------
(a) Transaction value is the total consideration paid in the form of: (i) cash;
(ii) notes; (iii) equity (valued as of the announcement date for
pooling-of-interest transactions and in accordance with generally
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accepted accounting principles for purchase accounting transactions); and
(iv) assumed long-term debt, net of cash, as of the end of the last full
fiscal quarter prior to the acquisition date.
(b) LTM Sales and LTM EBITDA of the acquired company represent data for the
twelve months ending on the last day of the last full fiscal quarter prior
to the acquisition date. Additionally, EBITDA for Herberger's is adjusted
for ESOP expense of $4.3 million. See "-- Summary Historical and Pro Forma
Financial and Operating Data" for the definition of EBITDA.
The Company employs a "best practices" approach to integrating acquired
companies. Best practices is a process whereby each acquired chain's operating
procedures and policies are reviewed to determine those practices which the
Company believes will increase synergies while minimizing business
interruptions. The Company believes the implementation of best practices
throughout the Company's chains has resulted in improved comparable store sales
and increased operating margins through better and more consistent inventory
control and pricing, and other operating efficiencies.
Strong Financial Position. The Company has been able to realize
significant growth while maintaining moderate leverage. Since February 1996, the
acquisitions of Younkers, Herberger's and Parisian have resulted in an increase
in net sales of approximately $1.6 billion, while senior debt as a percentage of
total capitalization decreased slightly. In addition to conservative balance
sheet management, the Company's strong cash flow generation has allowed it to
fund all capital expenditures, incremental working capital requirements and
fixed charges with internally generated cash flow. On a pro forma basis, the
Company's ratio of EBITDA to interest expense in fiscal 1996 would have been
3.7x. The Company's strong financial performance has provided it with
significant financial flexibility, including the ability to use its
publicly-traded common stock as consideration for selected acquisitions.
Geographic and Demographic Diversity. The Company operates 175 stores in
24 states. Stores are operated in metropolitan markets such as Atlanta, Georgia
and Indianapolis, Indiana, as well as in smaller markets such as Ames, Iowa and
Kalispell, Montana. The Company believes that its geographic diversity and the
demographic breadth of its target customer groups may to some extent serve to
insulate the Company from sales and earnings volatility typically associated
with poor weather conditions, or changes in local or regional economic
conditions.
Attractive Real Estate. The Company believes that its stores are primarily
located in premier malls in the markets in which the Company operates. As is
consistent with national trends, the Company further believes that construction
of new malls in many of its markets is likely to be limited. The Company
anticipates that the attractiveness of its existing locations, combined with
limited new mall development, may contribute to improved comparable store sales.
BUSINESS STRATEGY
The Company's business objective is to maximize profitability and
shareholder value by (i) expanding its core business through comparable store
sales growth, new store openings and margin expansion, and (ii) monitoring
acquisition opportunities while maintaining a strong capital structure.
Comparable Store Sales Growth. The Company expects that comparable store
sales will benefit from a number of merchandising initiatives including (i)
implementing best practices, (ii) expanding sales of key brands, and (iii)
increasing sales of the Company's private brands. As part of best practices, the
Company benchmarks sales of product categories and brand assortments for each
store and identifies and targets opportunities to strengthen such sales by
altering the merchandise mix. The Company has successfully used this strategy by
applying the long history of strength in the cosmetics business of McRae's and
Proffitt's stores to increase the penetration and profitability of Younkers
stores' cosmetics business. The Company believes that it will be able to further
utilize this strategy to increase sales in the Younkers shoe business, increase
McRae's women's apparel sales and introduce home goods into select Parisian
stores.
The Company believes that comparable store sales will also benefit from
expanded sales of key brands, such as Tommy Hilfiger, Liz Claiborne, Jones New
York, Polo/Ralph Lauren, Calvin Klein, Guess, and Nine West, among others. The
Company's large scale and proven track record with these vendors has enabled the
Company to introduce certain of these brands into acquired stores which, prior
to combining with the
8
<PAGE> 9
Company, did not have access to these vendors. For instance, Tommy Hilfiger,
Nautica and Lancome will now be carried in select Herberger's stores.
Additionally, the Company plans to increase sales of its private brand offerings
within the apparel and housewares categories from 6% of total net sales to 12%
to 15% over the next two to three years. For example, the Company has recently
developed its own line of men's dress shirts and accessories, under the brand
name RBM. The RBM collection is designed to fill a niche for quality men's
furnishings at moderate prices.
New Store Openings. The Company plans to open 15 to 20 new stores across
all chains over the next three years and to make selective real estate
acquisitions in existing or new markets. The Company targets premier mall
locations principally based on favorable demographic profiles and trends, as
well as the compatibility and traffic draws of other tenants. High quality real
estate is a primary criterion for all new stores. In addition, the Company plans
to selectively remodel or expand certain existing stores.
Margin Expansion. The Company has implemented the following strategies to
increase margins: (i) leveraging key vendor relationships; (ii) capitalizing on
purchasing economies of scale; (iii) extending key brands into certain acquired
stores; (iv) shifting the merchandise mix toward higher margin products; (v)
increasing private brand penetration; (vi) consolidating administrative and
support areas and eliminating redundant expenses; and (vii) realizing
efficiencies related to the re-engineering of certain operating activities.
The Company intends to further increase gross margins by increasing sales
of its private brand products, which typically generate higher margins and
enhance customer loyalty. Operating margins are also expected to benefit from
sales productivity enhancements across the Company's chains and from the
integration cost savings programs developed by management in conjunction with
the Younkers, Parisian, and Herberger's acquisitions. These programs reduced
operating expenses by a total of $6 million in fiscal 1996 (consistent with the
Company's announced target) and are expected to produce annualized expense
savings of $20 million in fiscal 1997 and $29 million in fiscal 1998 (compared
to the 1995 cost structure of the chains on an independent basis).
Monitor Acquisition Opportunities. The Company has an established record
of successfully acquiring and integrating regional department store chains. The
Company believes that its philosophy of retaining the local identity and
merchandising organization of acquired companies makes the Company an attractive
acquirer for regional department store companies. The Company's criteria in
evaluating strategic opportunities include (i) strong market presence; (ii)
prime real estate locations; (iii) similar merchandising strategies targeted
toward middle to upper income consumers; (iv) geographic proximity to the
Company's core markets; (v) compatible corporate culture; and (vi) favorable
demographics in the regions served. Although the Company currently has no
agreements, arrangements or understandings with respect to future acquisitions,
the Company expects the department store industry will continue to consolidate,
and the Company will regularly evaluate possible acquisition opportunities as
they arise.
Maintain Strong Capital Structure. The Company intends to maintain a
strong balance sheet to support its growth objectives. The fulfillment of this
objective has been facilitated by strong cash flows and the Company's issuance
of its Common Stock as all or part of the consideration used in its recent
acquisitions. The Company believes that, absent any additional acquisitions,
future cash flows from operations (with seasonal needs supplemented by
borrowings under its Credit Facility) will be sufficient to service debt and
lease payments, and to fund capital expenditures and working capital
requirements.
RECENT DEVELOPMENTS
Strengthening and Retaining Management. In recent months, the Company has
acted to strengthen and retain its senior management in light of its recent
growth and strategic objectives. In April 1997, the Board of Directors of the
Company authorized a new five-year employment agreement with R. Brad Martin, its
Chairman and Chief Executive Officer since 1989. Among other recent
appointments, the Company also named Douglas E. Coltharp as Executive Vice
President and Chief Financial Officer, William D. Cappiello as President and
Chief Executive Officer of Parisian, Frank E. Kulp as President and Chief
Executive Officer of Herberger's, Mark Shulman as President and Chief Executive
Officer of Younkers, Toni E. Browning as President and Chief Executive Officer
of the Proffitt's Division, Dawn H. Robertson as President and Chief Executive
Officer of McRae's, and Donald E. Wright as Senior Vice President of Finance and
Accounting.
9
<PAGE> 10
Implementation of Capital Structure Improvements. The Company is in the
process of implementing a number of capital structure improvements to position
it for future growth. The issuance of the Notes is part of a plan to improve the
Company's capital structure by (i) reducing the amount of the Company's secured
indebtedness; (ii) reducing the amount of the Company's indebtedness that bears
interest at a floating rate; and (iii) extending the average life of the
Company's indebtedness. On June 26, 1997, the Company amended and restated its
existing credit facility (as amended and restated, the "Credit Facility") to,
among other things, (a) increase the revolving Credit Facility from $275 million
to $400 million, (b) extend the maturity from October 11, 1999 to June 26, 2002,
(c) make provision for, upon any senior indebtedness of Proffitt's being rated
investment grade, the elimination of the inventory borrowing base limitation on
borrowings under the Credit Facility, (d) reduce the financial performance
benchmarks at which more favorable pricing options are made available to the
Company, and (e) lessen in varying degrees the scope of the affirmative and
negative covenants applicable to the Company and its subsidiaries. The Company
may use the proceeds of borrowings under the Credit Facility to refinance
certain existing indebtedness, to finance capital expenditures, for general
corporate purposes and to finance certain acquisitions. Furthermore, the Company
is pursuing a restructuring of one of its existing accounts receivable financing
arrangements covering receivables generated by all the stores, except Younkers,
in an effort to extend the term of a portion of such arrangements from one year
to three to five years through the sale of investment grade term asset-backed
securities. The Company anticipates that such transaction may be completed
during or shortly after the Exchange Offer. There is no assurance, however, that
such transaction will be completed as presently contemplated. See "Receivables
Securitization Facilities."
Sale of Seven Virginia Stores. The Company continuously evaluates store
performance and closes or sells stores that do not meet management's objectives.
As part of its ongoing efforts to efficiently deploy its capital, the Company
recently closed seven Proffitt's stores in Virginia and sold the fixed assets to
an unrelated company. While these stores were profitable, they did not meet
management's targeted return on investment. Proceeds from the sale of these
stores will be reinvested in new stores and existing store renovations.
RISK FACTORS
See "Risk Factors," beginning on page 13, for a discussion of certain
factors that should be considered by holders of both Series A Notes and Exchange
Notes.
10
<PAGE> 11
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following table presents summary historical and pro forma financial and
operating data derived from the audited Consolidated Financial Statements of the
Company for the last five fiscal years and the unaudited Condensed Consolidated
Financial Statements for the three months ended May 3, 1997 and May 4, 1996. The
historical financial data should be read in conjunction with the Company's
Consolidated Financial Statements and Condensed Consolidated Financial
Statements (Unaudited) and the notes thereto appearing elsewhere herein. The
summary historical pro forma financial and operating data give effect to the
purchase of Parisian as if it had occurred on February 4, 1996, are based on
certain assumptions and are derived from, and should be read in conjunction with
the Pro Forma Combined Statement of Income (Unaudited) appearing elsewhere
herein. The summary pro forma financial data do not purport to present the
actual financial position or results of operations of the Company had the
Parisian acquisition and the events assumed therein in fact occurred on the
dates specified, nor are they necessarily indicative of the results of
operations that may be achieved in the future. The data for the three months
ended May 3, 1997 and May 4, 1996 are not necessarily indicative of the results
that may be expected for the current fiscal year. See "Pro Forma Combined
Statement of Income (Unaudited)" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS ENDED PRO FORMA FISCAL YEAR ENDED(A)
------------------------- YEAR ENDED ---------------------------------------
MAY 3, MAY 4, FEBRUARY 1, FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996(A) 1997 1997 1996 1995
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Net sales................ $ 526,370 $365,179 $2,320,955 $1,889,779 $1,661,056 $1,513,444
Cost and expenses:
Cost of sales.......... 335,882 237,201 1,511,802 1,230,454 1,087,619 980,028
Selling, general and
administrative
expenses............. 128,629 88,952 551,804 440,502 398,999 352,448
Depreciation and
amortization......... 10,898 9,811 48,471 41,037 43,013 40,305
Property and equipment
rentals.............. 19,048 11,270 81,747 60,684 50,609 47,857
Taxes other than income
taxes................ 12,622 9,638 49,720 40,403 36,938 34,421
Merger, restructuring
and integration
costs(b)............. 1,468 2,763 15,929 15,929 20,822 --
Operating income......... 17,796 7,804 62,576 61,864 753 52,385
Other income (expense):
Finance charge income,
net(c)............... 10,878 7,160 37,883 32,305 31,273 27,934
Interest expense....... (10,692) (4,706) (44,702) (26,756) (29,389) (23,286)
Other income, net...... 136 498 3,409 1,572 4,051 4,826
Income before provision
for income taxes,
extraordinary loss and
cumulative effect of
changes in accounting
methods................ 18,118 10,756 59,166 68,985 6,688 61,859
Net income (loss)........ 10,544 6,308 29,768 37,399 (1,419) 37,448
OTHER FINANCIAL DATA(D):
EBITDAR.................. $ 60,251 $ 37,046 $ 248,921 $ 212,297 $ 172,824 $ 173,307
Rental expense........... 19,048 11,270 81,747 60,684 50,609 47,857
---------- -------- ---------- ---------- ---------- ----------
EBITDA................... 41,203 25,776 167,174 151,613 122,215 125,450
Unusual items(e)......... (1,495) (503) (14,835) (14,835) (43,125) --
---------- -------- ---------- ---------- ---------- ----------
EBITDA after unusual
items.................. $ 39,708 $ 25,273 $ 152,339 $ 136,778 $ 79,090 $ 125,450
---------- -------- ---------- ---------- ---------- ----------
Capital expenditures..... $ 24,090 $ 9,944 $ 66,242 $ 61,03 $ 51,469 $ 53,293
Ratio of EBITDA to
interest expense....... 3.9 5.5 3.7x 5.7x 4.2x 5.4x
Ratio of total debt to
EBITDA(h).............. 3.1x 2.7x 3.1 2.4 2.7 2.7
<CAPTION>
FISCAL YEAR ENDED(A)
-------------------------
JANUARY 29, JANUARY 30,
1994 1993
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED INCOME
STATEMENT DATA:
Net sales................ $1,063,488 $ 858,754
Cost and expenses:
Cost of sales.......... 690,083 523,444
Selling, general and
administrative
expenses............. 255,856 220,889
Depreciation and
amortization......... 26,693 19,586
Property and equipment
rentals.............. 37,049 26,344
Taxes other than income
taxes................ 25,050 18,227
Merger, restructuring
and integration
costs(b)............. -- --
Operating income......... 28,757 50,264
Other income (expense):
Finance charge income,
net(c)............... 19,312 16,151
Interest expense....... (11,286) (11,701)
Other income, net...... 4,063 233
Income before provision
for income taxes,
extraordinary loss and
cumulative effect of
changes in accounting
methods................ 40,846 54,947
Net income (loss)........ 25,540 32,522
OTHER FINANCIAL DATA(D):
EBITDAR.................. $ 115,874 $ 112,578
Rental expense........... 37,049 26,344
---------- ----------
EBITDA................... 78,825 86,234
Unusual items(e)......... -- --
---------- ----------
EBITDA after unusual
items.................. $ 78,825 $ 86,234
---------- ----------
Capital expenditures..... $ 86,192 $ 48,078
Ratio of EBITDA to
interest expense....... 7.0x 4.2x
Ratio of total debt to
EBITDA(h).............. 2.8 3.4
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
THREE MONTHS ENDED PRO FORMA FISCAL YEAR ENDED(A)
------------------------- YEAR ENDED ---------------------------------------
MAY 3, MAY 4, FEBRUARY 1, FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996(A) 1997 1997 1996 1995
----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Working capital.......... $ 375,348 $226,361 $ 344,410 $ 344,410 $ 235,194 $ 301,270
Total assets............. 1,456,794 921,606 1,403,796 1,403,796 919,013 967,667
Long-term debt, less
current portion........ 505,108 247,537 502,577 502,577 269,442 325,501
Shareholders' equity..... 555,159 334,394 539,898 539,898 327,371 337,007
SELECTED STORE DATA(F):
Stores at beginning of
period................. 173 144 181 144 146 115
Stores opened or
acquired............... 2 1 3 4 1 31
Stores closed or sold.... -- (2) (11) (11) (3) --
---------- -------- ---------- ---------- ---------- ----------
Stores at end of
period(g).............. 175 143 173 173 144 146
========== ======== ========== ========== ========== ==========
<CAPTION>
FISCAL YEAR ENDED(A)
-------------------------
JANUARY 29, JANUARY 30,
1994 1993
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Working capital.......... $ 306,853 $ 203,977
Total assets............. 653,680 536,603
Long-term debt, less
current portion........ 203,838 216,985
Shareholders' equity..... 275,104 122,582
SELECTED STORE DATA(F):
Stores at beginning of
period................. 106 77
Stores opened or
acquired............... 12 29
Stores closed or sold.... (3) --
---------- ----------
Stores at end of
period(g).............. 115 106
========== ==========
</TABLE>
- ---------------
(a) Effective February 1, 1997 and February 3, 1996, Herberger's and Younkers,
respectively, were acquired by the Company. Such acquisitions were accounted
for under the pooling-of-interests method. Accordingly, the Company's
financial statements were restated for all periods to include the results of
operations and financial position of Herberger's and Younkers. The pro forma
financial and operating data do not reflect the cost savings realized by the
Company from consolidation of administrative and operating functions and
other synergies following such acquisitions.
(b) In connection with the acquisitions of Younkers and Herberger's, the Company
incurred certain merger, restructuring and integration costs, including
transaction costs, costs associated with severance and related benefits,
abandonment and elimination of duplicate administrative office space,
property, data processing equipment and software, and other costs.
(c) Finance charge income includes finance charges and late payment fees earned
on the Company's proprietary credit cards, less the portion of such income
allocated to third party purchasers of such credit card receivables. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Finance Charge Income, Net," "Receivables Securitization
Facilities" and Note 4 to the Company's Consolidated Financial Statements.
(d) EBITDA represents earnings before interest, taxes, depreciation,
amortization and unusual items. EBITDAR represents EBITDA plus rental
expense. While EBITDA and EBITDAR should not be construed as substitutes for
operating income or as better measures of liquidity than cash flows from
operating activities, which are determined in accordance with generally
accepted accounting principles, they are included herein to provide
additional information with respect to the ability of the Company to meet
future debt service, capital expenditure and working capital requirements.
In fiscal 1996, the Company incurred additional charges aggregating $16.3
million associated with the closing of seven stores in Virginia ($4.9
million), Herberger's employee stock ownership plan ($3.9 million), excess
markdowns associated with adjustments to Herberger's inventory ($3.8
million), and write-offs and accruals related to various Herberger's balance
sheet items ($3.7 million). Pro forma EBITDA before these additional charges
for the fiscal year ended February 1, 1997 would have been approximately
$183.5 million, and the ratios of EBITDA to interest expense and total debt
to EBITDA would have been 4.1x and 2.8x, respectively.
(e) Unusual items for the 52 weeks ended February 1, 1997 include net gains from
long-lived assets of $1.1 million and merger, restructuring and integration
costs of $15.9 million. Unusual items for the 53 weeks ended February 3,
1996 include expenses of $3.2 million related to Younkers' hostile takeover
defense, losses from long-lived assets of $19.1 million, and merger,
restructuring and integration costs of $20.8 million.
(f) Where operations within a particular shopping mall are divided among two or
more locations but operate under the same chain, the combined operation is
counted as one store.
(g) Excludes two stores opened subsequent to February 1, 1997, and reflects the
closing of seven stores in Virginia. See "-- Recent Developments -- Sale of
Seven Virginia Stores."
(h) EBITDA is annualized for the three months ended May 3, 1997 and May 4, 1996,
respectively, for purposes of calculating the ratio.
12
<PAGE> 13
RISK FACTORS
Eligible holders of Series A Notes should consider carefully, in addition
to the other information contained in this Prospectus, the following risk
factors before tendering Series A Notes in the Exchange Offer.
RANKING; INDEBTEDNESS OF THE COMPANY
All of the Notes and the related Guarantees will be senior unsecured
obligations of the Company and the Subsidiary Guarantors ranking pari passu in
right of payment with all existing and future unsubordinated obligations of the
Company, including indebtedness incurred under the Credit Facility. Such Notes
and Guarantees will be effectively subordinated to all secured indebtedness of
the Company and the Subsidiary Guarantors to the extent of the value of the
assets securing such indebtedness. After any realization upon the collateral or
a dissolution, liquidation, reorganization or similar proceeding involving the
Company or any Subsidiary Guarantor, there can be no assurance that there will
be sufficient available proceeds or other assets for holders of the Notes to
recover all or any portion of their claims under the Notes and the Indenture. As
of May 3, 1997, on a pro forma basis, after giving effect to the issuance of the
Series A Notes and the application of the net proceeds therefrom, the Company
and the Subsidiary Guarantors would have had approximately $521.2 million of
indebtedness outstanding, of which approximately $295.3 million would have been
senior indebtedness and approximately $60.3 million would have been secured
indebtedness. At such date, the Company would have had outstanding approximately
$225.9 million of indebtedness subordinated in right of payment to the Exchange
Notes. The prepayment of the 9 7/8% Senior Subordinated Notes due 2003 of
Parisian (the "Senior Subordinated Notes") is not restricted under the
Indenture. See "Description of the Notes -- Certain Covenants -- Limitation on
Restricted Payments."
Each Subsidiary Guarantor's Guarantee of the Notes may be subject to review
under relevant federal and state fraudulent conveyance and similar law. In the
event the Guarantees of any Subsidiary Guarantors are deemed to be unenforceable
as a fraudulent conveyance or otherwise, all the Notes will be effectively
subordinated in right of payment to all outstanding indebtedness of such
Subsidiary Guarantor or Subsidiary Guarantors.
A portion of the Company's cash flow from operations will be dedicated to
debt service, thereby reducing funds available for operations and capital
expenditures. The indebtedness and the restrictive covenants to which the
Company is subject under the terms of its indebtedness (including the Notes and
the Exchange Notes) may make the Company more vulnerable to economic downturns
and competitive pressures, may hinder its ability to execute its growth
strategy, and may reduce its flexibility to respond to changing business
conditions. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Description of Other Indebtedness."
COMPETITION
The department store business is highly competitive. The Company's stores
compete with national and regional department store chains, specialty apparel
stores and discount store chains, some of which are larger than the Company and
may be able to devote greater financial and other resources to marketing and
other competitive activities. The Company also competes with local stores that
carry similar categories of merchandise. The Company generally competes on the
basis of pricing, quality, merchandise selection, customer service and amenities
and store design. The Company's success also depends in part on its ability to
anticipate and respond to changing merchandise trends and customer preferences
in a timely manner. Accordingly, any failure by the Company to anticipate and
respond to changing merchandise trends and customer preferences could materially
adversely affect sales of the Company's private brands and product lines, which
in turn could materially adversely affect the Company's business, financial
condition or results of operations. There can be no assurance that the Company's
stores will continue to compete successfully with such other stores or that any
such competition will not have a material impact on the Company's financial
condition or results of operations. See "Business -- Competition."
13
<PAGE> 14
GENERAL ECONOMIC CONDITIONS; SEASONALITY
The Company's future performance is subject to prevailing economic
conditions and to all operating risks normally incident to the retail industry.
The Company experiences seasonal fluctuations in sales and net income, with
disproportionate amounts typically realized during the fourth quarter of each
year. Sales and net income are generally weakest during the first quarter. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Seasonality," "Business -- Seasonality" and Note 17 to the
Company's Consolidated Financial Statements.
INTEGRATION OF ACQUIRED COMPANIES
As part of its business strategy, the Company has consummated several
acquisitions and will regularly evaluate future acquisition opportunities
including acquisitions of other regional department store chains and individual
stores or locations. The Company's future operations and earnings will be
affected by its ability to continue to successfully integrate the operations of
any acquired businesses or store locations. While the Company has in the past
been successful at effectively integrating the operations of acquired
businesses, there can be no assurance that the Company will be able to continue
to do so. In addition, the successful integration of operations will be subject
to numerous contingencies, some of which are beyond the Company's control. The
failure to successfully integrate any such operations with those of the Company
could have a material adverse effect on the Company's financial position,
results of operations and cash flows.
RESTRICTIONS ON RESALE
The Series A Notes have not been registered under the Securities Act or any
state securities laws and, unless so registered or qualified, may not be offered
or sold except pursuant to an exemption from, or in transactions not subject to,
the registration requirements of the Securities Act or any applicable state
securities laws. The Exchange Notes have been registered under the Securities
Act and, generally, will be freely tradable. See "Exchange Offer" and "Plan of
Distribution."
ABSENCE OF AN ESTABLISHED TRADING MARKET FOR THE NOTES
The Series A Notes are new securities that were first issued on May 21,
1997. There is currently no established trading market for the Notes. Although
the Initial Purchasers have informed the Company that they currently intend to
make a market in the Series A Notes and, upon issuance, the Exchange Notes, they
are not obligated to do so and any such market making may be discontinued at any
time without notice. Accordingly, there can be no assurance as to the
development or liquidity of any market for the Notes. To the extent Series A
Notes are exchanged in this Exchange Offer, the liquidity of the market for the
remaining Series A Notes may be reduced. The Series A Notes have been designated
eligible for trading in the Private Offerings, Resale and Trading through
Automatic Linkages (PORTAL) market. The Company does not intend to apply for
listing of the Exchange Notes on any securities exchange or for quotation
through Nasdaq. There is no assurance that an active public or other market will
develop for the Exchange Notes, and it is expected that the market, if any, that
develops for the Exchange Notes will be similar to the limited market that
currently exists for the Series A Notes.
LIMITED REGISTRATION RIGHTS
EXCEPT AS OTHERWISE PROVIDED HEREIN, FOLLOWING THE CONSUMMATION OF THE
EXCHANGE OFFER, ANY HOLDERS OF SERIES A NOTES NOT TENDERED THEREIN WHO ARE NOT
ENTITLED TO RESELL THE SAME PURSUANT TO A RESALE PROSPECTUS, IF ANY, REQUIRED TO
BE FILED AS A POST-EFFECTIVE AMENDMENT TO THIS REGISTRATION STATEMENT OR
PURSUANT TO A SHELF REGISTRATION STATEMENT, WILL HAVE NO FURTHER EXCHANGE OR
REGISTRATION RIGHTS, AND SUCH NOTES WILL CONTINUE TO BE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER.
14
<PAGE> 15
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements concerning the
Company's existing and contemplated operations, economic performance and
financial condition. These statements are based upon a number of assumptions and
estimates which are inherently subject to uncertainties and contingencies, many
of which are beyond the control of the Company, including the level of consumer
spending for apparel and other merchandise carried by the Company, competition
among department and specialty stores, management's ability to predict consumer
tastes, merchandise brands and mix, the effectiveness of planned advertising,
marketing and promotional campaigns, appropriate inventory management,
realization of planned synergies, private brand sales and effective cost
containment. See "Cautionary Notice Regarding Forward-Looking Statements."
THE EXCHANGE OFFER
PERSONS NOT ELIGIBLE TO PARTICIPATE IN THE EXCHANGE OFFER
ANY HOLDER OF SERIES A NOTES WHO IS PROHIBITED BY APPLICABLE LAW OR SEC
POLICY FROM PARTICIPATING IN THE EXCHANGE OFFER, INCLUDING ANY HOLDER WHO IS AN
AFFILIATE OF THE COMPANY OR A BROKER-DEALER WHO HOLDS SERIES A NOTES ACQUIRED
DIRECTLY FROM THE COMPANY OR ONE OF ITS AFFILIATES, AND ANY PERSON WHO INTENDS
TO, OR HAS ANY ARRANGEMENT OR UNDERSTANDING TO PARTICIPATE IN, A DISTRIBUTION OF
THE EXCHANGE NOTES, SHOULD CONTACT THE COMPANY WITHIN 20 BUSINESS DAYS OF THE
COMMENCEMENT OF THE EXCHANGE OFFER IN ORDER TO PRESERVE ITS REGISTRATION RIGHTS
THAT ARE DISCUSSED HEREIN.
REGISTRATION RIGHTS AND EFFECT OF EXCHANGE OFFER
The Series A Notes were sold by the Company on the Issue Date to the
Initial Purchasers pursuant to a Purchase Agreement dated as of May 15, 1997, by
and among the Company, the Subsidiary Guarantors and the Initial Purchasers (the
"Purchase Agreement"). Subsequently, the Initial Purchasers sold the Series A
Notes to various "qualified institutional buyers" ("QIBs") and to a limited
number of institutional "accredited investors" (as defined in Rule
501(a)(1),(2), (3) or (7) under the Securities Act ("Accredited Investors")) in
reliance upon Rule 144A and other available exemptions under the Securities Act.
As a condition to the Initial Purchasers' obligations under the Purchase
Agreement, the Company and the Subsidiary Guarantors entered into the
Registration Rights Agreement with the Initial Purchasers, pursuant to which the
Company and the Subsidiary Guarantors agreed to file with the Commission a
registration statement (the "Registration Statement") on an appropriate form
under the Securities Act with respect to an offer to the holders of Series A
Notes who are able to make certain representations ("Eligible Holders"), the
opportunity to exchange their Series A Notes for Exchange Notes.
The Registration Statement covers the offer to the Exchange Notes pursuant
to the Exchange Offer made hereby and resales by broker-dealers that acquired
Notes for their own accounts as a result of market-making and other trading
activities. Such resales of Transfer Restricted Securities made in reliance upon
the registration thereof under the Securities Act may be made only pursuant to
the "Plan of Distribution" set forth in this Prospectus or the other prospectus,
if any, filed as an amendment to the Registration Statement. To be eligible to
effect resales of Transfer Restricted Securities pursuant to a Registration of
the Notes for resale by holders ineligible to participate in the Exchange Offer,
holder of Transfer Restricted Securities must (i) notify the Company within 20
business days after the commencement of the Exchange Offer that it has
determined that it is not permitted by law or any policy of the Commission to
participate in the Exchange Offer made hereby or that such holder may not resell
the Exchange Notes acquired by it in the Exchange Offer to the public without
delivering a prospectus and that the prospectus included in this Registration
Statement is inappropriate or unavailable for such resales by such holder or
that such holder is a broker-dealer and holds Notes acquired directly from the
Company or one of its affiliates and (ii) provide to the Company, within 15 days
following the Company's request therefor, such information as the Company may
reasonably request for use in connection with the Registration Statement. In the
event that any holders of Transfer Restricted Securities comply with the
foregoing requirements, and supply any additional information
15
<PAGE> 16
reasonably requested by the Company within 20 business days following such
request, the Company will file, as promptly as is practicable, an amendment to
the Registration Statement containing an appropriate resale prospectus and will
use its reasonable efforts to cause such amendment to become effective under the
Securities Act and to remain continuously effective thereunder for a period of
three years following the Closing Date.
Each holder of Series A Notes that wishes to exchange such Series A Notes
for Exchange Notes in the Exchange Offer is required to establish that it is an
Eligible Holder that may participate in such Exchange Offer by making certain
representations, including representations that (i) any Exchange Notes to be
received by it will be acquired in the ordinary course of its business and that
it did not acquire such Series A Notes directly from the Company, (ii) it has no
arrangement or understanding with any person to participate in and has no
intention of participating in, a distribution (within the meaning of the
Securities Act) of the Exchange Notes and (iii) it is not an "affiliate," as
defined in Rule 405 under the Securities Act, of the Company.
If the holder is a broker-dealer that will receive Exchange Notes for its
own account in exchange for Series A Notes that were acquired as a result of
market-making activities or other trading activities, it also will be required
to acknowledge that it will deliver a prospectus in connection with any resale
of such Exchange Notes, but that by delivering such a prospectus it is not
thereby deemed to admit that it is an "underwriter" within in the meaning of the
Securities Act.
Holders of Notes acquired directly from the Company, affiliates of the
Company and persons participating in, or having any arrangement or understanding
with any person to participate in, a distribution of the Exchange Notes will be
ineligible, under Commission policy, to participate in the Exchange Offer, and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any secondary resale transaction of the Notes.
If (i) the Company is not permitted to consummate the Exchange Offer
because the Exchange Offer is not permitted by applicable law or Commission
policy, (ii) the Exchange Offer is not for any other reason consummated within
150 days after the Issue Date, (iii) any holder of Series A Notes notifies the
Company within 20 business days after commencement of the Exchange Offer that
(a) due to a change in law or policy it is not entitled to participate in the
Exchange Offer, (b) due to a change in law or policy it may not resell the
Exchange Notes acquired by it in the Exchange Offer to the public without
delivering a prospectus and the prospectus contained in the Exchange Offer
Registration Statement is not appropriate or available for such resales by such
holder or (c) it is a broker-dealer and owns Series A Notes acquired directly
from the Company or an affiliate of the Company or (iv) the holders of a
majority of the principal amount of the Series A Notes may not resell the
Exchange Notes acquired by them in the Exchange Offer to the public without
restriction under the Securities Act (other than delivery of the prospectus
contained in the Exchange Offer Registration Statement), the Company will file
with the Commission a Shelf Registration Statement to cover resales of the
Transfer Restricted Notes (as defined herein) by the holders thereof. The
Company has agreed to use its best efforts to cause the applicable registration
statement to be declared effective as promptly as possible by the Commission.
For purposes of the foregoing and as used elsewhere herein, "Transfer
Restricted Notes" means each Series A Note until (i) the date on which such
Series A Note has been exchanged by a person other than a broker-dealer referred
to in clause (ii) below for an Exchange Note in the Exchange Offer, (ii)
following the exchange by a broker-dealer in the Exchange Offer of a Series A
Note for an Exchange Note, the date on which such Exchange Note is sold to a
purchaser who receives from such broker-dealer on or prior to the date of such
sale, a copy of the prospectus contained in the Registration Statement, as
amended or supplemented, (iii) the date on which such Series A Note has been
effectively registered under the Securities Act and disposed of in accordance
with the Shelf Registration Statement, (iv) the date on which such Series A Note
is distributed to the public pursuant to Rule 144 under the Securities Act (or
any similar provision then in force, but not Rule 144A under the Securities
Act), (v) the date on which such Series A Note shall have been otherwise
transferred by the holder thereof and a new Note not bearing a legend
restricting further transfer shall have been delivered by the Company and
subsequent disposition of such Note shall not require registration under the
Securities Act or (vi) such Series A Note ceases to be outstanding.
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<PAGE> 17
Under existing Commission interpretations, the Exchange Notes will, in
general, be freely transferable by holders after the Exchange Offer without
further registration under the Securities Act; provided that in the case of
eligible broker-dealers participating in the Exchange Offer, a prospectus
meeting the requirements of the Securities Act must be delivered upon resale by
such broker-dealers in connection with resales of the Exchange Notes. The
Company has agreed, for period of 90 days after consummation of the Exchange
Offer (subject to extension in certain cases), to make available a prospectus
meeting the requirements of the Securities Act to any such broker-dealer for use
in connection with any resale of any Exchange Notes acquired in the Exchange
Offer. A broker-dealer which delivers such a prospectus to purchasers in
connection with such resales may be deemed a statutory underwriter that may, as
such, may be subject to certain of the civil liability provisions under the
Securities Act and will be bound by the provisions of the Registration Rights
Agreement (including certain indemnification rights and obligations).
The Company has agreed to pay all expenses incident to the Exchange Offer
and to indemnify the Initial Purchasers against certain liabilities, including
liabilities under the Securities Act.
The Registration Rights Agreement provides that unless the Exchange Offer
is not permitted by applicable law or Commission policy, the Company will: (i)
file the Registration Statement with the Commission on or prior to 45 days after
the Issue Date, (ii) use its best efforts to have the Registration Statement
declared effective by the Commission on or prior to 120 days after the Issue
Date and (iii) commence the Exchange Offer following the effectiveness of the
Registration Statement and use its best efforts to issue, on or prior to 30
business days after the date on which the Registration Statement was declared
effective by the Commission, Exchange Notes in Exchange for all Series A Notes
tendered prior thereto in the Exchange Offer.
In addition, the Registration Rights Agreement provides that, if obligated
to file the Shelf Registration Statement, the Company will use its best efforts
to file prior to the later of (a) 150 days after the Issue Date or (b) 30 days
after such filing obligation arises and use its best efforts to cause the Shelf
Registration Statement to be declared effective by the Commission on or prior to
90 days after such obligation arises; provided, however that if the Company has
not consummated the Exchange Offer within 150 days of the Issue Date, then the
Company will file the Shelf Registration Statement with the Commission on or
prior to the 165th day after the Issue Date. The Company shall use its best
efforts to keep such Shelf Registration Statement, if required, continuously
effective, supplemented and amended until the earlier of two years from the
Issue Date or such shorter period ending when all Notes covered by the Shelf
Registration Statement have been sold in the manner set forth and as
contemplated in the Shelf Registration Statement, such Notes are no longer
outstanding or when the Notes become eligible for resale pursuant to Rule 144
under the Securities Act without volume restrictions.
A holder of Notes that sells its Notes pursuant to the Shelf Registration
Statement generally will be required to be named as a selling securityholder in
the related prospectus and to deliver a prospectus to purchasers, will be
subject to certain of the civil liability provisions under the Securities Act in
connection with such sales and will be bound by the provisions of the
Registration Rights Agreement that are applicable to such a holder (including
certain indemnification and contribution obligations). In addition, each holder
of the Notes will be required to timely deliver information to be used in
connection with the Shelf Registration Statement and to provide comments on the
Shelf Registration Statement within the time periods set forth in the
Registration Rights Agreement in order to have their Notes included in the Shelf
Registration Statement and to benefit from the provisions regarding additional
interest set forth in the following paragraph.
If the Company issues a notice that the Shelf Registration Statement is
unusable due to the pendency of an announcement of a material corporate
transaction, or such a notice is required under applicable securities laws to be
issued by the Company, and the aggregate number of days in any consecutive
twelve-month period for which all such notices are issued or required to be
issued exceeds 30 days in the aggregate, then the interest rate borne by the
Notes will be increased by 0.25% per annum following the date that such Shelf
Registration Statement ceases to be usable for a period of time in excess of the
period permitted above, which rate shall be increased by an additional 0.25% per
annum at the beginning of each subsequent 90-day period; provided that the
aggregate increase in such annual interest rate may in no event exceed 1.00% per
annum. Upon the
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<PAGE> 18
Company declaring that the Shelf Registration Statement is usable after the
period of time described in the preceding sentence, the interest rate borne by
the Notes will be reduced to the original interest rate if the Company is
otherwise in compliance with this paragraph. Such additional interest, if any,
shall accrue and be paid only on the actual number of days for which the Shelf
Registration Statement is unusable.
The Company has filed the Registration Statement required by the
Registration Rights Agreement on or before the date specified for such filing.
However, if (i) such registration statement (or any other registration statement
required by the Registration Rights Agreement) is not declared effective by the
Commission on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date"), subject to certain limited exceptions, (ii) the
Company fails to consummate the Exchange Offer within 30 business days of the
Effectiveness Target Date with respect to the Registration Statement, or (iii)
the Shelf Registration Statement or the Registration Statement is declared
effective but thereafter, subject to certain limited exceptions, ceases to be
effective or usable in connection with resales of Transfer Restricted Notes or
with the Exchange Offer, as the case may be, during the periods specified in the
Registration Rights Agreement (each such event referred to in clauses (i)
through (iii) above, a "Registration Default"), then the interest rate on the
Transfer Restricted Notes will increase ("Additional Interest") with respect to
the first 90-day period (or portion thereof) while a Registration Default is
continuing immediately following the occurrence of such Registration Default in
an amount equal to 0.25% per annum of the principal amount of the Notes. The
rate of Additional Interest will increase by an additional 0.25% per annum of
the principal amount of the Notes for each subsequent 90-day period (or portion
thereof) while a Registration Default is continuing until all Registration
Defaults have been cured, up to a maximum amount of 1.00% of the principal
amount of the Notes. Additional Interest, if any, shall be computed based on the
actual number of days elapsed during which any such Registration Default exists.
Following the cure of a particular Registration Default, the accrual of
Additional Interest with respect to such Registration Default will cease.
EXCEPT AS OTHERWISE PROVIDED HEREIN WITH RESPECT TO THE SHELF REGISTRATION
STATEMENT, FOLLOWING THE CONSUMMATION OF THE EXCHANGE OFFER, ANY HOLDER OF
SERIES A NOTES THAT HAS NOT TENDERED AND EFFECTIVELY DELIVERED TO THE EXCHANGE
AGENT IN ACCORDANCE WITH THE EXCHANGE OFFER, AND ANY HOLDER OF EXCHANGE NOTES
WHO IS NOT ENTITLED TO RESELL SUCH EXCHANGE NOTES PURSUANT TO A RESALE
PROSPECTUS, IF ANY, REQUIRED TO BE FILED AS AN AMENDMENT TO THE REGISTRATION
STATEMENT, WILL HAVE NO FURTHER EXCHANGE OR REGISTRATION RIGHTS AND SUCH SERIES
A NOTES WILL CONTINUE TO BE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER. See
"-- Termination of Certain Rights," "-- Consequences of Failure to Exchange,"
and "-- Resale of Notes." Accordingly, the ability of any such holder of Notes
to resell its Notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Series A
Notes validly tendered and not withdrawn prior to 5:00 P.M. Eastern Time, on the
Expiration Date. The Company will issue $1,000 principal amount of Exchange
Notes in exchange for each $1,000 principal amount of outstanding Series A Notes
accepted in the Exchange Offer. Holders may tender some or all of their Series A
Notes pursuant to the Exchange Offer. However, Series A Notes may be tendered
only in integral multiples of $1,000.
The form and terms of the Exchange Notes are substantially identical to the
form and terms of the Series A Notes except that (i) the Exchange Notes have
been registered under the Securities Act and hence will not bear the transfer
restrictions set forth on the Series A Notes and (ii) the holders of the
Exchange Notes generally will not be entitled to certain rights under the
Registration Rights Agreement, which rights generally will terminate upon
consummation of the Exchange Offer. The Exchange Notes will evidence the same
indebtedness as the Series A Notes and will be entitled to the benefits of the
Indenture, including the Guarantees.
Holders of the Notes do not have any appraisal or dissenters' rights under
Indenture or otherwise in connection with the Exchange Offer. The Company
intends to conduct the Exchange Offer in accordance with
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<PAGE> 19
the Indenture, the Registration Rights Agreement, and the applicable
requirements of the Exchange Act and the rules and regulations of the SEC
thereunder, including Rule 14e-1 thereunder.
The Company shall be deemed to have accepted validly tendered Series A
Notes when, as and if the Company has given telephonic, facsimile or written
notice thereof to the Exchange Agent (as defined herein). The Exchange Agent
will act as agent for the tendering holders for the purpose of receiving the
Exchange Notes from the Company.
If any tendered Series A Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Series A Notes will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Series A Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of Series
A Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than transfer taxes in certain circumstances, in connection with
the Exchange Offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 P.M., Eastern Time, on August 8,
1997, unless the Company, in its sole discretion, extends the Exchange Offer, in
which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended.
To extend the Exchange Offer, the Company will notify the Exchange Agent of
any extension by oral or written notice, followed by a public announcement
thereof no later than 9:00 A.M., Eastern Time, on the next business day after
the previously scheduled Expiration Date.
The Company reserves the right, in its reasonable judgment, (i) to delay
accepting any Series A Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "-- Conditions"
shall not have been satisfied, by giving telephonic, facsimile or written notice
of such delay, extension or termination to the Exchange Agent or (ii) to amend
the terms of the Exchange Offer in any manner. Any such delay in acceptance,
extension or termination, and any amendment will be followed as promptly as
practicable by a public announcement thereof. If the Exchange Offer is amended
in a manner determined by the Company to constitute a material change, the
Company will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to the registered holders.
If the Company does not consummate the Exchange Offer, or, in lieu thereof,
the Company does not file and cause to become effective a Shelf Registration
Statement for the Series A Notes within the time periods set forth herein,
Additional Interest will accrue and be payable on the Notes. See
" -- Registration Rights and Effect of Exchange Offer."
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest from May 15, 1997, the date of
issuance of the Series A Notes that are exchanged for the Exchange Notes (or, if
later, the most recent Interest Payment Date to which interest on such Series A
Notes has been paid or duly provided for). Accordingly, holders of Series A
Notes that are accepted for exchange will not receive interest that is accrued
but unpaid on those Notes at the time of tender, but such interest will be
payable on the first Interest Payment Date following the Expiration Date.
Interest on the Exchange Notes will be payable semiannually on each May 15 and
November 15, commencing on November 15, 1997.
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<PAGE> 20
PROCEDURES FOR TENDERING
Only Eligible Holders of Series A Notes may tender such Series A Notes in
the Exchange Offer. To tender in the Exchange Offer, a holder of Series A Notes
must complete, sign and date the Letter of Transmittal, or a facsimile thereof,
have the signatures thereon guaranteed if required by the Letter of Transmittal
and mail or otherwise deliver the Letter of Transmittal or such facsimile,
together with the Series A Notes and any other required documents, to the
Exchange Agent so as to be received by the Exchange Agent at the address set
forth below prior to 5:00 P.M., Eastern Time, on the Expiration Date. Delivery
of the Series A Notes may be made by book-entry transfer in accordance with the
procedures described below. Confirmation of such book-entry transfer must be
received by the Exchange Agent prior to the Expiration Date. In addition, either
(i) certificates for such Series A Notes must be received by the Exchange Agent
along with the Letter of Transmittal, or (ii) a timely confirmation of a
book-entry transfer (a "Book-Entry Confirmation") of such Series A Notes, if
such procedure is available, into the Exchange Agent's account at DTC (the
"Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date, or (iii) the holder must comply with the guaranteed delivery
procedures described below. To be tendered effectively, the Letter of
Transmittal or, in the case of a book-entry transfer, an Agent's Message in lieu
of a letter of transmittal, and all other required documents must be received by
the Exchange Agent at the address set forth below under "-- Exchange Agent"
prior to the Expiration Date. The term "Agent's Message" means a message
transmitted by DTC to, and received by, the Exchange Agent and forming a part of
a Book-Entry Confirmation, which states that DTC has received express
acknowledgment from the tendering DTC participant indicating that such
participant has received, and agrees to be bound by, the Letter of Transmittal
and that the Company may enforce such Letter of Transmittal against such
participant.
The tender by a holder and the acceptance thereof by the Company will
constitute an agreement between such holder of Series A Notes and the Company
upon the terms and subject to the conditions set forth herein and in the Letter
of Transmittal.
THE METHOD OF DELIVERY OF THE SERIES A NOTES AND THE LETTER OF TRANSMITTAL
AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE SOLE ELECTION
AND RISK OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT
HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION
DATE. NO LETTER OF TRANSMITTAL OR SERIES A NOTES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Series A Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee, including
Series A Notes held in book-entry form and who wishes to tender should contact
the registered holder of Notes promptly, or in the case of book-entry Series A
Notes, DTC participant who holds such Series A Notes at DTC on behalf of the
beneficial owner, and instruct such registered holder to tender on such
beneficial owner's behalf. See "Exchange Offer."
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Series A Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
the Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of a
registered national securities exchange or of the NASD, a commercial bank or
trust company having an office or correspondent in the United States or an
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Series A Notes listed therein, such Series A Notes must
be endorsed or accompanied by a properly completed bond power,
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<PAGE> 21
signed by such registered holder as such registered holder's name appears on
such Series A Notes with the signature thereon guaranteed by an Eligible
Institution.
If the Letter of Transmittal or any Series A Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Series A Notes and withdrawal of tendered
Series A Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute right
to reject any and all Series A Notes not properly tendered or any Series A Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive, to the
extent permitted by applicable law, any defects, irregularities or conditions of
tender as to particular Series A Notes. The Company's interpretation of the
terms and conditions of the Exchange Offer (including the instructions in the
Letter of Transmittal) will be final and binding on all parties. Unless waived,
any defects or irregularities in connection with tenders of Series A Notes must
be cured within such time as the Company shall determine. Although the Company
intends to notify holders of Series A Notes of defects or irregularities with
respect to tenders of Series A Notes, none of the Company, the Exchange Agent
nor any other person shall incur any liability for failure to give such
notification. Tenders of Series A Notes will not be deemed to have been made
until such defects or irregularities have been cured or waived. Any Series A
Notes received by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders as soon as practicable
following the Expiration Date.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request promptly after the date of this
Prospectus to establish accounts with respect to the Series A Notes at DTC for
the purpose of facilitating the Exchange Offer, and subject to the establishment
thereof, any financial institution that is a DTC Participant may make book-entry
delivery of the Series A Notes by causing DTC to transfer such Series A Notes
into the relevant Exchange Agent's account with respect to the Series A Notes in
accordance with DTC's ATOP procedures for such transfer. Although delivery of
the Series A Notes may be effected through book-entry transfer into the Exchange
Agent's account at DTC, an Agent's Message or an appropriate Letter of
Transmittal properly completed and duly executed with any required signature
guarantee and all other required documents must in each case be transmitted to
and received or confirmed by the Exchange Agent at its address set forth below
on or prior to the Expiration Date, or, if the guaranteed delivery procedures
described below are complied with, within the time period provided under such
procedures. Delivery of documents to DTC does not constitute delivery to the
Exchange Agent.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Series A Notes and (i) whose Series A
Notes are not immediately available, (ii) who cannot deliver their Series A
Notes, the Letter of Transmittal or any other required documents to the Exchange
Agent or (iii) who cannot complete the procedures for book-entry transfer, in
each case prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder of Series A Notes, the
certificate number(s) of such holder's Series A Notes and the principal
amount of Series A Notes tendered, stating that the tender is being made
thereby and guaranteeing that, within three New York Stock Exchange trading
days after the Expiration Date, the Letter of Transmittal (or facsimile
thereof), together with the
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<PAGE> 22
certificates(s) representing the tendered Series A Notes (or a confirmation
of book-entry transfer of such Series A Notes into the Exchange Agent's
account at DTC) and any other documents required by the Letter of
Transmittal, will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Series A Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Series A Notes into the Exchange Agent's account at DTC)
and all other documents required by the Letter of Transmittal, are received
by the relevant Exchange Agent within three New York Stock Exchange trading
days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Series A Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWALS OF TENDERS
Except as otherwise provided herein, tenders of Series A Notes may be
withdrawn at any time prior to 5:00 P.M., Eastern Time, on the Expiration Date.
To withdraw a tender of Series A Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the relevant
Exchange Agent at its address set forth herein prior to 5:00 P.M., Eastern Time,
on the Expiration Date. Any such notice of withdrawal must (i) specify the name
of the person having deposited the Series A Notes to be withdrawn (the
"Depositor"), (ii) identify the Series A Notes to be withdrawn (including the
certificate number(s) and principal amount of such Series A Notes, or, in the
case of Series A Notes transferred by book-entry transfer, the name and number
of the account at DTC to be credited and the DTC Participant through which such
Series A Notes are held), (iii) be signed by the holder of such Series A Notes
in the same manner as the original signature on the Letter of Transmittal by
which such Series A Notes were tendered (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
transfer agent and registrar with respect to the Series A Notes register the
transfer of such Series A Notes into the name of the person withdrawing the
tender; and (iv) specify the name in which any such Series A Notes are to be
registered, if different from that of the Depositor. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Company, whose determination shall be final and binding on
all parties. Any Series A Notes so withdrawn will be deemed not to have been
validly tendered for purposes of the Exchange Offer and no Exchange Notes will
be issued with respect thereto unless the Series A Notes so withdrawn are
validly and timely re-tendered. Any Series A Notes which have been tendered but
which are not accepted for exchange will be returned to the holder thereof
without cost to such holder, as soon as practicable after withdrawal, rejection
of tender or termination of the Exchange Offer. Properly withdrawn Series A
Notes may be re-tendered by following one of the procedures described above
under "-- Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer including, without
limitation, the terms and conditions contained herein and in the Letter of
Transmittal, the Company shall not be required to accept for exchange, or to
exchange Exchange Notes for, any Series A Notes, and may terminate or amend the
Exchange Offer as provided herein before the acceptance of such Series A Notes,
if:
(a) any law, statute, rule, regulation or interpretation by the staff
of the SEC is proposed, adopted or enacted, which, in the reasonable
judgment of the Company, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(b) any governmental approval has not been obtained, which approval
the Company shall, in its reasonable judgment, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
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If the Company determines in its reasonable judgment that any of the
conditions are not satisfied, the Company may, in its sole discretion (i) refuse
to accept any Series A Notes and return all tendered Notes to the tendering
holders, (ii) extend the Exchange Offer and retain all Series A Notes tendered
prior to the expiration of the Exchange Offer, subject, however, to the rights
of holders to withdraw such Series A Notes (see "-- Withdrawals of Tenders") or
(iii) waive such unsatisfied conditions with respect to the Exchange Offer and
accept all properly tendered Series A Notes which have not been withdrawn. If
such waiver constitutes a material change to the Exchange Offer, the Company
will promptly disclose such waiver by means of a prospectus supplement that will
be distributed to the registered holders of Series A Notes.
TERMINATION OF CERTAIN RIGHTS
Holders of the Notes to whom this Exchange Offer is made have special
rights under the Registration Rights Agreement, certain of which will terminate
upon the consummation of the Exchange Offer. Such special rights which will
terminate include (a) the right to require the Company to comply with the
following: (x) to file with the Commission a registration statement under the
Securities Act with respect to the Exchange Notes no later than 45 days
following the Issue Date, (y) to use its best efforts to cause such registration
statement to become effective under the Securities Act within 120 days after the
Issue Date, and (z) to commence the Exchange Offer following the effectiveness
of such registration statement and use its best efforts to issue, on or prior to
30 business days after the date on which such registration statement was
declared effective by the Commission, Exchange Notes in exchange for all Notes
validly tendered prior thereto in the Exchange Offer; (b) the right to receive
Additional Interest in the event of a breach by the Company of any of its
obligations set forth in the foregoing clauses (x), (y) or (z), in an amount,
during the first 90-day period (or portion thereof) immediately following the
occurrence, and during the continuance, of such a breach, equal to 0.25% per
annum of the principal amount of the Notes, such amount to increase by an
additional 0.25% of the principal amount of the Notes for each subsequent 90-day
period (or portion thereof) until the breach and all other breaches thereunder
in respect of such obligations have been cured, up to a maximum amount of 1.00%
of the principal amount of the Notes. See "-- Registration Rights and Effect of
Exchange Offer."
The Registration Statement also requires the registering for resale,
pursuant to Rule 415 under the Securities Act, the Transfer Restricted Notes
under certain circumstances. Such resale of Transfer Restricted Notes made in
reliance upon the registration thereof under the Securities Act may be made only
pursuant to the "Plan of Distribution" set forth in this Prospectus or a
separate resale prospectus, if any, filed as an amendment to the Registration
Statement. To be eligible to effect resales of Transfer Restricted Notes
pursuant to the Shelf Registration Statement, a holder of Transfer Restricted
Notes must (i) notify the Company in writing within 20 days after the
commencement of the Exchange Offer that (a) due to a change in law or policy it
is not entitled to participate in the Exchange Offer, (b) due to a change in law
or policy it may not resell the Exchange Notes acquired by it in the Exchange
Offer to the public without delivering a prospectus and this Prospectus is not
appropriate or available for such resales by such holder or (c) it is a
broker-dealer and owns Notes acquired directly from the Company or an affiliate
of the Company and (ii) provide to the Company, within 15 days following receipt
by such holder of the Company's request therefor, such information as the
Company may reasonably request for use in connection with the Shelf Registration
Statement. In the event that any holders of Transfer Restricted Notes comply
with the foregoing requirements, and supply any additional information
reasonably requested by the Company within 15 days following such request, the
Company will file, as promptly as practicable, an amendment to this Registration
Statement containing an appropriate resale prospectus and will use its best
efforts to cause such amendment to become effective under the Securities Act and
to remain continuously effective thereunder for a period of two years following
the Issue Date. In the event that the Company fails to comply with its
obligations in connection with resales of Transfer Restricted Notes under the
resulting Shelf Registration Statement it may be required to pay Additional
Interest. See "-- Registration Rights and Effect of Exchange Offer."
23
<PAGE> 24
EXCHANGE AGENT
The Trustee will act as Exchange Agent for the Exchange Offer with respect
to the Notes (the "Exchange Agent").
Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal for the Notes and requests for
copies of Notice of Guaranteed Delivery should be directed to the Exchange
Agent, addressed as follows:
By Registered or Certified Mail, Overnight Mail or Courier Service or in
Person by Hand:
The First National Bank of Chicago
c/o First Chicago Trust Company of New York
8th Floor, Window 2
New York, New York 10005
By Facsimile: (212) 240-8938
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone, facsimile or in person by officers and
regular employees of the Company and its affiliates, who may be reimbursed their
reasonable expenses incurred in connection with such solicitation, but who will
not otherwise receive special compensation for such efforts.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or other
persons soliciting acceptance of the Exchange Offer. The Company, however, will
pay the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith
and pay other registration expenses, including reasonable fees and expenses of
the Trustee, filing fees, blue sky fees and printing and distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Notes pursuant to the Exchange Offer. If, however, certificates
representing the Exchange Notes or the Series A Notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be issued in
the name of, any person other than the registered holder of the Series A Notes
tendered, or if tendered Series A Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of the Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered holder or any other person) will be payable by the tendering
holder of Series A Notes.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded by the Company at the same carrying
value as the Series A Notes, which is the aggregate principal amount in the case
of the Series A Notes. Accordingly, no gain or loss for accounting purposes will
be recognized in connection with the Exchange Offer. The expenses of the
Exchange Offer will be amortized over the term of the Exchange Notes.
RESALE OF EXCHANGE NOTES
Based on an interpretation by the staff of the SEC set forth in no-action
letters issued to unrelated third parties, the Company believes that Exchange
Notes issued pursuant to the Exchange Offer in exchange for Notes may be offered
for resale, resold and otherwise transferred by any holder thereof (other than
any such holder which is a broker-dealer that holds Series A Notes acquired for
its own accounts as a result of market-making or other trading activities or any
such holder which is an "affiliate" of the Company within the meaning of Rule
405 under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business and
such holder does not intend to participate, and has no arrangement or
24
<PAGE> 25
understanding with any person to participate, in the distribution of such
Exchange Notes. Any holder who tenders in the Exchange Offer with the intention
to participate, or for the purpose of participating, in a distribution of the
Exchange Notes may not rely on the position of the staff of the SEC enunciated
in Exxon Capital Holdings Corporation (available April 13, 1989); Morgan Stanley
& Co., Incorporated (available June 5, 1991) and Shearman & Sterling (available
July 2, 1993), or similar no-action letters, but rather must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. In addition, any such resale transaction
by such person should be covered by an effective registration statement
containing the selling security holders' information required by Item 507 of SEC
Regulation S-K under the Securities Act. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Series A Notes, where such
Series A Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, may be a statutory underwriter and must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes.
By tendering Series A Notes in the Exchange Offer, each holder tendering
such Series A Notes will represent to the Company that, among other things, (i)
the Exchange Notes to be acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such
Exchange Notes, whether or not such person is a holder, (ii) neither the holder
nor any such other person has an arrangement or understanding with any person to
participate in a distribution of such Exchange Notes and (iii) the holder and
such other person acknowledge that if they participate in the Exchange Offer for
the purpose of distributing the Exchange Notes (a) they must, in the absence of
an exemption therefrom, comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale of the Exchange
Notes and cannot rely on the no-action letters referenced above and (b) failure
to comply with such requirements in such instance could result in such holder
incurring liability under the Securities Act for which such holder is not
indemnified or otherwise protected by the Company. Further, by tendering in the
Exchange Offer, each holder that may be deemed an "affiliate" (as defined under
Rule 405 under the Securities Act) of the Company will represent to the Company
that such holder understands and acknowledges that the Exchange Notes may not be
offered for resale, resold or otherwise transferred by that holder without
registration under the Securities Act or an exemption therefrom.
As set forth above, affiliates of the Company are not entitled to rely on
the foregoing interpretations of the staff of the SEC with respect to resales of
the Exchange Notes without compliance with the registration and prospectus
delivery requirements of the Securities Act. The Company has agreed to bear all
registration expenses incurred under the Registration Rights Agreement,
including printing and distribution expenses, reasonable fees of counsel, blue
sky fees and expenses, reasonable fees of independent accountants in connection
with the preparation of comfort letters (to the extent required), and SEC and
the NASD filing fees and expenses.
CONSEQUENCES OF FAILURE TO EXCHANGE
As a result of the making of this Exchange Offer, the Company will have
fulfilled one of its obligations under the Registration Rights Agreement, and
holders of Series A Notes who do not tender their Series A Notes generally will
not have any further registration rights under the Registration Rights Agreement
or otherwise. Accordingly, any holder of Series A Notes that does not exchange
that holder's Series A Notes for Exchange Notes will continue to hold
unregistered Series A Notes and will be entitled to all the rights and
limitations applicable thereto under the Indenture, except to the extent that
such rights or limitations, by their terms, terminate or cease to have further
effectiveness as a result of the Exchange Offer.
The Series A Notes that are not exchanged for Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such Series A
Notes may be resold only (i) to the Company (upon redemption thereof or
otherwise), (ii) pursuant to an effective registration statement under the
Securities Act, (iii) so long as the Series A Notes are eligible for resale
pursuant to Rule 144A, to a qualified institutional buyer within the meaning of
Rule 144A under the Securities Act in a transaction meeting the requirements of
Rule 144A, (iv) outside the United States to a foreign person pursuant to the
exemption from the registration requirements of the Securities Act provided by
Regulation S thereunder, (v) pursuant to an exemption from registration under
the Securities Act provided by Rule 144 thereunder (if available) or (vi) to an
institutional
25
<PAGE> 26
accredited investor in a transaction exempt from the registration requirements
of the Securities Act, in each case in accordance with any applicable securities
laws of any state of the United States. See "Risk Factors -- Restrictions on
Transfer."
NO RECOMMENDATION
Participation in the Exchange Offer is voluntary and holders of Series A
Notes should carefully consider whether to accept. Holders of Series A Notes are
urged to consult their own financial and tax advisors in making their own
decision on what action to take. The Boards of Directors of the Company and the
Guarantors make no recommendation as to whether or not holders should tender
Series A Notes pursuant to the Exchange Offer.
OTHER
The Company may in the future seek to acquire unregistered Series A Notes
that are not tendered in the Exchange Offer in open market, privately negotiated
or other transactions, through subsequent exchange offers or otherwise. The
Company has no present plans to acquire any Series A Notes that are not tendered
in the Exchange Offer or, except as required by the Registration Rights
Agreement, to file a registration statement to permit resales of any untendered
Series A Notes.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge (i) that by receiving Exchange
Notes for its own account in exchange for Series A Notes, where such Series A
Notes were acquired as a result of market-making activities or other trading
activities, such broker-dealer may be a statutory underwriter, and (ii) that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with the resales of Exchange Notes
received in exchange for the Series A Notes where such Series A Notes were
acquired as a result of market-making activities or other trading activities.
The Company has agreed that for a period of 90 days (subject to extensions in
certain cases) after the date on which the Registration Statement is declared
effective, it will make this Prospectus, as amended or supplemented, available
to any broker-dealer that requests such documents in the Letter of Transmittal
for use in connection with any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers or any other persons. Exchange Notes received by
broker-dealers for their own account pursuant to the Exchange Offer may be sold
from time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the Exchange Notes or
a combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer and/or the purchasers of any such
Exchange Notes. Any broker-dealer that resells Exchange Notes that were received
by it for its own account pursuant to the Exchange Offer and any broker or
dealer that participates in a distribution of such Exchange Notes may be deemed
to be an "underwriter" within the meaning of the Securities Act and any profit
on any such resale of Exchange Notes and any commissions or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Registration Rights Agreement and will
indemnify the holders (including any broker-dealers) and certain parties related
to the holders against certain liabilities, including liabilities under the
Securities Act.
26
<PAGE> 27
USE OF PROCEEDS
The Company will not receive any proceeds from the issuance of the Exchange
Notes pursuant to the Exchange Offer. The net proceeds to the Company from the
sale of the Series A Notes were approximately $120.8 million (after deducting
estimated expenses and commissions), of which (i) approximately $64.0 million is
being used to repay real estate and mortgage notes, (ii) approximately $3.8
million is being used to repay unsecured notes payable, and (iii) approximately
$53.0 million is being used to reduce outstanding borrowings under the Credit
Facility. Amounts used to reduce balances under the Credit Facility may be
reborrowed, subject to having the requisite borrowing base and satisfying other
conditions to borrowing, and utilized for general corporate purposes. At
February 1, 1997, the indebtedness to be repaid accrued interest at a weighted
average interest rate of approximately 7.7% per annum and had maturities ranging
from January 1, 1998 to February 1, 2010. See "Description of Other
Indebtedness."
CAPITALIZATION
The following table sets forth the capitalization of the Company as of May
3, 1997, (i) on an actual basis and (ii) as adjusted to reflect the sale of the
Notes (after deducting the offering expenses and the application of the net
proceeds therefrom). This table should be read in conjunction with the
Consolidated Financial Statements of the Company and the notes thereto included
elsewhere herein.
<TABLE>
<CAPTION>
AS OF MAY 3, 1997
---------------------------
ACTUAL AS ADJUSTED
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt(a):
Credit Facility........................................... $ 163,100 $ 110,101
Real estate and mortgage notes............................ 113,578 49,547
Sale of Notes............................................. -- 125,000
Other notes payable....................................... 3,754 --
Capital lease obligations................................. 10,706 10,706
Senior Subordinated Notes(b).............................. 125,000 125,000
Convertible subordinated debentures....................... 86,250 86,250
Junior subordinated debt.................................. 14,590 14,590
---------- -----------
Total long-term debt.............................. 516,978 521,194
Shareholders' equity........................................ 555,159 555,159
---------- -----------
Total capitalization.............................. $1,072,137 $ 1,076,353
========== ===========
</TABLE>
- ---------------
(a) Includes current maturities of long-term debt.
(b) Since May 3, 1997, the Company has purchased approximately $32 million of
Senior Subordinated Notes.
27
<PAGE> 28
SELECTED FINANCIAL DATA
The selected financial and operating data below are derived from, and
should be read in conjunction with, the Company's Consolidated Financial
Statements and Condensed Consolidated Financial Statements and the notes thereto
appearing elsewhere herein. The data for the three months ended May 3, 1997 and
May 4, 1996 are not necessarily indicative of the results that may be expected
for the current fiscal year. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS ENDED FISCAL YEAR ENDED(A)
------------------------- -------------------------------------------------------------------
MAY 4, FEBRUARY 1, FEBRUARY 3, JANUARY 28, JANUARY 29, JANUARY 30,
MAY 3, 1997 1996(A) 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT
DATA:
Net sales..................... $ 526,370 $365,179 $1,889,779 $1,661,056 $1,513,444 $1,063,488 $ 858,754
Costs and expenses:
Cost of sales................. 335,882 237,201 1,230,454 1,087,619 986,028 690,083 523,444
Selling, general and
administrative expenses... 128,629 88,952 440,502 398,999 352,448 255,856 220,889
Other operating expenses.... 42,568 30,719 142,124 130,560 122,583 88,792 64,157
Expenses related to hostile
takeover defense(b)....... -- 3,182 -- -- --
(Gains) losses from
long-lived assets(c)...... 27 (2,260) (1,094) 19,121 -- -- --
Merger, restructuring and
integration costs(d)...... 1,468 2,763 15,929 20,822 -- -- --
---------- -------- ---------- ---------- ---------- ---------- ----------
Operating income.............. 17,796 7,804 61,864 753 52,385 28,757 50,264
Other income (expense):
Finance charge income,
net(e).................... 10,878 7,160 32,305 31,273 27,934 19,312 16,151
Interest expense............ (10,692) (4,706) (26,756) (29,389) (23,286) (11,286) (11,701)
Other income, net........... 136 498 1,572 4,051 4,826 4,063 233
---------- -------- ---------- ---------- ---------- ---------- ----------
Income before provision for
income taxes,
extraordinary loss and
cumulative effect of
changes in accounting
methods................... 18,118 10,756 68,985 6,688 61,859 40,846 54,947
Provision for income
taxes..................... 7,574 4,448 31,586 6,047 24,411 16,122 20,631
---------- -------- ---------- ---------- ---------- ---------- ----------
Income before extraordinary
loss and cumulative effect
of changes in accounting
methods................... 10,544 6,308 37,399 641 37,448 24,724 34,316
Extraordinary loss (net of
tax) from early
extinguishment of debt.... -- -- -- (2,060) -- (1,088) --
Cumulative effect of changes
in accounting methods (net
of tax)(f)................ -- -- -- -- -- 1,904 (1,794)
---------- -------- ---------- ---------- ---------- ---------- ----------
Net income (loss)........... $ 10,544 $ 6,308 $ 37,399 $ (1,419) $ 37,448 $ 25,540 $ 32,522
========== ======== ========== ========== ========== ========== ==========
CONSOLIDATED BALANCE SHEET DATA:
Working capital............... $ 375,348 $226,361 $ 344,410 $ 235,194 $ 301,270 $ 306,853 $ 203,977
Total assets.................. 1,456,794 921,606 1,403,796 919,013 967,667 653,680 536,603
Long-term debt, less current
portion..................... 505,108 247,537 502,577 269,442 325,501 203,838 216,985
Shareholder's equity.......... 555,159 334,394 539,898 327,371 337,007 275,104 122,582
OTHER FINANCIAL AND OPERATING
DATA:
Stores open at end of
period...................... 175 143 173 144 146 115 106
Capital expenditures.......... $ 24,090 $ 9,944 $ 61,031 $ 51,469 $ 53,293 $ 86,192 $ 48,078
Ratio of earnings to fixed
charges..................... 2.1x 2.3x 2.4x 1.1x 2.5x 2.6x 3.7x
</TABLE>
- ---------------
(a) Effective February 1, 1997 and February 3, 1996, Herberger's and Younkers,
respectively, were acquired by the Company. These acquisitions were
accounted for under the pooling-of-interests method. Accordingly, the
Company's financial statements were restated for all periods to include the
results of operations and financial position of Herberger's and Younkers.
(b) Expenses incurred were related to the defense of the attempted hostile
takeover of Younkers by Carson Pirie Scott & Co.
28
<PAGE> 29
(c) The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" in the fourth quarter of
fiscal 1995. As a result of adopting this new accounting standard and as a
result of closing certain stores and warehouses, the Company incurred
impairment charges related to the write-down in carrying value of six stores
due to poor operating results, abandonment of duplicate warehouse and
leasehold improvements related to the Younkers acquisition, and a loss on
abandonment of leasehold improvements related to closed stores. For the
period ended February 1, 1997, the Company incurred additional charges of
$1.4 million for closed or underperforming stores of the newly-acquired
Herberger's chain. These losses were offset by gains from sales of assets
totaling $2.5 million consisting principally of land, building and fixtures
related to two Younkers stores sold to Carson Pirie Scott & Co.
(d) In connection with the Younkers and Herberger's acquisitions, the Company
incurred certain costs to effect such acquisitions and other costs to
restructure and integrate the combined operating companies. The costs
incurred included, among other costs, merger transaction costs, severance
and related benefits, abandonment and elimination of duplicate
administrative office space, property, data processing equipment and
software.
(e) Finance charge income includes finance charges and late payment fees earned
on the Company's proprietary credit cards, less the portion of such income
allocated to third party purchasers of such credit card receivables. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Finance Charge Income, Net;" "Receivables Securitization
Facilities" and Note 4 to the Company's Consolidated Financial Statements.
(f) Effective as of the beginning of the fiscal year ended January 30, 1993,
Younkers recognized a cumulative effect adjustment of $1.8 million (net of
income taxes of $1.2 million) due to the adoption of SFAS No. 106, under
which employers recognize the cost of retiree health and life insurance
benefits over the employees' period of service.
Effective January 31, 1993, the Company changed its method of accounting for
inventory to include certain purchasing and distribution costs. Previously,
these costs were charged to expense in the period incurred rather than in
the period in which the merchandise was sold. The cumulative effect of this
change was to increase net income $2.3 million (net of income taxes of $1.5
million). Also effective January 31, 1993, the Company also changed its
method of accounting for store preopening costs to expensing such costs when
incurred. The cumulative effect of this change was to decrease net income
$0.4 million (net of income taxes of $0.2 million). Previously, these costs
were amortized over the twelve months immediately following the individual
store openings.
In 1992, the Financial Accounting Standards Board issued SFAS No. 109,
Accounting for Income Taxes, which requires a change from the deferred
method to the asset and liability method of accounting for income taxes. The
Company adopted the new accounting standard effective January 31, 1993.
Adoption of the new standard had no effect on the Company's financial
position or results of operations. There would have been no impact on the
year ended January 30, 1993 had the standard been applied retroactively.
Effective January 30, 1994, the Company changed its method of accounting for
inventory to the last-in, first-out (LIFO) method for a substantial portion
of its inventories. Previously, all inventories were valued using the
first-in, first-out (FIFO) method. The cumulative effect of this change is
not presented because it is not determinable.
29
<PAGE> 30
PRO FORMA COMBINED STATEMENT OF INCOME (UNAUDITED)
The following Pro Forma Combined Statement of Income (Unaudited) has been
derived by the application of pro forma adjustments to the Company's
Consolidated Financial Statements included elsewhere herein to reflect the
Company's acquisition of Parisian on October 11, 1996, which was accounted for
as a purchase. Historical financial information presented in this Prospectus
includes results of Parisian from the acquisition date. The accompanying Pro
Forma Combined Statement of Income (Unaudited) for the year ended February 1,
1997 gives effect to the Parisian acquisition as if it had been consummated on
February 4, 1996. The Pro Forma Combined Statement of Income (Unaudited) is
intended for informational purposes only and is not necessarily indicative of
future results of operations or financial position of the Company had the
Parisian acquisition occurred on the indicated date and does not purport to
indicate the results of operations that may be achieved in the future. The Pro
Forma Combined Statement of Income (Unaudited) does not reflect the cost savings
realized by the Company from consolidation of administrative and operating
functions and other synergies. The Pro Forma Combined Statement of Income
(Unaudited) and the accompanying notes should be read in conjunction with the
Consolidated Financial Statements of the Company including the notes thereto,
appearing elsewhere herein. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------ ACQUISITION PRO FORMA
COMPANY(A) PARISIAN(B) ADJUSTMENTS(C) TOTAL
---------- ----------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales................................. $1,889,779 $431,176 $2,320,955
Costs and expenses:
Cost of sales........................... 1,230,454 279,699 $ 1,649(d) 1,511,802
Selling, general, and administrative
expenses............................. 440,502 112,390 (1,649)(d) 551,804
561(e)
Other operating expenses................ 142,124 38,328 (1,845)(e) 179,938
1,331(f)
Gains from long lived assets, net....... (1,094) (1,094)
Merger, restructuring and integration
costs................................ 15,929 15,929
---------- -------- ------- ----------
Operating income.......................... 61,864 759 (47) 62,576
Other income (expense):
Finance charge income, net.............. 32,305 5,578 37,883
Interest expense........................ (26,756) (11,932) (6,014)(g) (44,702)
Other income, net....................... 1,572 1,837 3,409
---------- -------- ------- ----------
Income (loss) before provision for income
taxes................................... 68,985 (3,758) (6,061) 59,166
Provision for income taxes................ 31,586 (799) (1,389)(h) 29,398
---------- -------- ------- ----------
Net income (loss)......................... $ 37,399 $ (2,959) $(4,672) $ 29,768
========== ======== ======= ==========
</TABLE>
- ---------------
(a) The historical income statement of the Company does not reflect the
operating results of Parisian prior to the Company's acquisition of
Parisian on October 11, 1996.
(b) Includes information derived from Parisian's unaudited historical income
statement for the period from February 4, 1996 through October 10, 1996.
(c) Pro forma adjustments do not include any charges or benefits related to the
integration of the operations of the businesses of the Company and
Parisian. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations Merger, Restructuring and Integration Costs" and
Notes 2 and 3 to the Company's Consolidated Financial Statements.
(d) Adjustments have been made to conform Parisian's direct cost method of
accounting for inventory to the full cost method used by the Company and to
conform Parisian's presentation of certain expenses with that of the
Company.
30
<PAGE> 31
(e) Adjustments have been made to conform Parisian's accounting method for store
preopening costs of deferral and amortization over twelve months to the
Company's accounting method of expensing such costs as incurred.
(f) Adjustments have been made to reflect the increase in depreciation and
amortization resulting from the purchase price allocation for the Parisian
acquisition.
(g) Adjustments have been made to reflect interest expense on acquisition debt
of approximately $119.0 million at 7.4% per annum for the period ended
October 10, 1996, assuming the debt was outstanding throughout the period.
(h) Adjustments have been made to reflect the income tax impact of the pro forma
merger and acquisition adjustments using a combined federal and state
income tax rate of 40%. See Note 6 to the Company's Consolidated Financial
Statements.
31
<PAGE> 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements of the Company and the notes thereto and other data and information
appearing in this Prospectus.
OVERVIEW
General. The Company is a leading regional department store company
offering a wide selection of fashion apparel, accessories, cosmetics and
decorative home furnishings, featuring assortments of premier brands and
specialty merchandise. The Company's five chains are Proffitt's (19 stores),
McRae's (29 stores), Younkers (48 stores), Parisian (40 stores) and Herberger's
(39 stores). The following table sets forth the merchandising mix for each chain
for the year ended February 1, 1997:
<TABLE>
<CAPTION>
TOTAL
PROFFITT'S MCRAE'S YOUNKERS PARISIAN(A) HERBERGER'S COMPANY
---------- ------- -------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Womens Apparel................. 32.6% 25.9% 31.7% 31.7% 39.0% 31.8%
Mens Apparel................... 13.7 16.6 16.1 21.7 15.3 17.4
Home/Gifts..................... 11.1 15.3 15.6 1.1 9.4 9.9
Cosmetics...................... 15.0 11.4 10.9 9.5 8.6 10.8
Children's Apparel............. 7.8 7.3 6.8 11.3 12.9 9.1
Accessories.................... 6.7 7.1 6.2 6.9 5.6 6.5
Shoes.......................... 7.3 8.0 2.9 12.3 5.4 7.5
Intimate Apparel............... 4.2 3.9 4.6 3.2 3.8 3.9
----- ----- ----- ----- ----- -----
Total owned.......... 98.4 95.5 94.8 97.7 100.0 96.9
Leased(b)...................... 1.6 4.5 5.2 2.3 E 3.1
Total................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== ===== =====
</TABLE>
- ---------------
(a) Represents entire period even though Parisian was acquired October 11, 1996.
(b) Leased departments include fine jewelry, beauty salon, and maternity
departments. See "Business -- Merchandising."
Recent Acquisitions and Growth in Store Base. The Company's financial
results for the periods discussed below have been affected by the Company's
significant acquisition-related growth. In March 1994, the Company acquired
McRae's, a privately owned company with 28 stores. In April 1995, the Company
completed the acquisition of Parks-Belk Company, the owner-operator of four
stores in Northeast Tennessee. Effective February 3, 1996, the Company acquired
Younkers, a publicly traded company with 51 stores. On October 11, 1996, the
Company acquired Parisian, a 38 store closely-held company. Effective February
1, 1997, the Company acquired Herberger's, an employee owned company with 39
stores. The McRae's, Parks-Belk and Parisian transactions were accounted for
using the purchase method and are included in the Company's income statements
from the date of acquisition; the Younkers and Herberger's transactions were
accounted for as poolings of interests. The Company's Consolidated Financial
Statements have been restated to reflect the Younkers and Herberger's
acquisitions.
Actions Impacting Future Results. The Company believes that its future
results of operations may be impacted by a number of factors, including (i) the
results of cost savings and operating efficiency programs undertaken in
connection with recent acquisitions, (ii) the results of the Company's efforts
to centralize certain administrative and support functions, (iii) the
implementation of the Company's plans to improve its capital structure, (iv) the
results of a shift to a more optimal merchandise mix and the realization of
improved purchasing power resulting from increased scale, and (v) future
acquisitions, if any, undertaken by the Company.
Management has identified synergies and developed cost savings programs in
conjunction with the Younkers, Parisian and Herberger's acquisitions. The
implementation of these programs reduced operating
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<PAGE> 33
expenses by $6 million (from the Younkers acquisition only) in fiscal 1996 and
is expected to produce annualized cost savings of $20 million in fiscal 1997 and
$29 million in fiscal 1998 (compared to the 1995 cost structure of the chains on
an independent basis). Cost reductions are expected to be achieved through the
elimination of duplicate corporate expenses, economies of scale, implementation
of best practices and consolidation of certain administrative support functions.
The Company expects that these programs may result in additional cost savings
which cannot presently be quantified. The realization of these cost savings is
subject to uncertainties described under "Risk Factors."
During 1995 and 1996, the Company consolidated certain administrative and
support functions, such as accounting, information systems, proprietary credit
card administration and store planning for the Proffitt's, McRae's and Younkers
chains. The Company is in the process of further consolidating these functions
to include the Parisian chain, with the majority of this work to be completed by
the fall of 1997. Consolidation of these functions for the Herberger's chain
will begin in 1997 and is expected to be completed in 1998. Merchandising, store
operations, sales promotion and advertising and visual presentation for the
Proffitt's, McRae's, Younkers, Parisian and Herberger's chains will remain
separate, but will be coordinated centrally by the Proffitt's Merchandising
Group.
The issuance of the Notes was part of a plan to improve the Company's
capital structure by (i) reducing the amount of the Company's secured
indebtedness, (ii) reducing the amount of the Company's indebtedness that bears
interest at floating rates of interest, and (iii) extending the average life of
the Company's indebtedness. To achieve these objectives, the Company will
undertake the following:
- Use of Proceeds from the Issuance of the Notes. The Company is
applying the net proceeds from the issuance of the Notes to (i) repay
approximately $64.0 million of real estate and mortgage notes, (ii)
repay approximately $3.8 million of unsecured notes payable and (iii)
reduce outstanding borrowings under the Credit Facility. This will
extend the maturity of the Company's indebtedness. See "Use of
Proceeds."
- Renegotiation of Revolving Credit Facility. The Company engaged
NationsBank of Texas, National Association ("NationsBank") and
NationsBanc Capital Markets, Inc. ("NCMI") in connection with the
Company's amendment and restatement of its existing Credit Facility to,
among other things, (a) increase the revolving Credit Facility from
$275 million to $400 million, (b) extend the maturity from October 11,
1999 to June 26, 2002, (c) make provision for, upon any senior
indebtedness of Proffitt's being rated investment grade, the
elimination of the inventory borrowing base limitation on borrowings
under the Credit Facility, (d) reduce the financial performance
benchmarks at which more favorable pricing options are made available
to the Company, and (e) lessen in varying degrees the scope of the
affirmative and negative covenants applicable to the Company and its
subsidiaries. The Company may use the proceeds of borrowings under the
Credit Facility to refinance certain existing indebtedness, to finance
capital expenditures, for general corporate purposes and to finance
certain acquisitions. See "Description of Other Indebtedness -- Bank
Credit Facilities" and " -- Liquidity and Capital Resource."
- New Receivables Arrangements. The Company has engaged NCMI to
restructure one of its existing accounts receivable securitization
facilities into a new master credit card trust covering receivables
generated by all the stores, except Younkers, with a view to issuing
approximately $200 million of investment grade asset-backed securities
having terms of up to five years secured by the Company's credit card
receivables, while continuing to provide the Company with the ability
to sell a variable interest in proprietary credit card receivables to
asset-backed commercial paper conduits. Although there is no assurance
that a new accounts receivable securitization facility will be
successfully established, or as to the final terms of such a facility,
it is currently anticipated that such a facility will be established
during Summer 1997. See " -- Liquidity and Capital Resources" and
"Receivables Securitization Facilities."
During the first and second fiscal quarters of 1997, the Company has
purchased approximately $32 million of Senior Subordinated Notes. The Company or
its subsidiaries may from time to time purchase
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<PAGE> 34
additional Senior Subordinated Notes with available cash and borrowings under
the Credit Facility. See "Description of Other Indebtedness -- Subordinated
Indebtedness -- Senior Subordinated Notes."
RESULTS OF OPERATIONS
The following table sets forth the selected financial data (excluding
unusual items) for the Company expressed as a percentage of net sales for the
periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED FISCAL YEAR ENDED(1)
-------------------- -----------------------------------------
MAY 3, MAY 4, FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996(1) 1997 1996 1995
-------- -------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales............................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales......................... 63.8 65.0 65.1 65.5 65.2
----- ----- ----- ----- -----
Gross profit.......................... 36.2 35.0 34.9 34.5 34.8
Selling, general and administrative
expenses............................ 24.4 24.4 23.3 24.0 23.3
Property and equipment rentals........ 3.6 3.1 3.2 3.0 3.1
Taxes other than income taxes......... 2.4 2.6 2.1 2.2 2.2
Finance charge income, net............ 2.1 2.0 1.7 1.9 1.8
Other income, net..................... 0.0 0.1 0.0 0.2 0.3
----- ----- ----- ----- -----
EBITDA................................ 7.8 7.1 8.0 7.4 8.3
Depreciation & amortization........... 2.1 2.7 2.2 2.6 2.7
----- ----- ----- ----- -----
EBIT.................................. 5.7% 4.4% 5.8% 4.8% 5.6%
</TABLE>
- ---------------
(1) Effective February 1, 1997 and February 3, 1996, Herberger's and Younkers,
respectively, were acquired by the Company. Such acquisitions were accounted
for under the pooling-of-interests method. Accordingly, the Company's
financial statements were restated for all periods to include the results of
operations and financial position of Herberger's and Younkers.
RESULTS OF OPERATIONS FOR QUARTERS ENDED MAY 4, 1996 AND MAY 3, 1997
For the quarter ended May 3, 1997, total Company sales were $526.4 million,
a 44% increase over $365.2 million in the prior year. Sales for the quarter
included $166.4 million of sales from the newly-acquired Parisian division. On a
comparable stores basis (excluding Parisian), total Company sales increased 3%
for the quarter.
For the quarter ended May 3, 1997, gross margin percentages increased over
the prior year. This improvement resulted from improved inventory management,
reduced markdowns, and the effects of inventory repositioning at both the
Parisian and Herberger's businesses, which was initiated in late 1996.
Selling, general, and administrative expenses declined as a percentage of
net sales for the quarter. This expense leverage primarily resulted from the
early stages of targeted cost reductions related to each of the Company's recent
business combinations.
Other operating expenses, which consist of rents, depreciation and
amortization, and taxes other than income taxes, declined as a percentage of net
sales for the quarter. This reduction was primarily due to the effect of closed
underperforming stores.
Total financing costs, which include interest expense and finance charge
income allocated to the third party purchasers of accounts receivable, increased
as a percentage of net sales for the quarter due to additional borrowings
related to the October 1996 purchase of Parisian.
Prior to the non-recurring items and ESOP charges outlined below, net
income totaled $11.9 million, or $.41 per share, a 77% increase over $6.7
million, or $.26 per share last year.
In conjunction with the Company's mergers with Younkers (completed February
3, 1996), Parisian, and Herberger's, the Company incurred certain non-recurring
integration charges in the first quarter of each year presented. For the quarter
ended May 3, 1997, these charges totaled $1.5 million before tax, or 0.3% of net
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<PAGE> 35
sales ($.9 million after tax, or $.03 per share). For the quarter ended May 4,
1996, these charges totaled $2.8 million before tax, or 0.8% of net sales ($1.7
million after tax, or $.07 per share).
For the quarter ended May 4, 1996, the Company realized pre-tax gains of
$2.3 million ($1.4 million after tax, or $0.6 per share) related to the
Company's March 1996 sale of two Younkers stores to Carson Pirie Scott & Co.
For the quarters ended May 3, 1997 and May 4, 1996, the Company incurred
pre-tax expenses of $0.7 million, or 0.1% of net sales, and $0.2 million, or
0.1% of net sales, respectively, related to the Company's Employee Stock
Ownership Plan ("ESOP") maintained at the newly acquired Herberger's Division.
On an after-tax basis, these charges totaled $.5 million, or $.01 per share, and
$.1 million, or less than $.01 per share, for the quarters ended May 3, 1997 and
May 4, 1996, respectively.
After these non-recurring items and ESOP charges, net income for the
quarter ended May 3, 1997 totaled $10.5 million, or $.37 per share, compared to
$6.3 million, or $.25 per share, for the quarter ended May 4, 1996. The increase
in earnings over the prior year primarily was due to solid gross margin
performance and leverage on operating expenses netted against increased
financing costs.
NET SALES FOR FISCAL 1994, FISCAL 1995 AND FISCAL 1996
Total Company net sales increased by 13.8% and 9.8% in fiscal 1996 and
fiscal 1995, respectively. The fiscal 1996 increase primarily was due to a
comparable store sales increase of 3% and revenues generated from the Parisian
chain acquired in October 1996. The fiscal 1995 sales increase primarily was due
to a comparable store sales increase of 3% and a full year of sales generated
from the McRae's stores acquired in March 1994.
GROSS MARGINS FOR FISCAL 1994, FISCAL 1995 AND FISCAL 1996
Gross margins were 34.9%, 34.5%, and 34.8% in fiscal 1996, fiscal 1995, and
fiscal 1994, respectively. The Company uses a full-cost method to account for
inventories, which includes certain purchasing and distribution costs. Such
costs which relate to obtaining merchandise and preparing it for sale are
included in cost of sales.
The improvement in gross margin percent in fiscal 1996 to 34.9% from 34.5%
in fiscal 1995 was a result of improved inventory management, resulting in
increased inventory turnover and lower markdowns. The decrease in gross margin
percent from 34.8% in 1994 to 34.5% in 1995 was primarily a result of increased
markdowns over the prior year.
Management expects that sales and gross margins can be enhanced over time
through further development of key businesses in each of the Company's chains;
expansion of key brands (primarily at the newly acquired Herberger's chain);
further private brand development; enhanced relationships and buying power with
vendors due to the Company's increased scale; and continued appropriate
inventory management.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES FOR FISCAL 1994, FISCAL 1995 AND
FISCAL 1996
Selling, general and administrative expenses ("SG&A") were 23.3% of net
sales in fiscal 1996, 24.0% of net sales in fiscal 1995, and 23.3% of net sales
in fiscal 1994. In fiscal 1996, primarily in conjunction with its acquisition of
Herberger's, the Company revised certain estimates and recorded other charges to
SG&A in the fourth quarter totaling $3.7 million, or 0.2% of net sales. The most
significant components of these charges were: (i) a $0.7 million charge for
store closing and conversion costs and (ii) a $1.7 million charge to strengthen
various accruals. In addition, the Company recorded fourth quarter charges to
SG&A of $1.0 million, or 0.1% of net sales, related to the sale of seven of the
Company's stores located in Virginia. In fiscal 1995, primarily in conjunction
with the Company's acquisition of Younkers, the Company revised certain
estimates and recorded other charges to SG&A in the fourth quarter totaling
$13.7 million, or 0.8% of net sales. The most significant components of these
charges were: (i) a $2.4 million charge for the conversion of the Younkers
leased shoe operation to an owned operation; (ii) a $2.0 million charge to
strengthen the Company's bad debt reserve; and (iii) a $5.0 million reserve for
various Younkers legal claims. See "Summary -- Recent Developments -- Sale of
Seven Virginia Stores."
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<PAGE> 36
Excluding these fourth quarter charges, SG&A as a percentage of net sales
was 23.0% in fiscal 1996 and 23.2% in fiscal 1995. The reduction of the SG&A
percentage in fiscal 1996 over fiscal 1995 was due to increased economies of
scale and the implementation of the synergies outlined under "-- Overview."
OTHER OPERATING EXPENSES FOR FISCAL 1994, FISCAL 1995 AND FISCAL 1996
Other operating expenses were 7.5% of net sales in fiscal 1996, compared to
7.9% in fiscal 1995 and 8.1% in fiscal 1994. Other operating expenses for fiscal
1996 include a $1.0 million charge, or 0.1% of net sales, related to the sale of
seven of the Company's stores located in Virginia. Excluding this charge, other
operating expenses as a percentage of net sales were 7.4% in fiscal 1996. The
percent decline in fiscal 1996 over fiscal 1995 and fiscal 1994 levels resulted
from leverage of these expenses over a larger sales base, the effect of closed
underperforming stores, and lower expenses due to the write-down of certain
property. See "Summary -- Recent Developments -- Sale of Seven Virginia Stores"
and "-- Gains (Losses) from Long-Lived Assets".
EXPENSES RELATED TO HOSTILE TAKEOVER DEFENSE BY YOUNKERS FOR FISCAL 1994, FISCAL
1995 AND FISCAL 1996
During fiscal 1995, the Company incurred expenses of approximately $3.2
million, or 0.2% of net sales, related to the defense of the attempted hostile
takeover of Younkers by Carson Pirie Scott & Co.
GAINS (LOSSES) FROM LONG-LIVED ASSETS FOR FISCAL 1994, FISCAL 1995 AND FISCAL
1996
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." The Company adopted the provision of this new
accounting standard in the fourth quarter of fiscal 1995. As a result of
adopting this new accounting standard and as a result of closing certain stores
and warehouses, the Company incurred impairment charges totaling $1.0 million,
or 0.1% of net sales, and $19.1 million, or 1.1% of net sales, in fiscal 1996
and fiscal 1995, respectively. The fiscal 1996 write-down of $1.0 million was
netted against gains on the sales of certain properties totaling $2.1 million,
or 0.1% of net sales, primarily related to the sale of two Younkers units in
March 1996. The $19.1 million charge in fiscal 1995 is comprised of $15.9
million related to the write-down in carrying value of six store properties and
$3.2 million related to the write-down of abandoned property.
MERGER, RESTRUCTURING, AND INTEGRATION COSTS FOR FISCAL 1994, FISCAL 1995 AND
FISCAL 1996
In connection with the acquisition of Herberger's by the Company, the two
companies incurred certain costs in the fourth quarter of fiscal 1996 to effect
the transaction and other costs to restructure, integrate and combine
operations. These costs totaled $10.0 million, or 0.5% of net sales, and were
comprised of $2.6 million of merger transaction costs (principally investment
banking, legal, and other direct merger costs); $6.5 million of severance and
related benefits, the consolidation of administrative operations, and systems
conversions; and $0.9 million for the write-off of duplicate administrative
facilities. Management also expects to incur certain additional integration
costs in fiscal 1997, such as transition payroll, training, and relocation
expenses. These expenses are expected to total approximately $3.0 to $4.0
million in 1997.
In connection with the acquisition of Younkers by the Company, the two
companies incurred certain costs in the fourth quarter of fiscal 1995 to effect
the transaction and other costs to restructure, integrate, and combine
operations. These costs totaled $20.8 million, or 1.3% of net sales, and were
comprised of $8.8 million of merger transaction costs (principally investment
banking, legal, and other direct merger costs); $3.2 million of severance and
related benefits, $7.4 million for the write-off of duplicate administrative
facilities, and $1.4 million of miscellaneous costs. The Company also incurred
certain additional integration costs in fiscal 1996, such as transition payroll,
training, and relocation expenses. These expenses totaled $5.9 million during
1996, or 0.3% of net sales.
FINANCE CHARGE INCOME, NET FOR FISCAL 1994, FISCAL 1995 AND FISCAL 1996
Net finance charge income was 1.7% of net sales in 1996 and 1.9% of net
sales in both 1995 and 1994.
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<PAGE> 37
For fiscal 1996, gross finance charge income (before allocation of finance
charges to the third party purchasers of accounts receivable) increased to 2.6%
of net sales from 2.4% in fiscal 1995. This increase was primarily due to
increased finance charge rates assessed in certain states and a full year's
benefit of the October 1995 implementation of late fee charges on past due
charge accounts for the Proffitt's and McRae's chains. See "-- Liquidity and
Capital Resources."
For fiscal 1995, gross finance charge income increased to 2.4% of net sales
over 2.2% of net sales in fiscal 1994. This increase was due to increased
customer usage of the Company's proprietary charge cards, increased finance
charge rates assessed in certain states, the October 1995 implementation of late
fee charges on past due charge account balances for the McRae's and Proffitt's
chains, and a full year's benefit of the May 1994 implementation of late fee
charges on past due charge account balances at the Younkers chain.
The allocation of finance charges to the third party purchasers of accounts
receivable totaled approximately $16.0 million, or 0.8% of net sales, in fiscal
1996; $8.8 million, or 0.5% of net sales, in fiscal 1995; and $5.6 million, or
0.4% of net sales, in fiscal 1994. Utilization of the Company's accounts
receivable securitization programs increased each year presented, commensurate
with the Company's growth in proprietary charge card sales. See "-- Liquidity
and Capital Resources."
Each of the Company's chains operates a proprietary credit card program. A
proprietary credit card program was introduced to the Herberger's customer base
on May 15, 1997.
INTEREST EXPENSE FOR FISCAL 1994, FISCAL 1995 AND FISCAL 1996
Interest expense as a percentage of net sales was 1.4% for fiscal 1996,
1.8% for fiscal 1995, and 1.5% for fiscal 1994. Total interest expense was $26.8
million, $29.4 million, and $23.3 million in fiscal 1996, fiscal 1995, and
fiscal 1994, respectively. The decrease in interest expense in fiscal 1996 over
fiscal 1995 was attributable to lower average borrowings under the Company's
Credit Facility due to an increase in cash flow from operations, and a reduction
in short-term interest rates. The increase in interest expense in fiscal 1995
over fiscal 1994 was attributable to higher borrowings associated with the
purchase and operation of the stores acquired from the Parks-Belk Company in
April 1995 and the acquisition of McRae's in March 1994, along with higher
interest rates.
INCOME TAXES FOR FISCAL 1994, FISCAL 1995 AND FISCAL 1996
The effective tax rates differ from the expected tax rates principally due
to nondeductible merger costs and other nondeductible expenses related to
acquisitions.
NET INCOME FOR FISCAL 1994, FISCAL 1995 AND FISCAL 1996
Net income (prior to extraordinary items) was $37.4 million in fiscal 1996,
or 2.0% of net sales, $0.6 million in fiscal 1995, or 0.0% of net sales, and
$37.4 million in fiscal 1994, or 2.5% of net sales. Earnings in fiscal 1996 were
negatively affected by such items as fourth quarter charges to SG&A in
conjunction with the acquisition of Herberger's by the Company and the sale of
seven of the Company's stores located in Virginia and merger, restructuring, and
integration costs previously discussed. Without these items, fiscal 1996 net
income would have totaled $52.2 million, or 2.8% of net sales. In fiscal 1995,
earnings were negatively affected by such items as fourth quarter charges to
SG&A in conjunction with the acquisition of Younkers, expenses related to the
Younkers hostile takeover attempt, charges for the impairment of long-lived
assets, and merger, restructuring, and integration costs previously discussed.
Without these items, fiscal 1995 net income would have totaled $38.4 million, or
2.3% of net sales. See "-- Expenses Related to Hostile Takeover Defense."
EXTRAORDINARY ITEM FOR FISCAL 1994, FISCAL 1995 AND FISCAL 1996
On February 3, 1996, Younkers replaced its debt financing of accounts
receivable with sales of ownership interests in its accounts receivable. In
addition, Younkers canceled its $150.0 million revolving credit agreement. As a
result of the early extinguishment of debt, certain deferred costs associated
with the debt facilities, such as loan origination costs and a loss from an
interest rate swap, were written off. This write-off of $3.4 million ($2.1
million net of income taxes) was recorded as an extraordinary item in fiscal
1995.
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<PAGE> 38
INFLATION
Inflation affects the costs incurred by the Company in its purchase of
merchandise and in certain components of its selling, general, and
administrative expenses. The Company attempts to offset the effects of inflation
through price increases and control of expenses, although the Company's ability
to increase prices is limited by competitive factors in its markets. Inflation
may also adversely affect the Company's net finance charge income. See
"Business -- Proprietary Credit Cards."
SEASONALITY
The Company's business, like that of most retailers, is subject to seasonal
influences, with a significant portion of net sales and net income realized
during the fourth quarter of each year, which includes the Christmas selling
season. In light of these patterns, selling, general, and administrative
expenses are typically higher as a percentage of net sales during the first
three quarters of each year, and working capital needs are greater in the last
quarter of each year. The fourth quarter increases in working capital needs have
typically been financed with internally generated funds, the sale of interests
in the Company's accounts receivable, and borrowings under the Company's
revolving credit facility. Generally, more than 30% of the Company's net sales
and over 50% of net income are generated during the fourth quarter. See "Risk
Factors -- Effect of General Economic Conditions; Seasonality",
"Business -- Seasonality" and Note 17 to the Company's Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary needs for liquidity are to: acquire, renovate, or
construct stores; service debt; meet operating lease and other rental payment
obligations; and provide working capital for new and existing stores.
The Company estimates capital expenditures for fiscal 1997 will approximate
$110 million, primarily for the construction of seven new stores opening in
fiscal 1997, initial expenditures related to new stores scheduled to be opened
in fiscal 1998, several store expansions and renovations, and enhancements to
management information systems.
At February 1, 1997, total debt was 48.8% of total book capitalization, up
from 42.8% at February 3, 1996. Excluding subordinated debt of approximately
$225.8 million at February 1, 1997 and approximately $100.5 million at February
3, 1996, senior debt was 27.4% of total capitalization, down from 28.0% one year
ago.
As of February 1, 1997, the Company owed $120.3 million of mortgage debt
related to 26 of its owned store locations and other owned properties.
Management believes the market value of these properties significantly exceeds
the related indebtedness.
The increase in the May 3, 1997 and February 1, 1997 asset, liability, and
shareholders' equity classifications over the May 4, 1996 balances presented was
largely attributable to the acquisition and financing of the Parisian
transaction completed on October 11, 1996. For example, May 3, 1997 merchandise
inventories and property and equipment balances increased over May 4, 1996
balances primarily due to the value of the acquired Parisian inventories and
property and equipment.
May 3, 1997 goodwill and tradenames increased over the balance at May 4,
1996 due to goodwill of approximately $225 million recorded in conjunction with
the October 1996 Parisian acquisition.
May 3, 1997 subordinated debt increased over the balance at May 4, 1996 due
to the addition of Parisian's $125 million of 9 7/8% notes due 2003.
In fiscal 1996, on a pro forma basis, the Company would have incurred
approximately $81.7 million in operating lease and rent expense. It is expected
that minimum operating lease and rent expense for fiscal 1997 will remain
relatively constant as a percentage of sales.
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<PAGE> 39
Net cash provided by operating activities was $82.5 million in fiscal 1996
and $66.6 million in fiscal 1995. In fiscal 1996 net income and depreciation and
amortization charges were offset by additional working capital needs of $14.3
million. In fiscal 1995, working capital needs were reduced by $14.0 million.
Net cash used in investing activities was $174.7 million in fiscal 1996 of
which $119.1 million was for the acquisition of Parisian and $61.0 million was
related to other capital expenditures. Net cash used in investing activities for
fiscal 1995 totaled $62.0 million, of which $51.5 million related to other
capital expenditures and $10.5 million was the cash portion of the purchase
price for the Company's acquisition of stores from the Parks-Belk Company.
Net cash provided by financing activities for fiscal 1996 totaled $66.4
million, which was primarily due to proceeds of $113.0 million from borrowings
on long-term debt netted against payments on such debt of $49.3 million. Net
cash provided by financing activities for fiscal 1995 totaled $7.0 million,
which was primarily due to proceeds of $32.3 million from borrowings on
long-term debt netted against payments on such debt of $20.3 million.
As a result of the amendment and restatement of its existing credit
facility on June 26, 1997, the Company currently has a $400 million unsecured
Credit Facility with several banks, which is available for general corporate
purposes. The Credit Facility, which matures in 2002, provides various borrowing
options, including prime rate and Eurodollar rates. The Company amended and
restated its existing credit facility to, among other things, (a) increase the
revolving Credit Facility from $275 million to $400 million, (b) extend the
maturity from October 11, 1999 to June 26, 2002, (c) make provision for, upon
any senior indebtedness of Proffitt's being rated investment grade, the
elimination of the inventory borrowing base limitation on borrowings under the
Credit Facility, (d) reduce the financial performance benchmarks at which more
favorable pricing options are made available to the Company, and (e) lessen in
varying degrees the scope of the affirmative and negative covenants applicable
to the Company and its subsidiaries. The Company may use the proceeds of
borrowings under the Credit Facility to refinance certain existing indebtedness,
to finance capital expenditures, for general corporate purposes and to finance
certain acquisitions. See "Description of Other Indebtedness -- Bank Credit
Facilities."
In January 1997, an Accounts Receivable Subsidiary (as defined under
"Description of the Exchange Notes") of the Company entered into a $300 million
facility agreement (the "Proffitt's Accounts Receivable Facility") with a third
party financial institution for the sale of ownership interests in accounts
receivable, which expires in 1998. The Proffitt's Accounts Receivable Facility
requires a portion of finance charges earned to be allocated to the purchaser of
the ownership interests in the accounts receivable in an amount sufficient to
cover the yield on commercial paper utilized by the purchaser to finance the
transaction, plus fees and expenses. As of May 30, 1997, the interest rate on
the Proffitt's Accounts Receivable Facility, including program fees, was
approximately 6.0% per annum, and $219.5 million of receivables were sold
through the Proffitt's Accounts Receivable Facility at that date. As of February
1, 1997, $234.0 million of receivables were sold through the Proffitt's Accounts
Receivable Facility. Amounts sold are limited to 82% of eligible accounts
receivable. See "Receivables Securitization Facilities."
The Proffitt's Accounts Receivable Facility replaced the following
facilities: (i) the Proffitt's and McRae's accounts receivable program ($175
million facility) and (ii) the Parisian accounts receivable program ($160
million facility). Maximum amounts sold under these facilities in fiscal 1996
were $172.4 million and $129.0 million, respectively.
Prior to February 3, 1996, Younkers utilized an accounts receivable
securitization program under which its receivables were used as collateral for
commercial paper issued by a wholly-owned special purpose subsidiary. Effective
with the February 3, 1996 acquisition by the Company, Younkers replaced amounts
borrowed under its prior securitization program with the Younkers Credit Card
Master Trust (the "Younkers Master Trust") including the sale of: (i) fixed rate
asset-backed securities of $75 million and (ii) variable ownership interests of
up to $50 million financed through variable rate asset-backed commercial paper.
The $75 million of receivables sold under the term asset-backed securities are
from a pool of $91.5 million of accounts receivable and remain fixed until 2000
at which time a portion of collections of outstanding receivables will be
retained by the purchaser until the $75 million is amortized. The purchaser
retains an
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allocation of finance charges earned on the $75 million of receivables in an
amount sufficient to provide a return of approximately 6.5% per annum.
Additional sales of receivables up to $50 million are restricted on the
basis of the level of eligible receivables in excess of the $91.5 million
supporting the fixed pool and a minimum ownership interest to be retained by
Younkers. Younkers may obtain additional proceeds by increasing the ownership
interest transferred to the purchaser or reduce the purchaser's interest by
allowing a portion of the collections to be retained by the purchaser. The
purchaser retains an allocation of finance charge income equal to a variable
rate based on commercial paper or Eurodollar rates. The $50 million facility
expires in 1998. As of March 21, 1997, the interest rate was approximately 5.8%
per annum, and $5.0 million of Younkers' receivables were sold under this
facility at that date. The aggregate fixed and variable interests in receivables
sold in fiscal 1996 totaled $90.0 million.
The Company has engaged NCMI to restructure one of its existing accounts
receivable securitization facilities into a new master credit card trust
covering receivables generated by all the stores, except Younkers, with a view
to issuing approximately $200 million of investment grade asset-backed
securities having terms of up to five years secured by the Company's credit card
receivables, while continuing to provide the Company with the ability to sell a
variable interest in proprietary credit card receivables to asset-backed
commercial paper conduits. It is currently anticipated that such a facility will
be established during or shortly after the Exchange Offer. See "Receivables
Securitization Facilities."
The Company anticipates its capital expenditures, working capital
requirements relating to planned new and existing stores and debt and lease
payment obligations will be funded through cash provided by operations and
borrowings under its Credit Facility. The Company expects to generate adequate
cash flows from operating activities to sustain current levels of operations,
debt service and lease payments. The Company maintains favorable banking
relations and anticipates the Credit Facility will be amended or new agreements
will be entered into in order to provide future borrowing requirements as
needed, although no assurance can be given in this regard. The Company also
believes it has access to a variety of other capital markets. The Company's goal
is to continue to maintain a strong balance sheet and prudent leverage,
providing the Company flexibility to capitalize on attractive opportunities for
growth. See "Description of Other Indebtedness."
The Company is using the net proceeds from the issuance of the Series A
Notes to repay certain outstanding mortgage and other indebtedness, to reduce
certain borrowings under the Credit Facility and for general corporate purposes.
As a result of the issuance of the Series A Notes and the application of the net
proceeds therefrom, the Company reduced the amount of its secured indebtedness,
reduced the amount of its indebtedness that bears interest at floating rates and
extended the average life of its indebtedness. The Company will not receive any
proceeds from the issuance of the Exchange Notes pursuant to the Exchange Offer.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." The new standard, which was effective for all sales of accounts
receivable beginning January 1, 1997, requires that a gain be recognized at the
time of sale to the extent the fair value of the undivided interest in the
receivables sold and the servicing rights retained exceed the carrying value of
the receivables. Historically, the Company has recognized the excess interest
earned on sold receivables over the life of the receivables. The effect of this
accounting change was immaterial to fiscal 1996.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share." The new standard changes the presentation and method
in which earnings per share are computed and is effective for the Company's year
ending January 31, 1998. The new standard will be applied on a "retroactive
restatement of all prior periods" basis. The Company is currently ascertaining
the impact the new standard will have on its earnings per share amounts for
fiscal 1996 and prior periods.
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BUSINESS
THE COMPANY
The Company is a leading regional department store chain operating 175
stores in 24 states, primarily in the Southeast and Midwest. The Company
operates its stores under five chain names: Proffitt's (19 stores), McRae's (29
stores), Younkers (48 stores), Parisian (40 stores) and Herberger's (39 stores).
Each chain operates primarily as a leading branded traditional department store
in its communities, with Parisian serving as a better branded specialty
department store. Most of the stores are located in premier regional malls in
the respective trade areas served. The Company's stores offer a wide selection
of fashion apparel, accessories, cosmetics and decorative home furnishings,
featuring assortments of premier brands, private brands and specialty
merchandise. Each of the Company's chains operates with its own merchandising,
marketing and store operations team in order to tailor regional assortments to
the local customer. At the same time, the Company coordinates merchandising
among the chains and consolidates administrative and support functions to
realize scale economies, to promote a competitive cost structure and to increase
margins.
Under the leadership of R. Brad Martin and an experienced senior management
team, the Company has executed a disciplined acquisition strategy and strategic
approach to new store openings, growing from 11 stores and net sales of $94.8
million in fiscal 1989 to 175 stores and pro forma net sales of $2.3 billion in
fiscal 1996. In addition, the Company has increased EBITDA from $8.9 million in
fiscal 1989 to $167.2 million in fiscal 1996, on a pro forma basis.
Members of the Company's senior management have substantial investments in
the Company. As of April 25, 1997, Mr. Martin beneficially owned approximately
4.7% of the Company's Common Stock and all directors and executive officers of
the Company as a group beneficially owned approximately 13.2% of the Company's
Common Stock.
BUSINESS STRENGTHS
The Company believes that it is well-positioned to build upon its
historical success by capitalizing on its competitive strengths, including the
following:
Strong Regional Focus. The Company places a high priority on being a
market leader in each of the markets in which it operates. In smaller
communities, the Company's stores are frequently the only branded name
department store catering to middle and upper income customers and offering
an array of brands that frequently are not otherwise available to shoppers
in such markets. In most larger metropolitan markets, the Company seeks to
maximize its market share by operating multiple stores in prime locations.
While the Company has grown through the acquisition of regional chains, its
philosophy has been to (i) maintain existing trade names and retain
merchandising and store personnel and (ii) utilize previously developed
regional expertise and knowledge of the local customer base by allowing
each chain to tailor merchandise assortments to the local customer. The
Company believes that the increased sales and gross margins resulting from
a coordinated but decentralized merchandising effort outweigh any
incremental operating cost savings associated with a completely centralized
strategy.
Scale Economies. With pro forma sales of approximately $2.3 billion
in fiscal 1996, the Company realizes scale economies in purchasing and
distribution, administrative areas such as accounting, proprietary credit
card administration, management information systems, and other
infrastructure-related areas. Although the Company's chains control
regional merchandising, the Proffitt's Merchandising Group coordinates
merchandising, planning and execution, visual presentation, marketing and
advertising activities among the chains. The Proffitt's Merchandising Group
manages strategic relationships with the Company's top vendors to ensure
that each chain is afforded the purchasing leverage of the Company as a
whole. In addition to seeking economies of scale in purchasing, the
Proffitt's Merchandising Group will continue to capitalize on corporate
level marketing synergies, such as the coordination of media buying and
direct mail programs, the establishment of preferred advertising rates, and
the production of store catalogs.
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Proven Track Record of Integrating Acquisitions. In recent years, the
Company has grown primarily through the acquisition of strong, regional
department store chains at valuations believed to be attractive by
management. The following table sets forth certain information concerning
the Company's significant acquisitions:
<TABLE>
<CAPTION>
TRANSACTION VALUE(A)
AS A MULTIPLE OF:
EQUITY AS A % --------------------
DATE OF NUMBER TRANSACTION OF TRANSACTION LTM LTM
COMPANY ACQUIRED ACQUISITION OF STORES VALUE (A) VALUE(A) SALES(B) EBITDA(B)
- ---------------- ----------- --------- ----------- -------------- -------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
McRae's, Inc. .............. March 31, 1994 28 $264.8 5% 0.6x 5.3x
Younkers, Inc. ............. February 3, 1996 51 321.6 79 0.5 6.5
Parisian, Inc. ............. October 11, 1996 38 375.0 28 0.5 8.7
G.R. Herberger's, Inc. ..... February 1, 1997 39 176.9 88 0.5 7.4
</TABLE>
- ---------------
(a) Transaction value is the total consideration paid in the form of: (i) cash;
(ii) notes; (iii) equity (valued as of the announcement date for
pooling-of-interest transactions and in accordance with generally accepted
accounting principles for purchase accounting transactions); and (iv)
assumed long-term debt, net of cash, as of the end of the last full fiscal
quarter prior to the acquisition date.
(b) LTM Sales and LTM EBITDA of the acquired company represent data for the
twelve months ending on the last day of the last full fiscal quarter prior
to the acquisition date. Additionally, EBITDA for Herberger's is adjusted
for ESOP expense of $4.3 million. See "-- Summary Historical and Pro Forma
Financial and Operating Data" for the definition of EBITDA.
The Company employs a "best practices" approach to integrating acquired
companies. Best practices is a process whereby each acquired chain's operating
procedures and policies are reviewed to determine those practices which the
Company believes will increase synergies while minimizing business
interruptions. The Company believes the implementation of best practices
throughout the Company's chains has resulted in improved comparable store sales
and increased operating margins through better and more consistent inventory
control and pricing, and other operating efficiencies.
Strong Financial Position. The Company has been able to realize
significant growth while maintaining moderate leverage. Since February 1996, the
acquisitions of Younkers, Herberger's and Parisian have resulted in an increase
in net sales of approximately $1.6 billion, while senior debt as a percentage of
total capitalization decreased slightly. In addition to conservative balance
sheet management, the Company's strong cash flow generation has allowed it to
fund all capital expenditures, incremental working capital requirements and
fixed charges with internally generated cash flow. On a pro forma basis, the
Company's ratio of EBITDA to interest expense in fiscal 1996 would have been
3.7x. The Company's strong financial performance has provided it with
significant financial flexibility, including the ability to use its
publicly-traded common stock as consideration for selected acquisitions.
Geographic and Demographic Diversity. The Company operates 175 stores in
24 states. Stores are operated in metropolitan markets such as Atlanta, Georgia
and Indianapolis, Indiana, as well as in smaller markets such as Ames, Iowa and
Kalispell, Montana. The Company believes that its geographic diversity and the
demographic breadth of its target customer groups may to some extent serve to
insulate the Company from sales and earnings volatility typically associated
with poor weather conditions, or changes in local or regional economic
conditions.
Attractive Real Estate. The Company believes that its stores are primarily
located in premier malls in the markets in which the Company operates. As is
consistent with national trends, the Company further believes that construction
of new malls in many of its markets is likely to be limited. The Company
anticipates that the attractiveness of its existing locations, combined with
limited new mall development, may contribute to improved comparable store sales.
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BUSINESS STRATEGY
The Company's business objective is to maximize profitability and
shareholder value by (i) expanding its core business through comparable store
sales growth, new store openings and margin expansion, and (ii) monitoring
acquisition opportunities while maintaining a strong capital structure.
Comparable Store Sales Growth. The Company expects that comparable store
sales will benefit from a number of merchandising initiatives including (i)
implementing best practices, (ii) expanding sales of key brands, and (iii)
increasing sales of the Company's private brands. As part of best practices, the
Company benchmarks sales of product categories and brand assortments for each
store and identifies and targets opportunities to strengthen such sales by
altering the merchandise mix. The Company has successfully used this strategy by
applying the long history of strength in the cosmetics business of McRae's and
Proffitt's stores to increase the penetration and profitability of Younkers
stores' cosmetics business. The Company believes that it will be able to further
utilize this strategy to increase sales in the Younkers shoe business, increase
McRae's women's apparel sales and introduce home goods into select Parisian
stores.
The Company believes that comparable store sales will also benefit from
expanded sales of key brands, such as Tommy Hilfiger, Liz Claiborne, Jones New
York, Polo/Ralph Lauren, Calvin Klein, Guess, and Nine West, among others. The
Company's large scale and proven track record with these vendors has enabled the
Company to introduce certain of these brands into acquired stores which, prior
to combining with the Company, did not have access to these vendors. For
instance, Tommy Hilfiger, Nautica and Lancome will now be carried in select
Herberger's stores. Additionally, the Company plans to increase sales of its
private brand offerings within the apparel and housewares categories from 6% of
total net sales to 12% to 15% over the next two to three years. For example, the
Company has recently developed its own line of men's dress shirts and
accessories, under the brand name RBM. The RBM collection is designed to fill a
niche for quality men's furnishings at moderate prices.
New Store Openings. The Company plans to open 15 to 20 new stores across
all chains over the next three years and to make selective real estate
acquisitions in existing or new markets. The Company targets premier mall
locations principally based on favorable demographic profiles and trends, as
well as the compatibility and traffic draws of other tenants. High quality real
estate is a primary criterion for all new stores. In addition, the Company plans
to selectively remodel or expand certain existing stores.
Margin Expansion. The Company has implemented the following strategies to
increase margins: (i) leveraging key vendor relationships; (ii) capitalizing on
purchasing economies of scale; (iii) extending key brands into certain acquired
stores; (iv) shifting the merchandise mix toward higher margin products; (v)
increasing private brand penetration; (vi) consolidating administrative and
support areas and eliminating redundant expenses; and (vii) realizing
efficiencies related to the re-engineering of certain operating activities.
The Company intends to further increase gross margins by increasing sales
of its private brand products, which typically generate higher margins and
enhance customer loyalty. Operating margins are also expected to benefit from
sales productivity enhancements across the Company's chains and from the
integration cost savings programs developed by management in conjunction with
the Younkers, Parisian, and Herberger's acquisitions. These programs reduced
operating expenses by a total of $6 million in fiscal 1996 (consistent with the
Company's announced target) and are expected to produce annualized expense
savings of $20 million in fiscal 1997 and $29 million in fiscal 1998 (compared
to the 1995 cost structure of the chains on an independent basis).
Monitor Acquisition Opportunities. The Company has an established record
of successfully acquiring and integrating regional department store chains. The
Company believes that its philosophy of retaining the local identity and
merchandising organization of acquired companies makes the Company an attractive
acquirer for regional department store companies. The Company's criteria in
evaluating strategic opportunities include (i) strong market presence; (ii)
prime real estate locations; (iii) similar merchandising strategies targeted
toward middle to upper income consumers; (iv) geographic proximity to the
Company's core markets; (v) compatible corporate culture; and (vi) favorable
demographics in the regions served. Although the Company currently has no
agreements, arrangements or understandings with respect to future acquisitions,
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the Company expects the department store industry will continue to consolidate
and the Company will regularly evaluate possible acquisition opportunities as
they arise.
Maintain Strong Capital Structure. The Company intends to maintain a
strong balance sheet to support its growth objectives. The fulfillment of this
objective has been facilitated by strong cash flows and the Company's issuance
of its Common Stock as all or part of the consideration used in its recent
acquisitions. The Company believes that, absent any additional acquisitions,
future cash flows from operations (with seasonal needs supplemented by
borrowings under its Credit Facility) will be sufficient to service debt and
lease payments and to fund capital expenditures and working capital
requirements.
DEPARTMENT STORES
Proffitt's. The Proffitt's chain operates 19 department stores located in
the Southeast and mid-Atlantic regions of the United States, with twelve of its
stores located in Tennessee. Proffitt's stores average approximately 95,000
gross square feet and approximately $149 in net sales per square foot of selling
space. The Proffitt's stores offer moderate to better brand name fashion
apparel, shoes, accessories, cosmetics and decorative home furnishings. Major
brands found in a typical Proffitt's store include Liz Claiborne, Calvin Klein,
Jones New York, Polo/Ralph Lauren, Tommy Hilfiger, Nautica, Marisa Christina,
Enzo, Nine West, Timberland, Levi's, Clinique, Lancome, and Estee Lauder.
Proffitt's stores are principally anchor stores in leading regional or community
malls. The Proffitt's chain is headquartered in Alcoa, Tennessee.
McRae's. The McRae's chain operates 29 stores located in four Southeastern
states, with 26 of its stores located in Mississippi and Alabama. McRae's stores
average approximately 101,000 gross square feet and approximately $183 in net
sales per square foot of selling space. The merchandise selection of the McRae's
chain is very similar to that of the Proffitt's chain with modifications for
regional tastes. The McRae's chain is headquartered in Jackson, Mississippi.
Younkers. Younkers is a leading fashion department store chain operating
48 stores located in Iowa, Nebraska, Wisconsin, Michigan, Illinois, Minnesota
and South Dakota. The Younkers stores average approximately 97,000 gross square
feet and approximately $149 in net sales per square foot of selling space.
Younkers' stores are generally located in mid-sized to smaller cities where
Younkers is one of the primary department stores and competition is more limited
than in major metropolitan areas.
Younkers stores are full-line department stores which offer a merchandise
selection similar to Proffitt's with modifications for regional taste. Younkers
also sells furniture and operates restaurants in certain of its stores. The
Younkers chain is headquartered in Des Moines, Iowa.
Parisian. The Parisian chain operates 40 specialty department stores
located in nine states, with 33 of its stores located in the Southeast and the
remainder located in the Midwest. The Parisian stores average approximately
107,000 gross square feet and approximately $228 in net sales per square foot of
selling space. Parisian's stores are generally anchor stores in enclosed
regional and premium malls.
Parisian carries moderate to better apparel, cosmetics, shoes, accessories
and gifts customarily found in other quality department stores, but does not
carry home furnishings, housewares, or furniture. In addition to popular brands
found in the Company's other department stores, Parisian carries premium lines
such as Brighton, Robert Talbott, Armani, Coach, and MAC cosmetics. Parisian
seeks to create a special shopping experience in its stores through carefully
selected fashion merchandise assortments, attractive store design, exciting
visual presentations and promotional events, and personal amenities that enhance
customer convenience and comfort.
The Parisian chain is headquartered in Birmingham, Alabama. Parisian stores
overlap with McRae's and Proffitt's stores in certain markets. In several
instances, these stores serve as anchor stores in the same mall. The Company
believes that the product offerings and image of the Parisian chain are distinct
and allow for the successful coexistence of these stores.
Herberger's. The Herberger's chain operates 39 stores located in ten
states throughout the Midwest and Great Plains states. Herberger's stores
average approximately 64,000 gross square feet and approximately $143
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in net sales per square foot of selling space. Most Herberger's stores are
located in rural population centers where Herberger's is generally the leading
brand name department store. Such markets typically encompass a retail trade
area ranging in size from approximately 50,000 to 300,000 people, although
certain stores are in larger markets where Herberger's believes it successfully
fulfills the customer's desire for a "neighborhood" department store.
Brands typically found in a Herberger's store include Liz Claiborne, Susan
Bristol, Chaps by Ralph Lauren, Calvin Klein, Woolrich, Timberland, Nike and
Estee Lauder. Prior to its acquisition by the Company, the size and location of
the Herberger's chain made it difficult to establish relationships with certain
popular and premium vendors as an independent company. As one of the Company's
chains, Herberger's has recently received commitments to introduce key brands
such as Tommy Hilfiger, Nautica, and Lancome in certain of its locations during
1997. The Herberger's chain is headquartered in St. Cloud, Minnesota.
Prior to its merger with the Company, Herberger's did not have an existing
proprietary credit card program. Instead, Herberger's had participated in a
co-branded VISA(R) program with a third-party financial institution which has
been terminated. On May 15, 1997, the Company introduced a proprietary credit
card at the Herberger's stores. Based on experience in its other chains, the
Company believes that the introduction of the proprietary credit card will
increase sales, improve customer loyalty and generate additional finance charge
income. The Herberger's proprietary credit card program will be administered
from the Company's central credit card processing center located in Jackson,
Mississippi.
Herberger's stores overlap with Younkers stores in Appleton, Wisconsin and
Waterloo, Iowa. The Company has announced that the Herberger's stores in
Appleton and Waterloo will be converted to Younkers stores to better leverage
advertising and promotion expenses.
MERCHANDISING
The Company's merchandising strategy is to provide middle to upper income
customers a wide assortment of quality fashion apparel, shoes, accessories,
cosmetics, and decorative home furnishings at competitive prices. The Company's
commitment to a branded merchandising strategy, enhanced by its merchandise
presentation and high level of customer service, makes it a preferred
distribution channel for premier brand-name merchandise. Key brands featured
include Liz Claiborne, Marisa Christina, Susan Bristol, Karen Kane, Jones New
York, Polo/Ralph Lauren, Tommy Hilfiger, Nautica, Calvin Klein, Guess, Haggar,
Estee Lauder, Clinique, Lancome, Vanity Fair, Nine West, Enzo, Coach, Brighton,
and Timberland. The Company's large scale and proven track record with these
vendors has enabled the Company to introduce certain of these brands into
acquired stores which prior to combining with the Company did not have access to
these vendors. The Company believes that the introduction of these key brands
will increase revenues and improve gross margins. The Company supplements its
name brand assortments with high quality private brands in selected merchandise
categories.
Private brand offerings are intended to provide national brand quality at
lower prices. During fiscal 1996 private brand offerings comprised approximately
6.0% of the Company's net sales. The Company believes that the extension of
certain existing private brands such as RBM and River Trader across the
Proffitt's, McRae's, Younkers and Herberger's chains, the introduction of
Parisian Signature as a premium brand in the stores of these chains, and the
introduction of other new private brands will enhance customer loyalty and
contribute to improved revenues and gross margin.
The Company has developed a detailed knowledge of each of its regional
markets and customer bases. This market knowledge and expertise has been gained
through the Company's regional merchandising structure in conjunction with
frequent store visits by senior management and merchandising personnel, as well
as, use of on-line merchandise information. The Company believes it is
successful in tailoring each store's merchandise assortments to the
characteristics of its markets and responding to demographic and customer
profiles.
The Proffitt's Merchandising Group coordinates merchandising planning,
execution, visual presentation, marketing, and advertising activities among the
chains. By so doing, the Proffitt's Merchandising Group
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enables the Company to leverage its purchasing power, monitor the performance of
brands and categories of merchandise on a per store and per buyer level, and
ensure consistency in standards across all of the chains. The Company believes
that the Proffitt's Merchandising Group will improve merchandise flow throughout
the Company, resulting in higher sales and margins and improvements in inventory
turnover.
Certain departments in the Company's stores are leased to independent
companies in order to provide high quality service and merchandise where
specialization and expertise are critical and economics do not justify the
Company's direct participation in the business. Leased departments include fine
jewelry, beauty salon, and maternity departments. The terms of the lease
agreements typically are between one and three years and require the lessee to
pay for fixtures and provide its own employees. Leased department sales are
included in the Company's net sales. Management regularly evaluates the
performance of the leased departments and requires compliance with established
customer service guidelines. See Note 1 to the Company's Consolidated Financial
Statements.
PRICING
The Company's primary merchandise focus is on moderate to better nationally
branded merchandise and private brands. Management believes that customers
respond to promotional events more favorably than they do to "everyday low
pricing." Accordingly, while the Company continues to maintain a competitive
pricing structure that provides value to its customers, the Company's business
includes various promotional events throughout the year.
The Company recognizes that competitors sometimes price merchandise below
the Company's prices. In such situations, it is the Company's policy to match
competitor's prices. Accordingly, sales associates have the authority to reduce
the price of any merchandise if the customer has seen the same item advertised
or sold at a lower price in the same geographic market.
PURCHASING AND DISTRIBUTION
The Company purchases merchandise from numerous suppliers. Management
monitors the Company's profitability and sales history with each supplier and
believes it has alternative sources available for each category of merchandise
it purchases. Management believes it has good relationships with its suppliers.
The 85,000 square foot distribution facility serving the Proffitt's chain
is located in metropolitan Knoxville, Tennessee, and the 164,000 square foot
distribution center for the McRae's chain is located in Jackson, Mississippi.
The Younkers chain is served by two distribution facilities. A 182,000 square
foot center in Green Bay, Wisconsin serves Younkers' northern stores, and a
120,000 square foot facility in Ankeny, Iowa serves Younkers' southern stores.
Parisian's 125,000 square foot distribution facility is located in Birmingham,
Alabama. Herberger's operates a 98,000 square foot distribution center near St.
Cloud, Minnesota.
The Company believes its distribution centers effectively utilize current
technology. The Company utilizes UPC bar code technology which is designed to
move merchandise onto the selling floor more quickly and cost-effectively by
allowing vendors to deliver floor-ready merchandise to the distribution
facilities. For example, high speed automated conveyor systems are capable of
scanning bar coded labels and diverting cartons to the proper merchandise
processing areas. Some types of merchandise are being processed in the receiving
area and immediately "cross-docked" to the shipping dock for delivery to the
stores. Certain processing areas are staffed with personnel equipped with
hand-held radio frequency terminals that can scan a vendor's bar code and
transmit the necessary information to a computer to check-in merchandise. As
utilization of this technology increases, it is expected to create a nearly
paperless environment for the distribution function.
The Company believes that opportunities may arise in the future to reduce
the number of its distribution centers, further improving the Company's
competitive cost structure. The Company is also undertaking several initiatives
to increase the percentage of floor-ready merchandise handled by its
distribution centers. Management believes that increases in the percentage of
floor-ready merchandise will reduce costs and improve the flow of goods to the
stores thereby improving inventory turnover.
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MANAGEMENT INFORMATION SYSTEMS
The Company's information systems provide information necessary for:
management operating decisions; sales and margin management; inventory control,
profitability monitoring by many measures (brand, family of business, buyer,
store, division), cost reduction programs; and gauging the success of customer
service enhancements. Data processing systems include point-of-sale reporting,
purchase order management, receiving, merchandise planning and control, payroll,
general ledger, credit card administration, and accounts payable. Bar code
ticketing is used, and scanning is utilized at all point-of-sale terminals to
ensure timely sales and margin data compilation and to provide for inventory
control monitoring. Information is made available on-line to merchandising staff
and store management on a timely basis, thereby reducing the need for paper
reports. The Company uses electronic data interchange ("EDI") with certain of
its vendors to facilitate timely merchandise replenishment. The Company believes
that the further use of EDI with its vendors will improve inventory turnover and
lower the administrative costs associated with invoice processing and
settlement.
The Company has historically upgraded, and expects to continue to upgrade,
its information systems to improve operations and support future growth. The
Company estimates it will make capital expenditures of approximately $20 million
to $25 million over the next three years for enhancements to its management
information systems. The Company has engaged IBM to lead the structure, design
and implementation of state-of-the-art systems.
MARKETING
The Company's advertising and promotions are coordinated to reinforce its
market position as a fashion department store selling quality merchandise at
competitive prices. Advertising is divided among fashion advertising, price
promotions, and special events.
The Company uses a multi-media approach, including newspaper, television,
radio, and direct mail. The Company's advertising and special events are
produced by each chain's in-house sales promotion staff in conjunction with
outside advertising agencies. The Company utilizes data captured through the use
of its proprietary credit cards to develop segmented advertising and promotional
events targeted at specific customers who have established purchasing patterns
for certain brands, departments, and store locations. To promote its image as
the fashion leader in its markets, the Company also sponsors fashion shows and
in-store special events highlighting the Company's key brands. The Proffitt's
Merchandising Group coordinates and assists the stores' marketing and
advertising to maintain quality and obtain better advertising rates. See
"-- Merchandising."
PROPRIETARY CREDIT CARDS
The Company issues proprietary credit cards for each of the Proffitt's,
McRae's, Younkers, and Parisian chains and introduced a Herberger's credit card
on May 15, 1997. Approximately 46.1% of net sales (excluding Herberger's sales
because Herberger's did not have a proprietary credit card) in fiscal 1996 were
charged to the Company's proprietary credit cards. Frequent use of the Company's
proprietary credit cards by customers is an important element in the Company's
marketing and growth strategies and generates significant finance charge income
which augments the income received from the sale of merchandise. The Company
believes that proprietary credit card holders shop more frequently with the
Company, purchase more merchandise, and are generally more loyal to the Company
than are customers who pay with cash or third-party credit cards. As previously
mentioned, the Company also makes frequent use of the names and addresses of its
proprietary credit card holders in direct marketing efforts. The introduction of
a proprietary credit card will allow Herberger's to participate in the Company's
credit card based promotional activities.
The Company seeks to expand the number and use of its proprietary credit
cards by, among other things, providing incentives to sales associates to open
"instant credit" accounts, which can generally be opened within approximately
three minutes through use of an automated voice response unit which provides
rapid credit checks. Also, customers who open accounts are entitled to certain
discounts on initial and subsequent purchases. At Younkers stores, the Company
has introduced a "Younkers Gold Card" to preferred customers which enables
cardholders to receive "points" for each credit card purchase. Points can be
redeemed for
47
<PAGE> 48
discounts on subsequent purchases. Historically, cardholders redeeming points
have tended to make purchases in addition to the merchandise purchased on
redemption of points. Based on its experience with the Younkers Gold Card, the
Company is evaluating whether to introduce the gold card concept in its other
chains.
The Company has approximately 4.0 million credit cards outstanding, of
which approximately 2.0 million accounts have been active within the last six
months. The Company employs state-of-the-art systems to monitor and administer
its credit cards through the Vision 21 system. All credit card service is
currently conducted centrally from the Company's facility in Jackson,
Mississippi, except the Parisian credit card service which will move to Jackson
on or about June 15, 1997. The Company believes that it takes appropriate steps
to control losses in its credit card portfolio. For instance, the Company
conducts behavior scoring on all active card holders semi-annually and utilizes
the results to adjust credit limits and/or terminate certain accounts.
PROPOSED CREDIT CARD BANK
The origination of receivables at the operating division level subjects the
Company to regulatory compliance in each of the 24 states in which it currently
operates at least one store. State laws, among other things, impose interest
ceilings and may restrict the application of certain other finance charges
(e.g., late fees). The Company believes that the formation of a nationally
chartered bank (to be created as a wholly-owned subsidiary) as the issuer of its
proprietary credit cards would enhance its profitability by: (i) allowing for
the standardization of terms across all divisions, (ii) providing for the
exportation of interest rates and late fee income across the franchise states,
and (iii) allowing for future flexibility and potential income generation
through various other programs (e.g., co-branded MasterCard(R) and VISA credit
cards). The Company is considering forming a special purpose credit card bank to
issue proprietary credit cards on behalf of the Company's various chains. The
Company expects that a credit card bank would create efficiencies and cost
savings, and enhance finance charge revenue.
CUSTOMER SERVICE
The Company believes that personal customer attention builds loyalty and
that the Company's sales associates provide a level of customer service superior
to its competitors. Each store is staffed with knowledgeable, friendly sales
associates skilled in salesmanship and customer service. Sales associates
maintain customer records, send personalized thank-you notes, and communicate
personally with customers to advise them of special promotions and new
merchandise offerings. Superior customer service is encouraged through the
development and monitoring of sales and productivity goals and through specific
award and recognition programs. The Company also builds customer loyalty through
various amenities including special parking spaces for expectant mothers, infant
changing tables in customer restrooms on each floor of a store, in-store cooking
and decorating classes and fashion shows.
ASSOCIATES
On March 31, 1997, the Company employed approximately 27,000 associates, of
which approximately 13,000 were employed on a part-time basis. The Company hires
additional temporary employees and increases the hours of part-time employees
during seasonal peak selling periods. Approximately 20 associates in a Younkers
distribution center are covered by collective bargaining agreements. The Company
considers its relations with its employees to be generally good.
PROPERTIES
Proffitt's leases a 44,000 square foot administrative office and owns an
85,000 square foot distribution center, both of which are located in
metropolitan Knoxville, Tennessee.
McRae's owns a 272,000 square foot administrative office building and a
164,000 square foot distribution center in Jackson, Mississippi. The Jackson
facility also serves as the Company's operations center and houses central
support functions for all of the divisions including certain accounting
functions, inventory control, management information systems, credit
administration and distribution management.
48
<PAGE> 49
Younkers leases a 127,000 square foot administrative office located in Des
Moines, Iowa. Younkers owns a 120,000 square foot distribution center and a
182,000 square foot distribution center in Ankeny, Iowa and Green Bay,
Wisconsin, respectively.
Parisian owns a 125,000 square foot administrative office building and a
125,000 square foot distribution facility, both of which are located in
Birmingham, Alabama. The Birmingham office building also serves as the Company's
administrative headquarters for various support areas for all of the divisions
including the Proffitt's Merchandising Group, Finance and Treasury, Budgeting
and Planning, Legal, and Human Resources.
Herberger's owns a 58,000 square foot administrative office located in its
St. Cloud, Minnesota store, and a 98,000 square foot distribution center located
in Sartell, Minnesota.
The Company operates 175 stores in 24 states with 16.2 million gross square
feet and 13.3 million selling square feet. The Company owns 26 of its store
locations and leases 149. Store leases generally require the Company to pay a
base rent plus an amount based on a percentage of sales. Generally, the Company
is responsible under its store leases for a portion of mall promotion and common
area maintenance expenses and for certain utility, property tax and insurance
expenses.
COMPETITION
The department store business is highly competitive. The Company's stores
compete with national and regional department store chains. The Company also
competes with local stores that carry similar categories of merchandise. The
Company believes it has a competitive price structure and generally competes on
the basis of pricing, quality, merchandise selection, availability of credit
under its various proprietary credit card programs, customer service and
amenities, and store design and locations. The Company's success also depends in
part on its ability to anticipate and respond to changing merchandise trends and
customer preferences and demands in a timely manner. See "Risk
Factors -- Competition."
LEGAL PROCEEDINGS
The Company is involved in various legal proceedings arising from its
normal business activities. Management believes that none of these legal
proceedings will have a material adverse effect on the financial condition or
results of operations of the Company.
49
<PAGE> 50
MANAGEMENT
The Company's directors and executive officers are as follows:
<TABLE>
<CAPTION>
AGE AS OF
MAY 15,
NAME 1997 POSITION
- ---- --------- --------
<S> <C> <C>
R. Brad Martin............................ 45 Chairman of the Board of Directors and
Chief Executive Officer
James A. Coggin........................... 54 President and Chief Operating Officer
Julia A. Bentley.......................... 38 Senior Vice President of Investor
Relations and Planning and Secretary
Douglas E. Coltharp....................... 36 Executive Vice President and Chief
Financial Officer
Brian J. Martin........................... 40 Executive Vice President of Law and
General Counsel
Robert M. Mosco........................... 47 President and Chief Executive Officer
of Proffitt's Merchandising Group
Donald E. Wright.......................... 39 Senior Vice President of Finance and
Accounting
Dawn H. Robertson......................... 54 President and Chief Executive Officer
of McRae's
Toni E. Browning.......................... President and Chief Executive Officer
of Proffitt's Division
William D. Cappiello...................... 53 President and Chief Executive Officer
of Parisian
Frank E. Kulp, III........................ 53 President and Chief Executive Officer
of Herberger's
Mark Shulman.............................. President and Chief Executive Officer
of Younkers
Bernard E. Bernstein...................... 65 Director
Edmond D. Cicala.......................... 71 Director
Ronald de Waal............................ 44 Vice Chairman of the Board of
Directors and Director
Gerard K. Donnelly........................ 63 Director
Donald F. Dunn............................ 71 Director
Michael S. Gross.......................... 35 Director
Donald E. Hess............................ 48 Director
G. David Hurd............................. 67 Director
C. Warren Neel............................ 58 Director
Marguerite W. Sallee...................... 50 Director
Gerald Tsai, Jr........................... 67 Director
</TABLE>
R. Brad Martin has served as a Director since 1984 and became Chairman of
the Board in February 1987 and Chief Executive Officer in July 1989. Mr. Martin
previously served as President from July 1989 until March 1994 and from
September 1994 to March 1995. Mr. Martin serves on the Board of Directors of
Delta Life Corporation, First Tennessee National Corporation, Harrah's
Entertainment, Inc., and Pilot Corporation. Mr. Martin and Brian J. Martin are
brothers.
50
<PAGE> 51
James A. Coggin was named President and Chief Operating Officer of the
Company in March 1995 and served as Executive Vice President and Chief
Administrative Officer of the Company from March 1994 to March 1995. From June
1978 to March 1994, Mr. Coggin served as Executive Vice President and Chief
Administrative Officer of McRae's. Mr. Coggin joined McRae's in 1971.
Julia A. Bentley was named Senior Vice President of Investor Relations and
Planning and Secretary of the Company in March 1994. From January 1993 to March
1994, Ms. Bentley served as Senior Vice President of Finance, Chief Financial
Officer, Secretary and Treasurer, and from March 1989 to January 1993, she
served as Vice President, Chief Financial Officer, Secretary, and Treasurer. Ms.
Bentley is a Certified Public Accountant and joined the Company in 1987 after
several years with an international public accounting firm.
Douglas E. Coltharp joined the Company in November 1996 as Executive Vice
President and Chief Financial Officer. Mr. Coltharp was with NationsBank from
1987 to November 1996, where he held a variety of senior positions including his
most recent post of Senior Vice President of Corporate Finance.
Brian J. Martin was named Executive Vice President of Law and General
Counsel in April 1997. He served as Senior Vice President of Human Resources and
Law and General Counsel from August 1995 to April 1997 and served as Senior Vice
President and General Counsel of the Company from March 1995 to August 1995. He
joined the Company in 1994 as Vice President and General Counsel. From June 1990
to May 1994, Mr. Martin was affiliated with the Indianapolis, Indiana law firm
of Barnes & Thornburg. Mr. Martin served as Assistant Solicitor General of the
United States between January 1988 and June 1990. Mr. Martin and R. Brad Martin
are brothers.
Robert M. Mosco was promoted to President and Chief Executive Officer of
Proffitt's Merchandising Group in October 1996. Between February 1996 and
October 1996, Mr. Mosco served as President and Chief Executive Officer of
Younkers. Mr. Mosco served as President and Chief Operating Officer of Younkers
between 1992 and January 1996. From 1989 to 1992, he held the position of
Executive Vice President of Merchandising and Marketing for Younkers. Mr. Mosco
joined Younkers in 1987. Mr. Mosco began his retail career with Gimbel's and
later worked for Rich's Department Stores.
Donald E. Wright joined the Company in April 1997 as Senior Vice President
of Finance and Accounting. Mr. Wright is a Certified Public Accountant and was a
Partner with the international accounting firm of Coopers & Lybrand. He joined
Coopers & Lybrand in 1979.
Dawn H. Robertson joined the Company in May 1997 as President and Chief
Executive Officer of McRae's. Ms. Robertson previously worked for the Kaufmann's
division of May Department Stores, where she most recently held the post of
Senior Vice President and General Merchandise Manager. Ms. Robertson joined
Kaufmann's in 1985, and prior to that, she held various merchandising positions
with the G. Fox division of May and with R.H. Macy.
Toni E. Browning was appointed President and Chief Executive Officer of the
Proffitt's department stores in May 1997. Ms. Browning was most recently Senior
Vice President of Stores for Younkers. She has held previous department store
and merchandising positions with Dayton Hudson Corporation and with both the
Lazarus and Blocks Divisions of Federated/Allied Stores.
William D. Cappiello joined the Company in April 1997 as President and
Chief Executive Officer of Parisian. Mr. Cappiello held a variety of management
and executive positions in both merchandising and store areas with R.H. Macy &
Co. between 1971 and April 1997. From June 1993 to April 1997, he served as
President of Macy's West, Inc. and from August 1985 to May 1993, he was Director
of Stores for Macy's West.
Frank E. Kulp, III was named President and Chief Executive Officer of
Herberger's in March 1997. Between November 1995 and March 1997, he was a Senior
Vice President and General Merchandise Manager for Younkers. From 1987 to 1995,
Mr. Kulp held the post of President and Chief Operating Officer of Lamonts, a
department store chain headquartered in Bellevue, Washington. He held previous
merchandis-
51
<PAGE> 52
ing management positions with Donaldson's and Lazarus department stores. Lamonts
filed a petition for reorganization under the Bankruptcy Code in January 1995.
Mark Shulman joined the Company in May 1997 as President and Chief
Executive Officer of the Younkers department stores. Prior to joining the
Company, Mr. Shulman was Executive Vice President and Chief Merchandising
Officer of Stage Stores, Inc. since 1994. He was previously the President of the
Dress Division for Leslie Fay, Inc., held the posts of President and Chief
Operating Officer of Bonjour, Inc., and served as President and Chief Executive
Officer of both Henri Bendel and Ann Taylor Stores Corporation.
Bernard E. Bernstein has served as a director since 1987. Mr. Bernstein is
a partner in the Knoxville, Tennessee law firm of Bernstein, Stair & McAdams.
Edmond D. Cicala has served as a director since 1987. Mr. Cicala is
President of Edmond Enterprises, Inc., and is the retired Chairman and Chief
Executive Officer of the Goldsmith's Division of Federated Department Stores.
Mr. Cicala is a Director of National Commerce Bancorporation, Memphis, Tennessee
and Evans, Inc.
Ronald de Waal has served as a director since 1985. He was elected Vice
Chairman of the Board of Directors in April 1997. Mr. de Waal is Chairman of We
International, B.V., a Netherlands corporation, which operates more than 250
fashion specialty stores in Belgium, the Netherlands, Switzerland, and Germany.
Gerard K. Donnelly has served as a director since 1996. Mr. Donnelly has
been Chairman of Princeton Middletown Partners, Inc., a consulting company,
since February 1994. From 1990 to January 1994, Mr. Donnelly was President,
Chief Executive Officer, and director of H. C. Prange Company, a specialty
retailer. H. C. Prange filed a petition for reorganization under the Bankruptcy
Code in September 1994.
Donald F. Dunn has served as a director since 1996. Mr. Dunn is a retired
Senior Vice President and director of Allied Stores Corporation. Mr. Dunn serves
on the Board of Directors of Tech Data Corporation.
Michael S. Gross has served as a director since 1994. Mr. Gross is Vice
President of Apollo Capital Management, Inc., the general partner of Apollo
Advisors, L.P. Mr. Gross serves on the Board of Directors of Converse, Inc.,
Florsheim Group, Inc., Furniture Brands International, Inc., Allied Waste, Inc.
and Urohealth, Inc.
Donald E. Hess in October 1996 became a Director and was named Chairman of
Parisian in April 1997. He served as President and Chief Executive Officer of
Parisian from October 1996 to April 1997. Mr. Hess served as President and Chief
Executive Officer between 1986 and October 1996. He serves on the Board of
Directors of AmSouth Bancorporation.
G. David Hurd has served as a director since 1996. Mr. Hurd served as
Chairman and Chief Executive Officer of The Principal Financial Group, an
insurance and financial services company, from 1989 until his retirement in
December 1994. Mr. Hurd is the Emeritus Chairman of The Principal Financial
Group.
C. Warren Neel has served as a director since 1987. Dr. Neel is Dean of the
College of Business Administration at the University of Tennessee, Knoxville.
Dr. Neel serves on the Board of Directors of American Healthcorp, Inc., Clayton
Homes, Inc., O'Charley's, Inc., and The Promus Companies, Inc.
Marguerite W. Sallee has served as a director since 1996. Ms. Sallee is
President and Chief Executive Officer of Corporate Family Solutions. Ms. Sallee
serves on the Board of Directors of MagneTek, Inc., and NationsBank of Tennessee
and Kentucky.
Gerald Tsai, Jr. has served as a director since 1993. Mr. Tsai is Chairman,
President, and Chief Executive Officer of Delta Life Corporation. Mr. Tsai
serves on the Board of Directors of Meditrust, Rite Aid Corporation, Sequa
Corporation, Triarc Companies, Inc., Delta Life and Annuity Company and Zenith
National Insurance Corporation.
52
<PAGE> 53
The business association of the persons as shown has been continued for
more than five years unless otherwise noted.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth, for the years ended February 1, 1997,
February 3, 1996, and January 28, 1995, the cash compensation paid by the
Company, as well as other compensation paid or accrued for these years to the
Company's Chief Executive Officer and to each of the other four highest
compensated executive officers ("Named Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
---------------------------
SECURITIES
ANNUAL COMPENSATION UNDERLYING
------------------------------------------- RESTRICTED OPTIONS
NAME & PRINCIPAL OTHER ANNUAL STOCK AWARD(S) GRANTED ALL OTHER
POSITION YEAR SALARY ($) BONUS ($)(A) COMPENSATION ($)(B) (#) COMPENSATION($)
---------------- ---- ---------- ------------ --------------- -------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
R. Brad Martin............ 1996 $536,031 $609,382(c) $27,700(d) $683,321(e)(f) $ 7,800(g)
Chairman of the Board 1995 445,833 233,250(h) 27,700(d) 312,000(i) 20,000 7,140(g)
and Chief Executive 1994 383,334 293,438(i) 27,700(d) 95,000 7,140(g)
Officer
James A Coggin(k)......... 1996 450,000 376,450(c) 373,750(e)(f)
President and Chief 1995 358,333 108,600(h) 20,000
Operating Officer 1994 270,833 208,125(j) 60,000
Robert M. Mosco(k)........ 1996 450,000 229,167 160,430(e) 60,000 37,500(l)
President and Chief 1995
Executive Officer 1994
of Proffitt's
Merchandising
Group
W. Thomas Gould(k)........ 1996 750,000 372,799(m) 100,000
Former Vice Chairman 1995
of Board and 1994
Chairman the
Younkers Division
Tom R. Amerman(k)......... 1996 300,000 87,750 25,000
Former Executive 1995
Vice President 1994
of Special
Projects
</TABLE>
- ---------------
(a) Amounts awarded under the Incentive Compensation Plan for the respective
fiscal years, even if deferred.
(b) As of February 1, 1997, the number and value (based on the $36.25 closing
price of Common Stock as of January 31, 1997) of shares of restricted stock
held by each of the Named Officers were as follows: Mr. Martin, 35,000
shares ($1,268,750); Mr. Coggin, 20,000 shares ($725,000); and Mr. Mosco,
12,500 shares ($453,125). Messrs. Gould and Amerman had no restricted stock
holdings at that date.
(c) Includes stock grants to Messrs. Martin and Coggin of 5,000 and 2,500 shares
of the Company's Common Stock, respectively.
(d) In February 1989, the Company entered into a compensation agreement with R.
Brad Martin which provides for a $500,000 interest-free loan due January
31, 1999 or upon Mr. Martin's termination of employment with the Company.
Other Annual Compensation represents imputed interest on that interest-free
loan.
53
<PAGE> 54
(e) In 1996, Messrs. Martin, Coggin, and Mosco were granted 25,000, 15,000, and
12,500 shares of Company Common Stock under a Restricted Stock Grant
Agreement under the Company's 1994 Long-Term Incentive Plan. Restrictions
shall lapse as a function of the Company achieving certain performance
goals. Under the Plan, shares will be earned ("Earned Shares") on the basis
of achieving these goals for 1996, 1997, and 1998. Restrictions will be
removed from 25% of such Earned Shares at the time they are earned, and
restrictions shall be removed from an additional 25% of such Earned Shares
at the end of each of the following three years. As of February 1, 1997,
8,333, 5,000, and 4,167 shares were Earned Shares for Messrs. Martin,
Coggin, and Mosco, respectively, and 2,083, 1,250, and 1,042 shares were
vested for Messrs. Martin, Coggin, and Mosco, respectively.
(f) Includes restricted stock awards of 10,000 and 5,000 shares of the Company's
Common Stock for Messrs. Martin and Coggin, respectively, which were
granted at the market price of $36.25 on the January 31, 1997 date of grant
(valued at $362,500 and $181,250 for Messrs. Martin and Coggin,
respectively). The awards will fully vest one year from the date of grant.
(g) Economic benefit of split dollar life insurance policy.
(h) Includes stock grants to Messrs. Martin and Coggin of 5,000 and 1,500 shares
of the Company's Common Stock, respectively, which were granted at the
market price of $32.25 on the March 21, 1996 date of grant (valued at
$161,250 and $48,375 for Messrs. Martin and Coggin, respectively).
(i) Represents a restricted stock award of 13,000 shares of the Company's Common
Stock which was granted at the market price of $24.00 on the February 12,
1996 date of grant. The award fully vested one year from the date of grant.
(j) Includes stock grants to Messrs. Martin and Coggin of 5,000 and 2,500 shares
of the Company's Common Stock, respectively, which were granted at the
market price of $21.50 on the February 6, 1995 date of grant (valued at
$107,500 and $53,750 for Messrs. Martin and Coggin, respectively).
(k) The hire date for Mr. Coggin was April 1, 1994 and for Messrs. Amerman,
Gould, and Mosco was February 3, 1996. Mr. Amerman resigned effective
February 7, 1997. Mr. Gould terminated his employment effective April 1,
1997. See "-- Mr. Gould's Employment Agreement."
(l) One-time relocation bonus.
(m) Reimbursement payment of excise, federal, and Medicare taxes.
EMPLOYMENT CONTRACTS
All of the Named Officers and certain other officers have employment
agreements with the Company. All agreements fix the Named Officers minimum base
compensation for the fiscal year and provide for participation by such officers
in employment benefit plans as the Company may adopt. The agreements for Messrs.
Martin, Coggin, and Mosco expire on May 9, 2002, October 11, 1999, and February
5, 2000, respectively. Mr. Amerman resigned on February 7, 1997, and his
agreement expired on that date. For terms of Mr. Gould's employment, see "-- Mr.
Gould's Employment Agreement." Under the terms of each agreement, each Named
Officer (excluding Mr. Gould) is entitled to receive his base salary for the
remainder of his employment period in the event he is terminated without cause.
If the termination is involuntary and due to a change in control or a potential
change in control, he is entitled to receive his base salary then in effect for
the greater of the remaining term of his agreement or twenty-four months. Annual
base salaries currently in effect are as follows: Messrs. Martin, $625,000;
Coggin, $510,000; and Mosco, $500,000. A "Change in Control" is defined as: (i)
the acquisition of 25% or more of the combined voting power of the Company's
outstanding securities, (ii) a tender offer, merger, sale of assets, or other
business combination which results in the transfer of a majority of the combined
voting power of the Company or any successor entity, or (iii) during any two
consecutive year period, the failure to elect a majority of the individuals
constituting the Board of Directors of the Company prior to the commencement of
such period, unless the election or nomination of any replacement Directors was
approved by vote of at least two-thirds of the Directors of the Company then
still in office who were Directors of the Company at the beginning of such
period. A "Potential Change in Control" is defined as: (i) the approval by the
shareholders of the Company of an agreement which, if consummated, will result
in a change of control or (ii) the acquisition of 5% or more of the outstanding
voting securities of the Company and the adoption by the Company's Directors of
a resolution to the effect that a potential change in control of the Company has
occurred.
54
<PAGE> 55
The Company also entered into an employment agreement with Robert M. Mosco
in conjunction with the Company's February 3, 1996 business combination with
Younkers. Under the terms of that Employment Agreement, Mr. Mosco had the right
to terminate his employment with the Company in the 13th month after the
business combination. In such event, he would have received a lump sum severance
payment in an amount equal to (i) salary through the date of termination and
bonus for the then-current year, (ii) three times Mr. Mosco's highest annual
salary in effect during the 12-month period prior to termination and three times
Mr. Mosco's average bonus in respect of the three immediately preceding fiscal
years, (iii) any unvested benefit under Younkers' defined benefit pension plan,
and (iv) any unvested employer contributions under Younkers' defined
contribution plan. In connection with Mr. Mosco's entering into a new Employment
Contract that expires on February 5, 2000, Mr. Mosco waived his right to
terminate employment and receive such compensation. In connection with that
waiver, the Company paid Mr. Mosco $1.1 million on February 3, 1997.
MR. GOULD'S EMPLOYMENT AGREEMENT
The Company entered into the employment agreement with Mr. Gould in
conjunction with the Company's February 3, 1996 acquisition of Younkers.
February 3, 1996 was the effective date of the agreement ("Effective Date"). Mr.
Gould's employment agreement, as amended ("Employment Agreement") has a five
year term and provides that Mr. Gould will be paid a minimum annual base salary
of $750,000. Mr. Gould's Employment Agreement provides that each of the Company
and Mr. Gould may terminate Mr. Gould's Employment Agreement prior to its
expiration upon thirty days prior written notice; provided, however, that such
notice may not be provided for at least one year from the Effective Date, and
provided further that Mr. Gould's payments thereunder are not terminated by
virtue of his notice. Mr. Gould terminated his employment with the Company
effective April 1, 1997. Under the terms of the Employment Agreement, the
Company will continue to pay Mr. Gould his annual salary and continue to provide
Mr. Gould with medical and life insurance coverage during the remaining term of
the Employment Agreement. In the event Mr. Gould's payments are subject to an
excise tax under Section 4999 of the Internal Revenue Code, he will receive a
reimbursement payment to offset such tax.
STOCK OPTIONS
The following table contains information concerning the grant of stock
options under the Proffitt's, Inc. 1994 Long-Term Incentive Plan ("Plan") to the
Named Officers as of fiscal year end.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------- POTENTIAL REALIZABLE VALUE
% OF AT ASSUMED ANNUAL RATES
TOTAL OPTIONS OF STOCK PRICE APPRECIATION
OPTIONS GRANTED TO EXERCISE OR FOR OPTION TERM(C)
GRANTED EMPLOYEES BASE PRICE EXPIRATION ---------------------------
NAME (#)(A) IN FISCAL YEAR ($/SHARE)(B) DATE 5% ($) 10% ($)
- ---- ------- -------------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
R. Brad Martin.......... -- -- -- -- -- --
James A. Coggin......... -- -- -- -- -- --
Robert M. Mosco......... 50,000(d) 10.2 $24.50 2/5/06 $ 770,396 $1,952,335
10,000(d) 2.0 39.75 10/28/06 249,986 633,513
W. Thomas Gould......... 100,000(d) 20.4 24.50 4/1/99(e) 1,540,792 3,904,669
Tom R. Amerman.......... 25,000(f) 5.1 24.50 5/8/97(g) 385,198 976,167
</TABLE>
- ---------------
(a) Under the terms of the Plan, the Stock Option Committee retains discretion,
subject to Plan limits, to modify the terms of outstanding options and to
reprice the options.
(b) All options were granted at the market closing price on the date of grant.
No incentive stock options were granted. The exercise price and tax
withholding obligations related to exercise may be paid by delivery of
already owned shares, subject to certain conditions.
55
<PAGE> 56
(c) Potential gains are reported net of the option exercise price but before
taxes associated with exercise. These amounts represent certain assumed
rates of appreciation only. Actual gains, if any, on stock option exercises
are dependent on the future performance of the Common Stock of the Company
and overall stock conditions, as well as the optionholder's continued
employment through the vesting period. The amounts reflected in this table
may not necessarily be achieved.
(d) Options are exercisable in cumulative one-fifth installments commencing six
months from the date of grant (with each subsequent installment vesting on
the anniversary date of grant) with full vesting occurring on the fourth
anniversary of the date of grant.
(e) Mr. Gould resigned April 1, 1997. Under the terms of his Employment
Agreement, all options fully vest upon termination of employment, and he has
two years from the termination date to exercise the vested portion of these
options.
(f) Options are exercisable in cumulative one-third installments commencing six
months from the date of grant (with each subsequent installment vesting on
the anniversary date of grant) with full vesting occurring on the second
anniversary of the date of grant.
(g) Mr. Amerman resigned on February 7, 1997, and under terms of the Plan, he
had 90 days from that date to exercise the vested portion of these options.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to the Named
Officers concerning the exercise of options during 1996 and unexercised options
held at fiscal year end.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR END AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR END (#) FISCAL YEAR END ($)(A)
SHARES ------------------- -----------------------
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
- ---- ------------ ------------ ------------------- -----------------------
<S> <C> <C> <C> <C>
R. Brad Martin........ 0 $ 0 150,000/70,000 $1,870,000/$820,000
James A. Coggin....... 0 0 44,000/36,000 510,000/412,500
Robert M. Mosco....... 0 0 89,106/50,000 2,046,108/470,000
W. Thomas Gould....... 127,500 3,744,215 185,824/80,000 4,349,520/940,000
Tom R. Amerman........ 65,324 993,847 0/16,667 0/195,837
------- ---------- ---------------- -------------------
</TABLE>
- ---------------
(a) Represents the difference between the closing price of the Company's Common
Stock on January 31, 1997 and the exercise price of the options.
CERTAIN TRANSACTIONS
Director Michael S. Gross is one of the founding principals of Apollo
Advisors, L.P., the managing general partner of Apollo Investment Fund, L.P.,
the general partner of Apollo Specialty Retail Partners, L.P. ("Apollo
Specialty"), the holder of the Company's Series A Preferred Stock, which was
converted into Common Stock in June 1996. The Company paid Apollo Specialty $0.8
million in regular dividends and a one-time $3.0 million payment for the early
conversion of the Preferred Stock for the fiscal year ended February 1, 1997.
Bernard E. Bernstein, Chairman of the Human Resources/Compensation
Committee, is a partner in Bernstein, Stair & McAdams, which serves, on
occasion, as legal counsel for the Company.
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<PAGE> 57
In February 1989, the Company made a $500,000 unsecured, interest-free loan
to R. Brad Martin as a supplement to his base pay. Under Mr. Martin's new
employment contract, this loan will be forgiven over a five-year period provided
that he remains employed by the Company.
In February 1997 the Company paid $1.1 million to Robert M. Mosco in
connection with his waiver of his right to terminate an employment agreement and
receive compensation provided for under such agreement. Mr. Mosco entered into a
new Employment Contract at the same time. See "Executive
Compensation -- Employment Contracts."
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PRINCIPAL SHAREHOLDERS
Listed in the following table are the number of shares owned by each
Director, the executive officers named in the Summary Compensation Table above,
and all Directors and officers of the Company as a group as of April 25, 1997.
The table also includes the beneficial owners as of April 25, 1997 of more than
5% of the Company's outstanding Common Stock who are known to the Company.
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER TOTAL SHARES PERCENTAGE OF
(AND ADDRESS IF BENEFICIAL BENEFICIALLY COMMON STOCK
OWNERSHIP EXCEEDS 5%) TITLE OWNED(A) OWNERSHIP
- --------------------------------- ----- ------------ -------------
<S> <C> <C> <C>
R. Brad Martin................... Chairman of the Board and Chief 1,327,423(b) 4.67%
Executive Officer
James A. Coggin.................. President and Chief Operating 85,129 *
Officer
Robert M. Mosco.................. President and Chief Executive 131,527(c) *
Officer of Proffitt's
Merchandising Group
W. Thomas Gould.................. Vice Chairman and Chairman of 315,456(d) 1.11
Younkers
Tom R. Amerman................... Executive Vice President of 16,886(e) *
Special Projects
Bernard E. Bernstein............. Director 16,401(f) *
Edmond D. Cicala................. Director 9,589 *
Ronald de Waal................... Vice Chairman of the Board and 1,250,713 4.43
Director
Gerard K. Donnelly............... Director 5,049 *
Donald F. Dunn................... Director 8,950 *
Michael S. Gross................. Director 2,200(g) *
Donald E. Hess................... Director 407,664(h) 1.44
G. David Hurd.................... Director 6,843 *
Richard D. McRae................. Director
C. Warren Neel................... Director 7,450 *
Harwell W. Proffitt.............. Director
Marguerite W. Sallee............. Director 2,200 *
Gerald Tsai, Jr.................. Director 5,200 *
Fidelity Management and Research
Corporation.................... 1,698,206
6.02 82 Devonshire Street
Boston, Massachusetts
Norwest Bank Minnesota, N.A. as
trustee........................ 2,913,716(j) 10.32
Investors Building
733 Marquette
Minneapolis, MN
All Directors and Officers as a
group (24 persons).............
3,803,906 13.15
</TABLE>
- ---------------
* Owns less than 1% of the total outstanding Common Stock of the Company.
(a) Includes shares that the following persons have a right to acquire within
sixty days after April 25, 1997 through the exercise of stock options:
Bernstein (3,200), Cicala (2,200), de Waal (2,200), Donnelly (2,070), Dunn
(2,070), Gross (1,200), Hurd (2,070), Martin (173,000), Neel (3,200),
Sallee (200), Tsai (2,200), Amerman (8,333), Coggin (58,000), Gould
(215,824), and Mosco (101,106).
(b) Includes: (i) 2,000 shares held by Mr. Martin for his children, (ii) 1,900
shares owned by RBM Venture Company, a company of which Mr. Martin is sole
shareholder, (iii) 100,000 shares held by Mr. Martin as trustee or
co-trustee for his children, (iv) 4,774 shares owned by the R. Brad and
Jean L. Martin Family Foundation, (v) 10,000 shares of restricted stock
which will vest on January 31, 1998, and (vi) 25,000
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<PAGE> 59
shares of restricted stock, the restrictions on which will lapse based on
performance measurements and length of service.
(c) Includes 3,158 shares held in a Company profit sharing and savings plan for
the account of Mr. Mosco. Excludes 16,282 shares reserved by the Company
for issuance to Mr. Mosco with respect to a deferred compensation
arrangement.
(d) Includes 3,577 shares owned by Mr. Gould's wife as to which he disclaims
beneficial ownership. Also includes 18,033 shares held in a Company profit
sharing and savings plan for the account of Mr. Gould. Excludes 84,735
shares reserved by the Company for issuance to Mr. Gould with respect to a
deferred compensation arrangement. Mr. Gould terminated his employment with
the Company effective April 1, 1997.
(e) Mr. Amerman resigned on February 7, 1997. He has 90 days from that date to
exercise the vested portion of his stock options, which total 8,333 shares.
(f) Includes 3,000 shares owned by the Bernard E. Bernstein Defined Benefit
Pension Plan.
(g) Does not include 1,211,801 shares held by Apollo Specialty. Mr. Gross is one
of the founding principals of Apollo Advisors, L.P., the managing general
partner of Apollo Investment Fund, L.P., the general partner of Apollo
Specialty. Mr. Gross disclaims beneficial ownership of all securities held
by Apollo Specialty.
(h) Includes: (i) 180,908 shares owned directly by Mr. Hess, (ii) 174,222 shares
held by Mr. Hess as trustee or co-trustee for his children, and (iii)
52,534 shares held by him as trustee for the children of his sister, Jo Ann
H. Morrison. Does not include: (i) 2,290 shares owned directly by his wife,
(ii) 7,330 shares held by his wife as co-trustee for one of their children,
and (iii) 88,058 shares held by another individual as trustee for Mr. Hess'
children, with respect to which shares Mr. Hess disclaims beneficial
ownership.
(i) Based solely on information provided by the beneficial owner.
(j) Represents shares held in trust for the G.R. Herberger's, Inc. 401(k)
Employee Stock Purchase Plan and Employee Stock Ownership Plan.
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DESCRIPTION OF OTHER INDEBTEDNESS
The following summary of certain agreements and instruments of the Company
does not purport to be complete and is qualified in its entirety by reference to
the various agreements and instruments described, copies of certain of which
have been included as exhibits to various filings by the Company with the
Commission. See "Available Information."
BANK CREDIT FACILITIES
The Company entered into the Credit Facility on June 26, 1997 with the
lenders named therein (the "Lenders") and NationsBank, as agent for the Lenders
(the "Agent"). Capitalized terms that are used but not defined in this section
have the meanings given such terms in the Credit Facility.
The Credit Facility provides for a revolving credit facility (the
"Revolving Credit Facility") of up to $400.0 million (the "Total Revolving
Credit Commitment"), which includes subfacilities of up to $50.0 million for
Letters of Credit and up to $25.0 million for short-term borrowings ("Swing Line
Loans"). The total amount of (i) Revolving Credit Loans, (ii) Swing Line Loans,
(iii) undrawn amounts of Letters of Credit and (iv) reimbursement obligations in
respect of Letters of Credit, may not exceed the lesser of the Total Revolving
Credit Commitment and the Borrowing Base; provided that such Borrowing Base
limitation will be eliminated if any senior indebtedness of the Company is rated
investment grade. The "Borrowing Base" is defined as 60.0% of the difference
between (x) Eligible Inventory and (y) subject to certain qualifications, the
face amount of all letters of credit issued in connection with the purchase of
inventory by the Company.
The Total Revolving Credit Commitment expires on June 26, 2002. In
addition, the Credit Facility requires that the Total Revolving Credit
Commitment be reduced under certain circumstances by net proceeds in excess of
$20.0 million resulting from one or more of certain non-ordinary course asset
sales during any Four-Quarter Period.
Revolving Credit Loans bear interest at a variable rate equal, at the
option of the Company, to (i) the Eurodollar Rate plus the Applicable Interest
Addition or (ii) the Base Rate. Swing Line Loans bear interest at a rate agreed
to by the Company and NationsBank from time to time. Under the terms of the
Credit Facility, the Applicable Interest Addition is adjusted based on the
financial performance of the Company.
The Credit Facility contains a number of covenants, including, among
others, covenants restricting the Company and its subsidiaries with respect to
the incurrence of indebtedness (including contingent obligations); the creation
of liens; the sale, lease, transfer or other disposition of assets; the making
of certain investments and loans; the making of acquisitions; the consummation
of certain transactions such as sales of substantial assets, mergers or
consolidations; transactions with affiliates; the making of capital
expenditures; the taking or failing to take certain actions with respect to
employee pension benefit plans; changing the Company's fiscal year; winding up,
liquidating or dissolving; and entering into agreements which limit the ability
to create liens. In addition, the Credit Facility contains affirmative covenants
including, among others, requirements regarding compliance with laws;
preservation of corporate existence; maintenance of insurance; payment of taxes
and other obligations; maintenance of properties; environmental compliance; the
keeping of books and records; the maintenance of intellectual property; the
continuance in the same or complementary lines of business; and the delivery of
financial and other information to the Agent and the Lenders.
The Company and its subsidiaries are also required to comply with certain
financial tests and maintain certain financial ratios. Certain of these
financial tests and ratios include: (i) maintaining a minimum Consolidated Net
Worth; (ii) preventing the ratio of Consolidated Funded Total Indebtedness to
Consolidated EBITDA from exceeding agreed upon ratios set forth in the Credit
Facility; (iii) maintaining a minimum Consolidated Fixed Charge Ratio; and (iv)
preventing the ratio of Consolidated Senior Funded Indebtedness to Consolidated
EBITDA from exceeding agreed upon ratios set forth in the Credit Facility.
The Credit Facility contains customary events of default. An event of
default under the Credit Facility would allow the lenders thereunder to
accelerate or, in certain cases, would automatically cause the
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acceleration of, the maturity of the indebtedness under the Credit Facility and
would restrict the ability of the Company to meet its obligations with respect
to the Exchange Notes.
The payment of principal and interest on indebtedness under the Credit
Facility is guaranteed on a senior basis by each of the Company's existing and
future, direct and indirect subsidiaries (except for Securitization Subsidiaries
and Foreign Subsidiaries).
OTHER SENIOR INDEBTEDNESS
In addition to the senior indebtedness of the Company under the Indenture
and as described above under "-- Bank Credit Facilities," after giving effect to
the issuance of the Series A Notes and the application of the net proceeds
therefrom, the Company and its subsidiaries have an aggregate of approximately
$60.3 million of outstanding senior indebtedness (which includes approximately
$10.7 million of capitalized lease obligations and approximately $49.6 million
of secured indebtedness) under various agreements and instruments having
interest rates ranging from 3.6% to 9.0% per annum (or from 8.63% to 12.05% per
annum for the implicit interest rates of such capitalized lease obligations) and
maturities ranging from September 1, 1998 to April 1, 2007. The issuance of the
Exchange Notes in the Exchange Offer will not change the Company's total
indebtedness or its total senior indebtedness. See "Use of Proceeds."
SUBORDINATED INDEBTEDNESS
Senior Subordinated Notes. Pursuant to the Amended and Restated Indenture
dated as of September 12, 1996 (the "Senior Subordinated Indenture") among the
Company, Parisian and AmSouth Bank of Alabama, Birmingham, Alabama, as trustee,
the Company guaranteed on a senior subordinated basis the Senior Subordinated
Notes previously issued by the Company's wholly-owned subsidiary, Parisian.
Capitalized terms that are used but not defined in this section have the
meanings given such terms in the Senior Subordinated Indenture.
An aggregate of approximately $93 million principal amount of the Senior
Subordinated Notes were outstanding as of June 9, 1997 and accrue interest at a
fixed rate of 9 7/8% per annum. The Senior Subordinated Notes mature and become
payable on July 15, 2003.
On or after July 15, 1998, Parisian may, at its option, redeem all or any
part of the Senior Subordinated Notes at a premium equal to 104.938% in 1998 and
102.469% in 1999, in each case of the principal amount thereof, together with
accrued and unpaid interest. Beginning in the year 2000 and thereafter, the
Senior Subordinated Notes are redeemable at 100% of the principal amount
thereof, together with accrued and unpaid interest. In addition, if a Change of
Control Triggering Event occurs at any time, each holder of the Senior
Subordinated Notes has the right to require Parisian to repurchase such holder's
Senior Subordinated Notes in whole or in part at 101% of the principal amount
thereof, together with accrued and unpaid interest.
The Senior Subordinated Indenture contains customary covenants which are
applicable to the Company and its subsidiaries (including Parisian) and are
similar to the covenants contained in the Indenture. However, certain of these
covenants are more restrictive than those contained in the Indenture. In
addition, the Senior Subordinated Indenture contains customary events of
default. An event of default under the Senior Subordinated Indenture would allow
the holders of the Senior Subordinated Notes to accelerate or, in certain cases,
would automatically cause the acceleration of, the maturity of the Senior
Subordinated Notes and would cause an event of default under the Indenture. The
guaranty by the Company under the Senior Subordinated Indenture is a senior
subordinated obligation of the Company and is subordinate in right of payment to
all Parent Senior Indebtedness of the Company, including the Exchange Notes. The
Senior Subordinated Notes are also senior subordinated obligations of Parisian
and are subordinate in right of payment to all Senior Indebtedness of Parisian,
including the guaranty by Parisian of the Exchange Notes.
Convertible Subordinated Debentures. The Company has issued $86.3 million
of 4 3/4% Convertible Subordinated Debentures due 2003 (the "Convertible
Debentures") under the Indenture dated as of October 6, 1993 (the "Convertible
Debenture Indenture") between the Company and Union Planters
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<PAGE> 62
National Bank, Memphis, Tennessee, as trustee. Capitalized terms that are used
but not defined in this section have the meanings given such terms in the
Convertible Debenture Indenture.
The Convertible Debentures accrue interest at a fixed rate of 4 3/4% per
annum and mature and become payable on November 1, 2003. The Company may, at its
option, redeem all or any part of the Convertible Debentures at a premium equal
to (i) 102.6369% in 1997, (ii) 102.1111% in 1998, (iii) 101.5833% in 1999, (iv)
101.0556% in 2000 and (v) 100.5278% in 2001, in each case of the principal
amount thereof, together with accrued and unpaid interest. Beginning in the year
2002 and thereafter, the Convertible Debentures are redeemable at 100% of the
principal amount thereof, together with accrued and unpaid interest. In
addition, if a Change of Control occurs at any time, each holder of the
Convertible Debentures has the right to require the Company to repurchase such
holder's Convertible Debentures in whole or in part at 100% of the principal
amount thereof, together with accrued and unpaid interest.
The Convertible Debenture Indenture contains covenants which are, in most
cases, less restrictive than the covenants contained in the Indenture. The
Convertible Debenture Indenture also contains customary events of default. An
event of default under the Convertible Debenture Indenture would allow the
holders of the Convertible Debentures to accelerate or, in certain cases, would
automatically cause the acceleration of, the maturity of the Convertible
Debentures and would cause an event of default under the Indenture. The
Convertible Debentures are subordinated obligations of the Company and are
subordinate in right of payment to all Senior Indebtedness of the Company,
including the Exchange Notes. In addition, on or before November 1, 2003, each
holder of Convertible Debentures may, at its option and upon the terms set forth
in the Convertible Debenture Indenture, convert its Convertible Debentures into
shares of Common Stock.
Junior Subordinated Debentures. As of May 3, 1997, the Company had
outstanding approximately $14.6 million principal amounts of 7.5% Junior
Subordinated Debentures due 2004 (the "Junior Debentures"). Capitalized terms
that are used but not defined in this section have the meanings given such terms
in the Junior Debentures.
The Junior Debentures, which were issued at a discount, have a principal
amount at maturity of $17.5 million and accrue interest at an effective rate of
11.0% per annum. The Junior Debentures mature and become payable on March 31,
2004.
The Company may, at its option, prepay, without premium, all or any part of
the Junior Debentures at any time, together with accrued and unpaid interest,
although repayment of the Junior Debentures is restricted by the terms of other
indebtedness of the Company. The Junior Debentures contain covenants which are,
in most cases, less restrictive than the covenants contained in the Indenture.
The Junior Debentures also contain customary events of default. An event of
default under the Junior Debentures would allow the holders of the Junior
Debentures to accelerate or, in certain cases, would automatically cause the
acceleration of, the maturity of the Junior Debentures and would cause an event
of default under the Indenture. The Junior Debentures are junior subordinated
obligations of the Company and are subordinate in right of payment to all Senior
Indebtedness of the Company, including the Exchange Notes.
RECEIVABLES SECURITIZATION FACILITIES
Proffitt's Accounts Receivable Facility. NationsBank, N.A., through
Enterprise Funding Corporation ("Enterprise"), has provided the Company with the
$300 million Proffitt's Accounts Receivable Facility for the securitization of
certain trade accounts receivable (the "Receivables") originated by Proffitt's,
McRae's, Herberger's and Parisian and sold to Proffitt's Credit Corporation
("PCC"), a wholly-owned, bankruptcy-remote, special purpose Accounts Receivable
Subsidiary of the Company. McRae's acts as the servicer for the Receivables. The
Proffitt's Accounts Receivable Facility expires in January 1998 and contains
covenants, representations and warranties customary for such facilities.
The Proffitt's Accounts Receivable Facility requires a portion of the
Receivables' finance charges earned to be allocated to Enterprise, as purchaser
of the receivables interests, sufficient to cover the yield on commercial paper
utilized by Enterprise to finance the purchase of such interests, plus fees and
expenses. As of May 30, 1997 and February 1, 1997, the weighted average interest
rate of the commercial paper issued
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under the Proffitt's Accounts Receivables Facility plus the program fee was 6.0%
and 5.8%, respectively. As of May 30, 1997 and February 1, 1997, the outstanding
amount invested by Enterprise in the Receivables under the Proffitt's Accounts
Receivable Facility was $219.5 million and $234.0 million, respectively.
The Company has engaged NCMI to restructure its existing Proffitt's
Accounts Receivable Securitization Facility into a new credit card master trust
covering receivables generated by all of the stores except Younkers, with a view
to issuing approximately $200 million of investment grade securities having
terms of up to five years secured by the Company's credit card receivables and
related property, while continuing to provide the Company with the ability to
sell a variable interest in proprietary credit card receivables to asset-backed
commercial paper conduits, including Enterprise. Although there is no assurance
that a new accounts receivable securitization facility will be successfully
established, or as to the final terms of such a facility, it is currently
anticipated that such a facility will be established during Summer 1997.
Younkers Master Trust Facility. In June 1995, the Younkers Master Trust
originated by the Younkers Credit Corporation ("YCC"), a wholly-owned,
bankruptcy-remote special purpose Accounts Receivable Subsidiary of the Company,
issued to third parties a total of $75 million of asset-backed securities in two
separate classes: (i) $67.0 million in aggregate principal amount of 6.43%
Series 1995-1 Class A Certificates and (ii) $8.0 million in aggregate principal
amount of 6.61% Series 1995-1 Class B Certificates. Concurrently therewith, the
Younkers Master Trust issued to YCC $16.5 million in aggregate principal amount
of Series 1995-1 Class C Certificates. YCC is required to maintain the principal
amount of the Younkers receivables in the Trust in an amount not less than $91.5
million, subject to reduction in the event of principal repayments on the Series
1995-1 Class A and Class B Certificates. YCC may from time to time create other
series of certificates that evidence undivided interests in the assets of the
Younkers Master Trust.
A percentage of finance charges and certain other amounts earned on the
assets in the Younkers Master Trust are allocated to pay interest charges on the
Series 1995-1 Class A and Class B Certificates. During the accumulation period
(which is anticipated to begin in December 1999), a percentage of the principal
repayments made on the assets in the Younkers Master Trust will be allocated to
repay the $75.0 million principal amount of the Series 1995-1 Class A and Class
B Certificates. Principal payments will be made on the Series 1995-1 Class A and
Class B Certificates in June 2000, to the extent then available, subject to an
earlier payment obligation resulting from certain defaults and breaches by YCC
or the servicer or the failure to satisfy certain portfolio yield requirements
or to generate sufficient eligible receivables.
In July 1995, a second series was established under the Younkers Master
Trust ("Series 1995-2 Certificates"). Under this Series 1995-2 program,
Receivables Capital Corporation or certain other unaffiliated purchasers may
from time to time purchase Series 1995-2 Certificates (Class A Certificates and
Class B Certificates) in an aggregate amount of up to $50.0 million, which
represent fractional undivided interests in the assets of the Younkers Master
Trust. The sales of the Series 1995-2 Certificates are limited by the level of
eligible receivables in the Younkers Master Trust in excess of the $91.5 million
supporting the Series 1995-1 Certificates and a minimum ownership interest to be
retained by the Company. The interest rate on the Series 1995-2 Certificates
will be a variable rate based upon either commercial paper rates or Eurodollar
rates over a fixed period. A percentage of finance charges and certain other
amounts earned on the assets in the Younkers Master Trust will be allocated to
pay interest charges on the Series 1995-2 Certificates. During the amortization
period (which is anticipated to begin in June 1999), a percentage of the
principal repayments made on the assets in the Younkers Master Trust will be
allocated to repay the then outstanding principal amount of the Series 1995-2
Certificates. Principal payments will be made on the Class A and Class B
Certificates beginning in June 2000, to the extent then available, subject to an
earlier payment obligation resulting from certain defaults and breaches by YCC
or the servicer, including certain cross defaults, or the failure to satisfy
certain portfolio yield requirements or to generate sufficient receivables. As
of April 28, 1997 and February 1, 1997, the weighted average interest rate of
the Series 1995-2 Certificates was 6.0% and 5.9%, respectively. As of April 28,
1997 and February 1, 1997, the outstanding amount invested in the Series 1995-2
Certificates was $5.0 million and $15.0, respectively.
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DESCRIPTION OF THE NOTES
The Exchange Notes are substantially identical (including principal amount,
interest rate, maturity and redemption rights) to the Series A Notes for which
they may be exchanged pursuant to this offer, except that (i) the offering and
sale of the Exchange Notes will have been registered under the Securities Act,
and (ii) holders of Exchange Notes will not be entitled to certain rights of
holders of the Series A Notes under the Registration Rights Agreement. The
Exchange Notes will be issued under the Indenture among the Company, the
Guarantors and the Trustee. For purposes of this section, references to the
"Company" mean only Proffitt's, Inc. and not any of its subsidiaries. The
following summary of the material provisions of the Indenture does not purport
to be complete and is subject to, and qualified by, reference to the provisions
of the Indenture, including the definitions of certain terms contained therein
and those terms made part of the Indenture by reference to the Trust Indenture
Act of 1939, as amended, as in effect on the date of the Indenture. The
definition of certain terms used in the following summary are set forth below
under "-- Certain Definitions."
GENERAL
The Notes will be general unsecured senior obligations of the Company
limited to $125,000,000 aggregate principal amount. The Notes will rank pari
passu in right of payment with all unsubordinated indebtedness of the Company
and will be senior in right of payment to all subordinated indebtedness of the
Company. The Notes will be issued only in fully registered form without coupons,
in denominations of $1,000 and integral multiples thereof. Principal of,
premium, if any, and interest on the Notes are payable, and the Notes are
transferable, at the office or agency of the Company in the City of New York
maintained for such purposes (which initially will be the corporate trust office
of the Trustee); provided, however, that payment of interest may be made at the
option of the Company by check mailed to the Person entitled thereto as shown on
the security register. No service charge will be made for any registration of
transfer, exchange or redemption of the Notes, except in certain circumstances
for any tax or other governmental charge that may be imposed in connection
therewith.
The Company will not be required to make any sinking fund payments with
respect to the Notes.
MATURITY, INTEREST AND PRINCIPAL
The Notes will mature on May 15, 2004. Interest on the Notes will accrue at
the rate of 8 1/8% per annum and will be payable semi-annually on each May 15
and November 15, commencing on November 15, 1997, to the holders of record of
Notes at the close of business on the May 1 and November 1, respectively,
immediately preceding such interest payment dates. Interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the Issue Date. Interest will be computed on the
basis of a 360-day year of twelve 30-day months.
CHANGE OF CONTROL TRIGGERING EVENT
The Indenture provides that, following the occurrence of a Change of
Control Triggering Event (the date of such occurrence being the "Change of
Control Date"), the Company will be obligated, within 20 days after the Change
of Control Date, to make an offer to purchase (a "Change of Control Offer") all
of the then outstanding Notes at a purchase price in cash equal to 101% of the
principal amount thereof, plus accrued and unpaid interest thereon, if any, to
the Purchase Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the purchase price for all
of the Notes that might be tendered by holders of Notes seeking to accept the
Change of Control Offer. If the Company fails to repurchase all of the Notes
tendered for purchase, such failure will constitute an Event of Default under
the Indenture. See "-- Events of Default" below.
The Company shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act, and any other applicable securities laws
or regulations and any applicable requirements of any
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securities exchange on which the Notes are listed, in connection with the
repurchase of Notes pursuant to a Change of Control Offer, and any violation of
the provisions of the Indenture relating to such Change of Control Offer
occurring as a result of such compliance, shall not be deemed a Default under
the Indenture.
NOTE GUARANTEES
All of the Company's subsidiaries (other than the Accounts Receivable
Subsidiaries and any Foreign Subsidiaries) on the Issue Date have, jointly and
severally, fully and unconditionally guaranteed the Company's obligations under
the Notes. In addition, if any Restricted Subsidiary of the Company becomes a
guarantor or obligor in respect of any other Indebtedness of the Company or any
of the Restricted Subsidiaries, the Company shall cause such Restricted
Subsidiary to enter into a supplemental indenture pursuant to which such
Restricted Subsidiary shall agree to guarantee the Company's obligations under
the Notes. If the Company defaults in payment of the principal of, premium, if
any, or interest on the Notes, each of the Guarantors will be unconditionally,
jointly and severally obligated to duly and punctually pay the same.
The obligations of each Guarantor under its Guarantee are limited to the
maximum amount which, after giving effect to all other contingent and fixed
liabilities of such Guarantor, and after giving effect to any collections from
or payments made by or on behalf of any other Guarantor in respect of the
obligations of such other Guarantor under its Guarantee or pursuant to its
contribution obligations under the Indenture, will result in the obligations of
such Guarantor under its Guarantee not constituting a fraudulent conveyance or
fraudulent transfer under Federal or state law. Each Guarantor that makes a
payment or distribution under its Guarantee shall be entitled to a contribution
from each other Guarantor in a pro rata amount based on the net assets of each
Guarantor determined in accordance with GAAP. See "-- Certain
Covenants -- Limitation on Guarantees by Restricted Subsidiaries."
Notwithstanding the foregoing, but subject to the requirements described
under "-- Consolidation, Merger, Sale of Assets, Etc.," any Guarantee by a
Guarantor shall be automatically and unconditionally released and discharged (i)
upon any sale, exchange or transfer, to any Person (other than an Affiliate of
the Company), of all of the Capital Stock of such Restricted Subsidiary, or all
or substantially all of the assets of such Restricted Subsidiary, pursuant to a
transaction which is in compliance with the Indenture (including, but not
limited to, the covenant described in "-- Disposition of Proceeds of Asset
Sales" above) or (ii) at the request of the Company, in the event that the
lenders under the Credit Facility (or any other revolving credit or term loan
facility entitled to a guarantee from such Guarantor) unconditionally release
such Guarantor from its guarantee obligations under such facility, if such
Guarantor is not a Leveraged Subsidiary; provided, however, that a release of a
Guarantor that is a Leveraged Subsidiary may only be obtained under the
circumstances described in this clause (ii) if, after giving effect to the
release, either (x) such Guarantor would have been permitted to incur all of its
then outstanding Indebtedness under the covenant "Limitation on Indebtedness" or
(y) the "Limitation on Indebtedness" covenant has been terminated pursuant to
the terms of the Indenture. The Company may, at any time, cause a Restricted
Subsidiary to become a Guarantor by executing and delivering a supplemental
indenture providing for the guarantee of payment of the Notes by such Restricted
Subsidiary on the basis provided in the Indenture.
The Indebtedness evidenced by each Guarantee (including the payment of
principal of, premium, if any, and interest on the Notes) will rank pari passu
in right of payment with all other unsubordinated indebtedness of such Guarantor
and will rank senior in right of payment to all subordinated indebtedness of
such Guarantor. As of May 3, 1997, on a pro forma basis after giving effect to
the Exchange Offer and the issuance of the Notes and the application of the net
proceeds therefrom, the Company and the Guarantors would have had approximately
$521.2 million of indebtedness outstanding, of which approximately $295.3
million was senior indebtedness and approximately $60.3 million was secured
indebtedness. At such date, the Company would have had outstanding approximately
$225.9 million of indebtedness subordinated in right of payment to the Notes.
The prepayment of the Parisian Notes is not restricted under the covenant
"-- Limitation on Restricted Payments."
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CERTAIN COVENANTS
The Indenture provides that the covenants set forth herein are applicable
to the Company; provided, however, that if no Default has occurred and is
continuing, after the ratings assigned to the Notes by both Rating Agencies are
equal to or higher than BBB- and Baa3, or the equivalents thereof, respectively
(the "Investment Grade Ratings"), and notwithstanding that the Notes may later
cease to have an Investment Grade Rating, the Company and the Restricted
Subsidiaries will not be subject to the provisions of the Indenture described
under "Limitation on Indebtedness," "Disposition of Proceeds of Assets Sales,"
"Limitation on Restricted Payments," clause (c) of the first and fourth
paragraphs of "Limitation on Designations of Unrestricted Subsidiaries,"
"Limitation on Preferred Stock of Restricted Subsidiaries," "Limitation on
Transactions with Affiliates," "Limitation on Dividends and Other Payment
Restrictions Affecting Restricted Subsidiaries" and clause (iii) of
"Consolidation, Merger, Sale of Assets, Etc."
Limitation on Indebtedness. The Indenture provides that the Company will
not, and will not cause or permit any of the Restricted Subsidiaries to,
directly or indirectly, create, incur, assume, issue, guarantee or in any manner
become liable for or with respect to, contingently or otherwise (in each case,
to "incur"), the payment of any Indebtedness (including any Acquired
Indebtedness); provided, however, that (i) the Company and any Guarantor may
incur Indebtedness (including Acquired Indebtedness) and (ii) any Restricted
Subsidiary may incur Acquired Indebtedness, if, in either case, immediately
after giving pro forma effect thereto, the Consolidated Fixed Charge Coverage
Ratio of the Company is at least equal to 2.00:1.
Notwithstanding the foregoing, the Company and, to the extent specifically
set forth below, the Restricted Subsidiaries may incur each and all of the
following (collectively, "Permitted Indebtedness"):
(i) Indebtedness of the Company and the Guarantors under the Credit
Facility in an aggregate principal amount at any one time outstanding not
to exceed the greater of (i) $400 million and (ii) 65% of Eligible
Inventory (as defined under the Credit Facility) of the Company and the
Restricted Subsidiaries (determined on a consolidated basis);
(ii) Indebtedness of the Company or any Guarantor under the Indenture,
the Notes and the Guarantees;
(iii) Indebtedness of the Company or any Restricted Subsidiary not
otherwise referred to in this paragraph that is outstanding on the Issue
Date, except Indebtedness to be repaid as described under "Use of Proceeds"
(other than Indebtedness repaid that is permitted to be reborrowed under
clause (i) above);
(iv) Indebtedness of the Company or any Restricted Subsidiary in
respect of performance bonds, bankers' acceptances, trade letters of credit
of the Company or any Restricted Subsidiary and surety bonds provided by
the Company or any Restricted Subsidiary in the ordinary course of
business;
(v) Indebtedness of any Restricted Subsidiary owed to and held by the
Company or any Subsidiary that is a Guarantor, and Indebtedness of the
Company owed to and held by any Subsidiary that is a Guarantor which is
unsecured and subordinated in right of payment to the payment and
performance of the Company's obligations under the Indenture and the Notes;
provided, however, that an incurrence of Indebtedness that is not permitted
by this clause (v) shall be deemed to have occurred upon (a) any sale or
other disposition of any Indebtedness of the Company or any Restricted
Subsidiary referred to in this clause (v) to a Person (other than the
Company or any Subsidiary that is a Guarantor), (b) any sale or other
disposition of Capital Stock of any Restricted Subsidiary which holds
Indebtedness of the Company or another Restricted Subsidiary such that such
Restricted Subsidiary ceases to be a Restricted Subsidiary and (c) the
designation of a Restricted Subsidiary which holds Indebtedness of the
Company or any other Restricted Subsidiary as an Unrestricted Subsidiary;
(vi) Any guarantees of Indebtedness by a Restricted Subsidiary
incurred in compliance with the covenant described under "-- Limitations on
Guarantees by Restricted Subsidiaries";
(vii) Interest Rate Protection Obligations of the Company or any
Restricted Subsidiary covering Indebtedness of the Company or any
Restricted Subsidiary (which Indebtedness is otherwise permitted
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to be incurred under this covenant) to the extent the notional principal
amount of such Interest Rate Protection Obligations does not exceed the
principal amount of the Indebtedness to which such Interest Rate Protection
Obligations relate;
(viii) Indebtedness of the Company or any Restricted Subsidiary under
Currency Agreements relating to (a) Indebtedness of the Company or any
Restricted Subsidiary and/or (b) obligations to purchase or sell assets or
properties, in each case, incurred in the ordinary course of business of
the Company or any Restricted Subsidiary; provided, however, that such
Currency Agreements do not increase the Indebtedness or other obligations
of the Company or any Restricted Subsidiary outstanding other than as a
result of fluctuations in foreign currency exchange rates or by reason of
fees, indemnities and compensation payable thereunder;
(ix) Purchase Money Indebtedness (other than Indebtedness incurred in
connection with an Asset Acquisition) and Capitalized Lease Obligations of
the Company or any Restricted Subsidiary in an aggregate amount not
exceeding (i) $25.0 million incurred in any one year and (ii) $50.0 million
outstanding at any time;
(x) (a) Indebtedness of the Company or any Guarantor to the extent the
proceeds thereof are used to Refinance Indebtedness of the Company or any
Guarantor or any Restricted Subsidiary incurred under the first paragraph
of this covenant or Indebtedness referred to under clause (ii) or (iii)
above and (b) Indebtedness of any Restricted Subsidiary that is not a
Guarantor to the extent the proceeds thereof are used to Refinance
Indebtedness of any Restricted Subsidiary that is not a Guarantor incurred
under the first paragraph of this covenant or Indebtedness referred to
under clause (iii) above; provided, however, that, in the case of either
clause (a) or (b), the principal amount of Indebtedness incurred pursuant
to this clause (x) (or, if such Indebtedness provides for an amount less
than the principal amount thereof to be due and payable upon a declaration
of acceleration of the maturity thereof, the original issue price of such
Indebtedness) shall not exceed the sum of the principal amount of
Indebtedness so refinanced (or, if such Indebtedness provides for an amount
less than the principal amount thereof to be due and payable upon a
declaration of acceleration of the maturity thereof, the original issue
price of such Indebtedness, plus any accreted value attributable thereto
since the original issuance of such Indebtedness), plus the amount of any
premium required to be paid in connection with such Refinancing pursuant to
the terms of such Indebtedness or the amount of any premium reasonably
determined by the Company or a Restricted Subsidiary, as applicable, as
necessary to accomplish such Refinancing by means of a tender offer or
privately negotiated purchase, plus the amount of expenses in connection
therewith; and
(xi) in addition to the items referred to in clauses (i) through (x)
above, additional Indebtedness of the Company and the Restricted
Subsidiaries not to exceed an aggregate principal amount at any time
outstanding of $50.0 million.
For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness permitted by this
covenant, the Company in its sole discretion shall classify such item of
Indebtedness and only be required to include the amount of such Indebtedness as
one of such types.
Limitation on Restricted Payments. The Indenture provides that the Company
will not, and will not cause or permit any of the Restricted Subsidiaries to,
directly or indirectly:
(i) declare or pay any dividend or make any other distribution or
payment on or in respect of Capital Stock of the Company or any Restricted
Subsidiary or any payment made to the direct or indirect holders (in their
capacities as such) of Capital Stock of the Company or any Restricted
Subsidiary (other than dividends or distributions made to the Company or a
Restricted Subsidiary and dividends and distributions payable solely in
Capital Stock of the Company (other than Redeemable Capital Stock) or in
rights to purchase Capital Stock of the Company (other than Redeemable
Capital Stock) or dividends and distributions made by a Restricted
Subsidiary on a pro rata basis to all shareholders of such Restricted
Subsidiary); or
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(ii) purchase, redeem, defease or otherwise acquire or retire for
value any Capital Stock of the Company (other than any such Capital Stock
owned by the Company or a Restricted Subsidiary that is a Guarantor); or
(iii) make any principal payment on, or purchase, defease, repurchase,
redeem or otherwise acquire or retire for value, prior to any scheduled
maturity, scheduled repayment, scheduled sinking fund payment or other
Stated Maturity, any Subordinated Indebtedness (other than any Subordinated
Indebtedness owed to and held by the Company or a Restricted Subsidiary
that is a Guarantor); or
(iv) make any Investment (other than a Permitted Investment) (such
payments or Investments (other than an exception thereto) described in the
preceding clauses (i), (ii), (iii) and (iv) are collectively referred to as
"Restricted Payments"), unless, at the time of and after giving effect to
the proposed Restricted Payment (the amount of any such Restricted Payment,
if other than in cash, shall be the Fair Market Value of the asset(s)
proposed to be transferred by the Company or such Restricted Subsidiary, as
the case may be, pursuant to such Restricted Payment):
(A) no Default shall have occurred and be continuing;
(B) the aggregate amount of all Restricted Payments declared or
made from and after the Issue Date and all Designation Amounts would not
exceed the sum of (1) 50% of cumulative Consolidated Net Income of the
Company during the period (treated as one accounting period) beginning
on the Issue Date and ending on the last day of the fiscal quarter of
the Company immediately preceding the date of such proposed Restricted
Payment for which consolidated financial information of the Company is
available (or, if such cumulative Consolidated Net Income of the Company
for such period shall be a deficit, minus 100% of such deficit), plus
(2) the aggregate net cash proceeds received by the Company either (x)
as capital contributions to the Company increasing its common equity
after the Issue Date or (y) from the issuance or sale of Capital Stock
(excluding Redeemable Capital Stock but including Capital Stock issued
upon the conversion of convertible Indebtedness, in exchange for
outstanding Indebtedness or from the exercise of options, warrants or
rights to purchase Capital Stock (other than Redeemable Capital Stock))
of the Company to any Person (other than to a Restricted Subsidiary of
the Company) after the Issue Date (excluding the net cash proceeds from
any issuance and sale of Capital Stock financed, directly or indirectly,
using funds borrowed from the Company or any Restricted Subsidiary until
and to the extent such borrowing is repaid), plus (3) without
duplication of any amounts included in clause (1) above, in the case of
the disposition or repayment of any Investment constituting a Restricted
Payment made after the Issue Date, an amount (to the extent not included
in Consolidated Net Income) equal to the lesser of the return of capital
with respect to such Investment and the initial amount of such
Investment which was treated as a Restricted Payment, in either case,
less the cost of the disposition of such Investment and net of taxes,
plus (4) without duplication of any amounts included in clause (1) above
so long as the Designation thereof was treated as a Restricted Payment
made after the Issue Date, with respect to any Unrestricted Subsidiary
that has been redesignated as a Restricted Subsidiary after the Issue
Date in accordance with "Limitation on Designations of Unrestricted
Subsidiaries" below, the Fair Market Value of the Company's interest in
such Subsidiary; provided, however, that such amount shall not in any
case exceed the Designation Amount with respect to such Restricted
Subsidiary at the time of its Designation, plus (5) $25.0 million, minus
(6) the Designation Amount (measured as of the date of Designation) with
respect to any Subsidiary of the Company which has been designated as an
Unrestricted Subsidiary after the Issue Date in accordance with
"Limitation on Designations of Unrestricted Subsidiaries" below; and
(C) the Company could incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness) under the "Limitation on Indebtedness"
covenant described above.
For purposes of the preceding clause (B)(2), upon the issuance of Capital
Stock either from the conversion of convertible Indebtedness or exchange for
outstanding Indebtedness or upon the exercise of options, warrants or rights,
the amount counted as net cash proceeds received will be the cash amount
received
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by the Company at the original issuance of the Indebtedness that is so converted
or exchanged or from the issuance of options, warrants or rights, as the case
may be, plus the incremental amount of cash received by the Company, if any,
upon the conversion, exchange or exercise thereof.
None of the foregoing provisions of this covenant will prohibit or restrict
(i) the payment of any dividend within 60 days after the date of its
declaration, if at the date of declaration such payment would be permitted by
the provisions of the Indenture; (ii) so long as no Default shall have occurred
and be continuing or would arise therefrom, the redemption, repurchase or other
acquisition or retirement of any shares of any class of Capital Stock of the
Company in exchange for, or out of the net cash proceeds of, a substantially
concurrent issue and sale of other shares of Capital Stock (other than
Redeemable Capital Stock) of the Company to any Person (other than to a
Restricted Subsidiary); provided, however, that any such net proceeds and the
value of any Capital Stock issued in exchange for such retired Capital Stock are
excluded from clause (B)(2) of the preceding paragraph; (iii) so long as no
Default shall have occurred and be continuing or would arise therefrom, any
redemption, repurchase or other acquisition or retirement of Subordinated
Indebtedness made by exchange for, or out of the net cash proceeds of, a
substantially concurrent issue and sale of (A) Capital Stock (other than
Redeemable Capital Stock) of the Company to any Person (other than to a
Restricted Subsidiary); provided, however, that any such net cash proceeds and
the value of any Capital Stock issued in exchange for Subordinated Indebtedness
are excluded from clause (B)(2) of the preceding paragraph or (B) Indebtedness
of the Company or any Guarantor so long as such Indebtedness (1) is subordinated
to the Notes or the Guarantees of such Guarantor, as the case may be, at least
to the same extent as the Subordinated Indebtedness so purchased, exchanged,
redeemed, repurchased, acquired or retired and (2) does not have a Stated
Maturity earlier than the Stated Maturity for the Subordinated Indebtedness
being redeemed, repurchased or otherwise acquired or retired; (iv) Investments
constituting Restricted Payments made as a result of the receipt of noncash
consideration from any Asset Sale made pursuant to and in compliance with the
covenant "-- Disposition of Proceeds of Asset Sales"; (v) so long as no Default
shall have occurred and be continuing, the Refinancing of the Parisian Notes;
(vi) so long as no Default shall have occurred and be continuing, any purchase,
redemption or other acquisition or retirement for value of any Capital Stock
(including any option, warrant or right to purchase Capital Stock) (other than
Redeemable Capital Stock) of the Company for purposes of making contributions of
such Capital Stock of the Company to employees of the Company or its
Subsidiaries pursuant to any qualified employee benefit or similar plan; (vii) a
Restricted Payment to pay for the repurchase, retirement or other acquisition or
retirement for value of Capital Stock (or warrants or options convertible into
or exchangeable for such Capital Stock) of the Company held by any future,
present or former employee, director or consultant of the Company or any
Subsidiary pursuant to any management equity plan or stock option plan or any
other management or employee benefit plan or agreement; provided, however, that
the aggregate amount of Restricted Payments made pursuant to this clause (vii)
does not exceed in any calendar year $2.5 million (with the unused amount in any
calendar year being carried over to succeeding calendar years subject to a
maximum of $5.0 million in any calendar year); (viii) payments or distributions
to dissenting stockholders pursuant to applicable law, pursuant to or in
connection with an Asset Sale or Asset Acquisition that complies with the
provisions of the Indenture; (ix) repurchases of Capital Stock (or warrants or
options convertible into or exchangeable for such Capital Stock) deemed to occur
upon exercise of stock options to the extent that shares of such Capital Stock
(or warrants or options convertible into or exchangeable for such Capital Stock)
represents a portion of the exercise price of such options; and (x) the
repurchase or retirement of Capital Stock of the Company in exchange for the
cancellation of Indebtedness owed to the Company or any Restricted Subsidiary;
provided, however, that the Fair Market Value of such Capital Stock is not less
than the outstanding principal balance of and accrued and unpaid interest on,
the Indebtedness so cancelled. In computing the amount of Restricted Payments
previously made for purposes of clause (B) of the preceding paragraph,
Restricted Payments under the immediately preceding clauses (i), (iv), (vi),
(vii) and (viii) shall be included.
Limitation on Transactions with Affiliates. The Indenture provides that
the Company will not, and will not cause or permit any of the Restricted
Subsidiaries to, directly or indirectly, conduct any business or enter into or
suffer to exist any transaction or series of related transactions with, or for
the benefit of, any of their respective Affiliates or any beneficial holder of
10% or more of any class of Voting Stock of the Company or any officer or
director of the Company or any Restricted Subsidiary (each, an "Affiliate
Transaction"), unless
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(i) such Affiliate Transaction is on terms that are no less favorable to the
Company or the Restricted Subsidiary, as the case may be, than those which could
have been obtained in a comparable transaction at such time from Persons who do
not have such a relationship and (ii) with respect to any Affiliate Transaction
or series of Affiliate Transactions involving aggregate payments or value equal
to or greater than $5.0 million, the Company shall have delivered an officer's
certificate to the Trustee certifying that such Affiliate Transaction or series
of related Affiliate Transactions complies with the preceding clause (i) and,
with respect to any Affiliate Transaction or series of Affiliate Transactions
involving aggregate payments or value equal to or greater than $10.0 million,
further certifying that such Affiliate Transaction or series of Affiliate
Transactions has been approved by a majority of the Board of Directors of the
Company, including a majority of the disinterested directors of the Board of
Directors of the Company.
Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to (i) transactions with or among the Company and the Restricted
Subsidiaries who are Guarantors; (ii) customary directors' fees, indemnification
and similar arrangements, consulting fees, employee salaries, bonuses or
employment agreements, compensation or employee benefit arrangements and
incentive arrangements with any officer, director or employee of the Company or
any Restricted Subsidiary entered into in the ordinary course of business
(including customary benefits thereunder) and payments under any indemnification
arrangements permitted by applicable law; (iii) the issue and sale by the
Company to its stockholders of Capital Stock (other than Redeemable Capital
Stock); (iv) any dividends made in compliance with "Limitation on Restricted
Payments" above; (v) loans and advances to officers, directors, employees and
consultants of the Company or any Restricted Subsidiary for travel,
entertainment, moving and other relocation expenses, in each case made in the
ordinary course of business; (vi) transactions with or by any Accounts
Receivable Subsidiary made in the ordinary course of business and transactions
related to any proprietary credit card issued by or for the benefit of the
Company or an Affiliate of the Company in the ordinary course of business; (vii)
any agreement or Affiliate Transactions as in effect on the Issue Date and any
transaction contemplated thereby; and (viii) tax sharing agreements between the
Company and any of its Subsidiaries providing for the payment by such Subsidiary
of an amount equal to the hypothetical United States tax liability of the
Subsidiary as if such Subsidiary had filed its own U.S. federal tax return for
any given taxable year.
Disposition of Proceeds of Asset Sales. The Indenture provides that the
Company will not, and will not cause or permit any Restricted Subsidiary to,
directly or indirectly, make any Asset Sale, unless (i) the Company or such
Restricted Subsidiary, as the case may be, receives consideration at the time of
such Asset Sale at least equal to the Fair Market Value of the assets sold or
otherwise disposed of and (ii) at least 75% of such consideration consists of
(A) cash or Cash Equivalents, (B) properties and capital assets to be used in
the same line of business being conducted by the Company or any Restricted
Subsidiary at such time or (C) Capital Stock in any Person which thereby becomes
a Wholly Owned Restricted Subsidiary whose assets consist primarily of
properties and capital assets used in the same line of business being conducted
by the Company or any Restricted Subsidiary at such time. In lieu of the
consideration described in clause (ii) above, the Company or any Restricted
Subsidiary may receive consideration from an Asset Sale or Asset Sales
consisting of obligations payable to the sellers of such asset or assets in an
aggregate amount not to exceed $25.0 million at any time outstanding; provided,
however, that all consideration received from an Asset Sale or Asset Sales in
excess of such $25.0 million shall be subject to the next preceding sentence.
The amount of any (i) Indebtedness of a Restricted Subsidiary that is not a
Guarantor that is actually assumed by the transferee in such Asset Sale and from
which the Company and the Restricted Subsidiaries are fully released shall be
deemed to be cash for purposes of determining the percentage of cash
consideration received by the Company or the Restricted Subsidiaries (and
excluding any liabilities that are incurred in connection with or in
anticipation of such Asset Sale) and (ii) notes or other similar obligations
received by the Company or any Restricted Subsidiary from such transferee that
are immediately converted, sold or exchanged (or are converted, sold or
exchanged within thirty days of the related Asset Sale) by the Company or the
Restricted Subsidiaries into cash shall be deemed to be cash, in an amount equal
to the net cash proceeds realized upon such conversion, sale or exchange for
purposes of determining the percentage of cash consideration received by the
Company or the Restricted Subsidiaries.
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The Company or such Restricted Subsidiary, as the case may be, may apply
the Net Cash Proceeds of any Asset Sale within 365 days of receipt thereof to
(i) repay Indebtedness of the Company or any Guarantor which is secured by a
Lien on the assets or property of the Company or any Guarantor which was the
subject of such Asset Sale and permanently reduce any related commitment, (ii)
repay Indebtedness (other than Subordinated Indebtedness) of any Restricted
Subsidiary that is not a Guarantor in respect of which neither the Company nor
any Guarantor is liable and permanently reduce any related commitment, (iii)
repay any Indebtedness (other than Subordinated Indebtedness) of the Company or
any Guarantor not repaid pursuant to the preceding clause (i) or (ii), or (iv)
make Asset Acquisitions or acquire, construct or improve properties or capital
assets, in each case, to be used in the same line of business being conducted by
the Company or any Restricted Subsidiary at such time.
To the extent all or part of the Net Cash Proceeds of any Asset Sale are
not applied within 365 days of such Asset Sale as described in clause (i), (ii),
(iii) or (iv) of the immediately preceding paragraph (such Net Cash Proceeds,
the "Unutilized Net Cash Proceeds"), the Company shall, within 20 days after
such 365th day, make an offer to purchase (the "Asset Sale Offer") all
outstanding Notes up to a maximum principal amount (expressed as a multiple of
$1,000) of Notes equal to such Unutilized Net Cash Proceeds, at a purchase price
in cash equal to 100% of the principal amount thereof, plus accrued and unpaid
interest thereon, if any, to the Purchase Date; provided, however, that the
Asset Sale Offer may be deferred until there are aggregate Unutilized Net Cash
Proceeds equal to or in excess of $10.0 million, at which time the entire amount
of such Unutilized Net Cash Proceeds, and not just the amount in excess of $10.0
million, shall be applied as required pursuant to this paragraph.
Notwithstanding the foregoing, the Company may retain up to $20.0 million of Net
Cash Proceeds of Asset Sales without applying it as required by the foregoing.
With respect to any Asset Sale Offer effected pursuant to this covenant,
among the Notes, to the extent the aggregate principal amount of Notes tendered
pursuant to such Asset Sale Offer exceeds the Unutilized Net Cash Proceeds to be
applied to the repurchase thereof, such Notes shall be purchased pro rata based
on the aggregate principal amount of such Notes tendered by each holder. To the
extent the Unutilized Net Cash Proceeds exceed the aggregate amount of Notes
tendered by the holders of the Notes pursuant to such Asset Sale Offer, the
Company may retain and utilize any portion of the Unutilized Net Cash Proceeds
not applied to repurchase the Notes for any purpose consistent with the other
terms of the Indenture.
In the event that the Company makes an Asset Sale Offer, the Company shall
comply, to the extent applicable, with the requirements of Section 14(e) of the
Exchange Act, and any other applicable securities laws or regulations and any
applicable requirements of any securities exchange on which the Notes are
listed, and any violation of the provisions of the Indenture relating to such
Asset Sale Offer occurring as a result of such compliance shall not be deemed a
Default or an Event of Default.
Limitation on Liens. The Indenture provides that the Company will not, and
will not cause or permit any Restricted Subsidiary to, directly or indirectly,
create, incur, assume or suffer to exist any Lien of any kind (other than
Permitted Liens), upon any of its property or assets, whether now owned or
acquired after the Issue Date, or any proceeds therefrom, or assign or convey
any right to receive income therefrom to secure either (i) Subordinated
Indebtedness, unless the Notes, in the case of the Company, and the Guarantees,
in the case of a Restricted Subsidiary that is a Guarantor, are secured by a
Lien on such property, assets or proceeds that is senior in priority to the
Liens securing such Subordinated Indebtedness or (ii) any other Indebtedness,
unless the Notes and the Guarantees, in the case of a Restricted Subsidiary that
is a Guarantor, are equally and ratably secured thereby.
Limitation on Guarantees by Restricted Subsidiaries. The Indenture
provides that the Company will not cause or permit any of the Restricted
Subsidiaries, directly or indirectly, to guarantee the payment of any
Indebtedness of the Company or any Restricted Subsidiary ("Other Indebtedness"),
except for guarantees to suppliers, lessors, licensees, contractors, franchises
or customers incurred in the ordinary course of business, unless such Subsidiary
(A) is a Guarantor or (B) simultaneously executes and delivers a supplemental
indenture to the Indenture pursuant to which it will become a Guarantor under
the Indenture; provided, however, that if such Other Indebtedness is (i)
Indebtedness that is ranked pari passu in right of payment with the Notes or the
Guarantee of such Restricted Subsidiary, as the case may be, the Guarantee of
such
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Subsidiary shall be pari passu in right of payment with the guarantee of the
Other Indebtedness; or (ii) Subordinated Indebtedness, the Guarantee of such
Subsidiary shall be senior in right of payment to the guarantee of the Other
Indebtedness (which guarantee of such Subordinated Indebtedness shall provide
that such guarantee is subordinated to the Guarantees of such Subsidiary to the
same extent and in the same manner as the other Indebtedness is subordinated to
the Notes or the Guarantee of such Restricted Subsidiary, as the case may be).
Restrictions on Preferred Stock of Restricted Subsidiaries. The Indenture
provides that the Company will not sell, and will not cause or permit any of the
Restricted Subsidiaries to issue, any Preferred Stock of any Restricted
Subsidiary (other than to the Company or to a Wholly-Owned Restricted
Subsidiary) or permit any Person (other than the Company or a Wholly-Owned
Restricted Subsidiary) to own any Preferred Stock of any Restricted Subsidiary.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Indenture provides that the Company will not, and will not
cause or permit any Restricted Subsidiary to, directly or indirectly, create or
otherwise cause or suffer to exist, or enter into any agreement with any Person
that would cause to become effective, any consensual encumbrance or restriction
of any kind, on the ability of any Restricted Subsidiary to (a) pay dividends,
in cash or otherwise, or make any other distribution on or in respect of its
Capital Stock or any other interest or participation in, or measured by, its
profits, to the Company or any other Restricted Subsidiary, (b) pay any
Indebtedness owed to the Company or any other Restricted Subsidiary, (c) make
loans or advances to, or guarantee any Indebtedness or other obligations of, the
Company or any other Restricted Subsidiary or (d) transfer any of its property
or assets to the Company or any other Restricted Subsidiary, except any
encumbrance or restriction (i) with respect to a Restricted Subsidiary that is
not a Restricted Subsidiary on the Issue Date, in existence at the time such
Person becomes a Restricted Subsidiary (but not created in contemplation
thereof); provided, however, that such encumbrances and restrictions are not
applicable to the Company or any Restricted Subsidiary, or the properties or
assets of the Company or any Restricted Subsidiary, other than such Person; (ii)
arising as a result of customary non-assignment provisions in leases entered
into in the ordinary course of business; (iii) existing under any agreement
governing the terms of or otherwise arising as a result of Purchase Money
Indebtedness (other than Indebtedness incurred to finance an Asset Acquisition)
for property acquired in the ordinary course of business that only imposes
encumbrances and restrictions on the property so acquired; (iv) contained in any
agreement for the sale or disposition of the Capital Stock or assets of any
Restricted Subsidiary; provided, however, that such encumbrances and
restrictions described in this clause (iv) are only applicable to such
Restricted Subsidiary or assets, as applicable, and any such sale or disposition
is made in compliance with "Disposition of Proceeds of Asset Sales" above to the
extent applicable thereto; or (v) existing under any agreement that refinances
or replaces the agreements containing the encumbrance or restrictions in the
foregoing clause (i); provided, however, that the terms and conditions of any
such restrictions permitted under this clause (v) are not materially less
favorable to the holders of the Notes than those under or pursuant to the
agreement evidencing the Indebtedness refinanced.
Limitation on Designations of Unrestricted Subsidiaries. The Indenture
provides that the Company may designate after the Issue Date any Subsidiary
(other than a Guarantor) as an "Unrestricted Subsidiary" under the Indenture (a
"Designation") only if:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation;
(b) the Company would be permitted to make an Investment (other than a
Permitted Investment) at the time of Designation (assuming the
effectiveness of such Designation) pursuant to the first paragraph of
"Limitation on Restricted Payments" above in an amount (the "Designation
Amount") equal to the Fair Market Value of the Company's interest in such
Subsidiary on such date calculated in accordance with GAAP;
(c) the Company would be permitted under the Indenture to incur $1.00
of additional Indebtedness (other than Permitted Indebtedness) pursuant to
the covenant described under "-- Limitation on Indebtedness" at the time of
such Designation (assuming the effectiveness of such Designation).
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In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
"-- Limitation on Restricted Payments" for all purposes of the Indenture in the
Designation Amount.
The Indenture further provides that (i) the Company shall not and shall not
cause or permit any Restricted Subsidiary to at any time (x) provide credit
support for, or subject any of its property or assets (other than the Capital
Stock of any Unrestricted Subsidiary) to the satisfaction of, any Indebtedness
of any Unrestricted Subsidiary (including any undertaking, agreement or
instrument evidencing such Indebtedness) (other than Permitted Investments in
Unrestricted Subsidiaries) or (y) be directly or indirectly liable for any
Indebtedness of any Unrestricted Subsidiary and (ii) no Unrestricted Subsidiary
shall at any time guarantee or otherwise provide credit support for any
obligation of the Company or any Restricted Subsidiary. For purposes of the
foregoing, the Designation of a Subsidiary of the Company as an Unrestricted
Subsidiary shall be deemed to be the Designation of all of the Subsidiaries of
such Subsidiary.
The Company may revoke any Designation of a Subsidiary as an Unrestricted
Subsidiary (a "Revocation") if:
(a) no Default shall have occurred and be continuing at the time of
and after giving effect to such Revocation;
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at
such time, have been permitted to be incurred for all purposes of the
Indenture;
(c) unless such redesignated Subsidiary shall not have any
Indebtedness outstanding (other than Indebtedness that would be Permitted
Indebtedness), immediately after giving effect to such proposed Revocation,
and the incurrence of any such additional Indebtedness, the Company could
incur $1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to the covenant described under "-- Limitation on Indebtedness";
and
(d) any transaction (or series of related transactions) between such
Subsidiary and any of its Affiliates that occurred while such Subsidiary
was an Unrestricted Subsidiary would be permitted by "-- Limitation on
Transactions with Affiliates" above as if such transaction (or series of
related transactions) had occurred at the time of such Revocation.
All Designations and Revocations must be evidenced by Board Resolutions of
the Company delivered to the Trustee certifying compliance with the foregoing
provisions.
Reporting Requirements. The Indenture provides that the Company will file
with the Commission, the Trustee and the Initial Purchasers, the annual reports,
quarterly reports and other documents required to be filed with the Commission
pursuant to Sections 13 and 15 of the Exchange Act, whether or not the Company
has a class of securities registered under the Exchange Act.
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
The Indenture provides that the Company will not, in any transaction or
series of related transactions, merge or consolidate with or into, or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially all
of its properties and assets as an entirety to, any Person or Persons, and that
the Company will not permit any of the Restricted Subsidiaries to enter into any
such transaction or series of related transactions if such transaction or series
of related transactions, in the aggregate, would result in a sale, assignment,
conveyance, transfer, lease or other disposition of all or substantially all of
the properties and assets of the Company and the Restricted Subsidiaries
(determined on a consolidated basis for the Company and the Restricted
Subsidiary), to any other Person or Persons, unless at the time and after giving
effect thereto (i) either (A)(1) if the transaction or transactions is a merger
or consolidation involving the Company, the Company shall be the surviving
Person of such merger or consolidation or (2) if the transaction or transactions
is a merger or consolidation involving a Restricted Subsidiary, such Restricted
Subsidiary shall be the surviving Person of such merger or consolidation, or
(B)(1) the Person formed by such consolidation or into
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which the Company or such Restricted Subsidiary is merged or to which the
properties and assets of the Company or such Restricted Subsidiary, as the case
may be, substantially as an entirety, are transferred (any such surviving Person
or transferee Person being the "Surviving Entity") shall be a corporation
organized and existing under the laws of the United States of America, any State
thereof or the District of Columbia and (2)(x) in the case of a transaction
involving the Company, the Surviving Entity shall expressly assume by a
supplemental indenture executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the Notes,
the Notes and the Indenture and the Registration Rights Agreement and, in each
case, the Notes, the Notes, the Indenture and the Registration Rights Agreement
shall remain in full force and effect, or (y) in the case of a transaction
involving a Restricted Subsidiary that is a Guarantor, the Surviving Entity
shall expressly assume by a supplemental indenture executed and delivered to the
Trustee, in form satisfactory to the Trustee, all the obligations of such
Restricted Subsidiary under its Guarantee, the Indenture and the Registration
Rights Agreement, and, in each case, such Guarantee, the Indenture and the
Registration Rights Agreement shall remain in full force and effect; (ii)
immediately after giving effect to such transaction or series of related
transactions on a pro forma basis, no Default shall have occurred and be
continuing; and (iii) the Company, or the Surviving Entity, as the case may be,
immediately after giving effect to such transaction or series of transactions on
a pro forma basis (including, without limitation, any Indebtedness incurred or
anticipated to be incurred in connection with or in respect of such transaction
or series of transactions), could incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness) under the "Limitation on Indebtedness" covenant
described above.
No Guarantor (other than a Guarantor whose Guarantee is to be released in
accordance with the terms of its Guarantee and the Indenture as provided in the
second sentence under "Limitation on Guarantees by Restricted Subsidiaries"
above) shall, in any transaction or series of related transactions, consolidate
with or merge with or into another Person, whether or not such Person is
affiliated with such Guarantor and whether or not such Guarantor is the
Surviving Entity, unless (i) the Surviving Entity (if other than such Guarantor)
is a corporation organized and validly existing under the laws of the United
States, any State thereof or the District of Columbia; (ii) the Surviving Entity
(if other than such Guarantor) expressly assumes by a supplemental indenture all
the obligations of such Guarantor under its Guarantee and the performance and
observance of every covenant of the Indenture and the Registration Rights
Agreement to be performed or observed by such Guarantor and (iii) immediately
after giving effect to such transaction or series of related transactions on a
pro forma basis, no Default shall have occurred and be continuing.
In connection with any consolidation, merger, transfer, lease or other
disposition contemplated hereby, the Company shall deliver, or cause to be
delivered, to the Trustee, in form and substance reasonably satisfactory to the
Trustee, an officers' certificate and an opinion of counsel, each stating that
such consolidation, merger, transfer, lease or other disposition and the
supplemental indenture in respect thereof comply with the requirements under the
Indenture. In addition, each Guarantor, unless it is the other party to the
transaction or unless its Guarantee will be released and discharged in
accordance with its terms as a result of the transaction, will be required to
confirm, by supplemental indenture, that its Guarantee will continue to apply to
the obligations of the Company or the Surviving Entity under the Indenture.
Upon any consolidation or merger of the Company or any Guarantor or any
transfer of all or substantially all of the assets of the Company in accordance
with the foregoing, in which the Company or a Guarantor is not the continuing
corporation, the successor corporation formed by such a consolidation or into
which the Company or such Guarantor is merged or to which such transfer is made,
shall succeed to, and be substituted for, and may exercise every right and power
of, the Company under the Indenture, the Notes and the Registration Rights
Agreement, as the case may be, or such Guarantor, as the case may be, under the
Indenture, and the Guarantee of such Guarantor and the Registration Rights
Agreement, as the case may be, with the same effect as if such successor
corporation had been named as the Company or Guarantor, as the case may be,
therein; and thereafter, except in the case of (a) a lease or (b) any sale,
assignment, conveyance, transfer, lease or other disposition to a Restricted
Subsidiary of the Company or such Guarantor, the Company or such Guarantor, as
the case may be, shall be discharged from all obligations and covenants under
the Indenture and the Notes and/or the Guarantee of such Guarantor, as the case
may be.
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The Indenture provides that for all purposes of the Indenture and the Notes
(including the provision of this covenant and the covenants described in
"-- Limitation on Indebtedness", "-- Limitation on Restricted Payments" and
"-- Limitation on Liens"), Subsidiaries of any Surviving Entity shall, upon such
transaction or series of related transactions, become Restricted Subsidiaries
unless and until designated as Unrestricted Subsidiaries pursuant to and in
accordance with "-- Limitation on Designations of Unrestricted Subsidiaries" and
all Indebtedness, and all Liens on property or assets, of the Company and the
Restricted Subsidiaries in existence immediately prior to such transaction or
series of related transactions will be deemed to have been incurred upon such
transaction or series of related transactions.
EVENTS OF DEFAULT
The following will be "Events of Default" under the Indenture:
(i) default in the payment of the principal of or premium, if any,
when due and payable, on any of the Notes (at its Stated Maturity, upon
optional redemption, required purchase, sinking fund, scheduled principal
payment or otherwise); or
(ii) default in the payment of an installment of interest on any of
the Notes, when due and payable, continued for 30 days or more; or
(iii) the Company or any Guarantor fails to comply with any of its
obligations described under "-- Consolidation, Merger, Sale of Assets,
Etc.," "Certain Covenants -- Change of Control" or "-- Certain
Covenants -- Disposition of Proceeds of Asset Sales"; or
(iv) the Company or any Guarantor fails to perform or observe any
other term, covenant or agreement contained in the Notes, the Guarantees or
the Indenture (other than a default specified in (i), (ii) or (iii) above)
for a period of 45 days after written notice of such failure requiring the
Company to remedy the same shall have been given (x) to the Company by the
Trustee or (y) to the Company and the Trustee by the holders of 25% in
aggregate principal amount of the Notes then outstanding; or
(v) default or defaults under one or more agreements, indentures or
instruments under which the Company or any Restricted Subsidiary then has
outstanding Indebtedness in excess of $25.0 million individually or in the
aggregate and either (a) such Indebtedness is already due and payable in
full or (b) such default or defaults results in the acceleration of the
maturity of such Indebtedness; or
(vi) any Guarantee ceases to be in full force and effect or is
declared null and void or any Guarantor denies that it has any further
liability under any Guarantee, or gives notice to such effect (other than
by reason of the termination of the Indenture or the release of any such
Guarantee in accordance with the terms of the Indenture); or
(vii) one or more judgments, orders or decrees of any court or
regulatory or administrative agency for the payment of money in excess of
$25.0 million either individually or in the aggregate shall have been
rendered against the Company or any Restricted Subsidiary or any of their
respective properties and shall not have been discharged and either (a) any
creditor shall have commenced an enforcement proceeding upon such judgment,
order or decree or (b) there shall have been a period of 60 consecutive
days during which a stay of enforcement of such judgment, order or decree,
by reason of a pending appeal or otherwise, shall not be in effect; or
(viii) certain events of bankruptcy, insolvency or reorganization with
respect to the Company or any Material Subsidiary shall have occurred.
If an Event of Default (other than as specified in clause (viii) with
respect to the Company), shall occur and be continuing, the Trustee, by notice
to the Company, or the holders of at least 25% in aggregate principal amount of
the Notes then outstanding, by notice to the Trustee and the Company, may
declare the principal of, premium, if any, and accrued interest on all of the
outstanding Notes due and payable immediately, upon which declaration, all such
amounts payable in respect of the Notes will become and be immediately due and
payable. If an Event of Default specified in clause (viii) above with respect to
the Company occurs and is continuing, then the principal of, premium, if any,
and accrued interest on all of the outstanding Notes will
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ipso facto become and be immediately due and payable without any declaration or
other act on the part of the Trustee or any holder of Notes.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the Trustee, the holders of a
majority in aggregate principal amount of the outstanding Notes, by written
notice to the Company and the Trustee, may rescind such declaration if (a) the
Company has paid or deposited with the Trustee a sum sufficient to pay (i) all
sums paid or advanced by the Trustee under the Indenture and the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, (ii) all overdue interest on all Notes, (iii) the principal of and
premium, if any, on any Notes which have become due otherwise than by such
declaration of acceleration and interest thereon at the rate borne by the Notes,
and (iv) to the extent that payment of such interest is lawful, interest upon
overdue interest at the rate borne by the Notes; and (b) all Events of Default,
other than the non-payment of principal of, premium, if any, and interest on the
Notes that has become due solely by such declaration of acceleration, have been
cured or waived.
The holders of not less than a majority in aggregate principal amount of
the outstanding Notes may on behalf of the holders of all the Notes waive any
past defaults under the Indenture, except a default in the payment of the
principal of, premium, if any, or interest on any Note, or in respect of a
covenant or provision which under the Indenture cannot be modified or amended
without the consent of the holder of each Note outstanding.
No holder of any of the Notes has any right to institute any proceeding
with respect to the Indenture or any remedy thereunder, unless the holders of at
least 25% in aggregate principal amount of the outstanding Notes have made
written request, and offered reasonable indemnity, to the Trustee to institute
such proceeding as Trustee under the Notes and the Indenture, the Trustee has
failed to institute such proceeding within 15 days after receipt of such notice
and the Trustee, within such 15-day period, has not received directions
inconsistent with such written request by holders of a majority in aggregate
principal amount of the outstanding Notes. Such limitations do not apply,
however, to a suit instituted by a holder of a Note for the enforcement of the
payment of the principal of, premium, if any, or interest on such Note on or
after the respective due dates expressed in such Note.
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent Person would
exercise under the circumstances in the conduct of such Person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
under the Indenture is not under any obligation to exercise any of its rights or
powers under the Indenture at the request or direction of any of the holders
unless such holders shall have offered to the Trustee reasonable security or
indemnity. Subject to certain provisions concerning the rights of the Trustee,
the holders of a majority in aggregate principal amount of the outstanding Notes
have the right to direct the time, method and place of conducting any proceeding
for any remedy available to the Trustee, or exercising any trust or power
conferred on the Trustee under the Indenture.
The Company is required to furnish to the Trustee annual and quarterly
statements as to the performance by the Company and the Guarantors of their
respective obligations under the Indenture and as to any default in such
performance. The Company is also required to notify the Trustee within five
business days of any event which is, or after notice or lapse of time or both
would become, an Event of Default.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, terminate the obligations
of the Company and the Guarantors with respect to the outstanding Notes
("defeasance"). Such defeasance means that the Company will be deemed to have
paid and discharged the entire Indebtedness represented by the outstanding
Notes, except for (i) the rights of holders of outstanding Notes to receive
payment in respect of the principal of, premium, if any, and interest on such
Notes when such payments are due, (ii) the Company's obligations to issue
temporary Notes, register the transfer or exchange of any Notes, replace
mutilated, destroyed, lost or stolen Notes and maintain an office or agency for
payments in respect of the Notes, (iii) the rights, powers,
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trusts, duties and immunities of the Trustee, and (iv) the defeasance provisions
of the Indenture. In addition, the Company may, at its option and at any time,
elect to terminate the obligations of the Company and any Guarantor with respect
to certain covenants that are set forth in the Indenture, some of which are
described under "-- Certain Covenants" above, and any omission to comply with
such obligations will not constitute a Default or an Event of Default with
respect to the Notes ("covenant defeasance").
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the holders of the Notes, cash in United States dollars, U.S. Government
Obligations (as defined in the Indenture), or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if any, and
interest on the outstanding Notes at maturity; (ii) the Company shall have
delivered to the Trustee an opinion of counsel to the effect that the holders of
the outstanding Notes will not recognize income, gain or loss for federal income
tax purposes as a result of such defeasance or covenant defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such defeasance or covenant defeasance
had not occurred (in the case of defeasance, such opinion must refer to and be
based upon a ruling of the Internal Revenue Service or a change in applicable
federal income tax laws); (iii) no Default shall have occurred and be continuing
on the date of such deposit or insofar as clause (viii) under the first
paragraph under "-- Events of Default" is concerned, at any time during the
period ending on the 91st day after the date of deposit; (iv) such defeasance or
covenant defeasance shall not cause the Trustee to have a conflicting interest
with respect to any securities of the Company or any Guarantor; (v) such
defeasance or covenant defeasance shall not result in a breach or violation of,
or constitute a default under, any material agreement or instrument to which the
Company or any Guarantor is a party or by which it is bound; (vi) the Company
shall have delivered to the Trustee an opinion of counsel to the effect that
after the 91st day following the deposit, the trust funds will not be subject to
the effect of any applicable bankruptcy, insolvency, reorganization or similar
laws affecting creditors' rights generally; and (vii) the Company shall have
delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that all conditions precedent under the Indenture to either
defeasance or covenant defeasance, as the case may be, have been complied with.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration or transfer of the Notes, as
expressly provided for in the Indenture) as to all outstanding Notes when (i)
either (a) all the Notes theretofore authenticated and delivered (except lost,
stolen or destroyed Notes which have been replaced or paid and Notes for whose
payment money has theretofore been deposited in trust or segregated and held in
trust by the Company and thereafter repaid to the Company or discharged from
such trust) have been delivered to the Trustee for cancellation or (b) all Notes
not theretofore delivered to the Trustee for cancellation have become due and
payable and the Company or any Guarantor has irrevocably deposited or caused to
be deposited with the Trustee funds in an amount sufficient to pay and discharge
the entire Indebtedness on the Notes not theretofore delivered to the Trustee
for cancellation, for principal of, premium, if any, and interest on the Notes
to the date of deposit together with irrevocable instructions from the Company
directing the Trustee to apply such funds to the payment thereof at maturity or
redemption, as the case may be; (ii) the Company or any Guarantor has paid all
other sums payable under the Indenture by the Company and the Guarantors; and
(iii) the Company and each of the Guarantors have delivered to the Trustee an
officers' certificate and an opinion of counsel each stating that all conditions
precedent under the Indenture relating to the satisfaction and discharge of the
Indenture have been complied with.
AMENDMENTS AND WAIVERS
From time to time, the Company and the Guarantors, when authorized by
resolutions of their boards of directors, and the Trustee may, without the
consent of the holders of any outstanding Notes, amend, waive or supplement the
Indenture or the Notes for certain specified purposes, including, among other
things, curing ambiguities, defects or inconsistencies, qualifying, or
maintaining the qualification of, the Indenture under the
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Trust Indenture Act of 1939, as amended, or making any change that does not
materially adversely affect the legal rights of any holder; provided, however,
that the Company has delivered to the Trustee an Opinion of Counsel (as such
term is defined in the Indenture) stating that such change does not materially
adversely affect the legal rights of any holder. Other amendments and
modifications of the Indenture or the Notes may be made by the Company, the
Guarantors and the Trustee with the consent of the holders of not less than a
majority of the aggregate principal amount of the outstanding Notes; provided,
however, that no such modification or amendment may, without the consent of the
holder of each outstanding Note affected thereby, (i) reduce the principal of or
change the Stated Maturity of any Note, or alter the provisions with respect to
the redemption or repurchase of the Notes in any manner adverse to the holders
of the Notes; (ii) reduce the rate of or change the time for payment of interest
on any such Note; (iii) change the place or currency of payment of principal of
(or premium) or interest on any such Note; (iv) modify any provisions of the
Indenture relating to the waiver of past defaults (other than to add sections of
the Indenture or the Notes subject thereto) or the right of the holders of Notes
to institute suit for the enforcement of any payment on or with respect to any
such Note or any Guarantee in respect thereof or the modification and amendment
provisions of the Indenture and the Notes (other than to add sections of the
Indenture or the Notes which may not be amended, supplemented or waived without
the consent of each holder therein affected); (v) reduce the percentage of the
principal amount of outstanding Notes necessary for amendment to or waiver of
compliance with any provision of the Indenture or the Notes or for waiver of any
Default in respect thereof; (vi) waive a default in the payment of principal of,
interest on, or redemption payment with respect to, the Notes (except a
rescission of acceleration of the Notes by the holders thereof as provided in
the Indenture and a waiver of the payment default that resulted from such
acceleration); (vii) modify the ranking or priority of any Note or the Guarantee
in respect thereof of any Guarantor in any manner adverse to the holders of the
Notes; (viii) modify the provisions of any covenant (or the related definitions)
in the Indenture requiring the Company to make and consummate a Change of
Control Offer upon a Change of Control Triggering Event or an Asset Sale Offer
in respect of an Asset Sale or modify any of the provisions or definitions with
respect thereto in a manner materially adverse to the holders of Notes affected
thereby otherwise than in accordance with the Indenture; or (ix) release any
Guarantor from any of its obligations under its Guarantee or the Indenture
otherwise than in accordance with the Indenture.
The holders of a majority in aggregate principal amount of the outstanding
Notes, on behalf of all holders of Notes, may waive compliance by the Company
and the Guarantors with certain restrictive provisions of the Indenture. Subject
to certain rights of the Trustee, as provided in the Indenture, the holders of a
majority in aggregate principal amount of the Notes, on behalf of all holders of
the Notes, may waive any past default under the Indenture (including any such
waiver obtained in connection with a tender offer or exchange offer for the
Notes), except a default in the payment of principal, premium or interest or a
default arising from failure to purchase any Notes tendered pursuant to an Offer
to Purchase pursuant thereto, or a default in respect of a provision that under
the Indenture cannot be modified or amended without the consent of the holder of
each Note that is affected.
GOVERNING LAW
The Indenture and the Notes and the Guarantees are governed by the laws of
the State of New York, without regard to the principles of conflicts of law.
CERTAIN DEFINITIONS
"Accounts Receivable Subsidiary" means Younkers Credit Corporation and
Proffitt's Credit Corporation and any other present or future Subsidiary
(including any credit card bank) of the Company that is, directly or indirectly,
wholly owned by the Company (other than director qualifying shares) and
organized for the purpose of and engaged in (i) purchasing, financing, and
collecting accounts receivable obligations of customers of the Company or its
Subsidiaries, (ii) issuing credit cards and financing accounts receivable
obligations of customers of the Company and its Subsidiaries, (iii) the sale or
financing of such accounts receivable or interests therein and (iv) other
activities incident thereto.
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"Acquired Indebtedness" means, with respect to any specified Person
Indebtedness of any other Person (i) assumed in connection with an Asset
Acquisition from such Person or (ii) existing at the time such Person becomes a
Restricted Subsidiary of any other Person (other than any Indebtedness incurred
in connection with, or in contemplation of, such Asset Acquisition or such
Person becoming such a Restricted Subsidiary).
"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person (other than the G.R. Herberger's
401(k) Employee Stock Purchase Plan and Employment Stock Ownership Plan). For
the purposes of this definition, "control" when used with respect to any
specified Person means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of Voting Stock,
by contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.
"Affiliate Transaction" has the meaning set forth under "-- Limitation on
Transactions with Affiliates."
"Asset Acquisition" means (i) an Investment by the Company or any
Restricted Subsidiary in any other Person pursuant to which such Person will
become a Restricted Subsidiary or will be merged or consolidated with or into
the Company or any Restricted Subsidiary or (ii) the acquisition by the Company
or any Restricted Subsidiary of the assets of any Person which constitute
substantially all of the assets of such Person, or any division or line of
business of such Person, or which is otherwise outside of the ordinary course of
business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance or
transfer or other disposition (including, without limitation, any merger,
consolidation or sale-leaseback transaction) to any Person other than the
Company or a Restricted Subsidiary, in one or a series of related transactions,
of (i) any Capital Stock of any Restricted Subsidiary; (ii) all or substantially
all of the assets of any division or line of business of the Company or any
Restricted Subsidiary; or (iii) any other properties or assets of the Company or
any Restricted Subsidiary other than in the ordinary course of business. For the
purposes of this definition, the term "Asset Sale" will not include (a) any
sale, issuance, conveyance, transfer, lease or other disposition of properties
or assets that is governed by the provisions described under the first paragraph
of "Consolidation, Merger, Sale of Assets, Etc."; (b) sales of surplus and other
property or equipment that has become worn out, obsolete or damaged or otherwise
unsuitable for use in connection with the business of the Company or any
Restricted Subsidiary, as the case may be; or (c) any transaction consummated in
compliance with "-- Certain Covenants -- Limitation on Restricted Payments." For
purposes of the covenant described under "Disposition of Proceeds of Asset
Sales," the term "Asset Sale" shall not include any sale, conveyance, transfer,
lease or other disposition of (x) any property or asset, whether in one
transaction or a series of related transactions (1) constituting a Capitalized
Lease Obligation or a transfer consisting solely of a grant of a security
interest permitted by the Indenture or (2) involving assets with a Fair Market
Value not in excess of $1.0 million, (y) accounts receivable to an Accounts
Receivable Subsidiary or to third parties that are not Affiliates of the Company
or any Subsidiary of the Company in the ordinary course of business or (z) the
sale, transfer or other disposition of shares of Capital Stock or Indebtedness
of an Unrestricted Subsidiary or Permitted Investments (other than Permitted
Investments of the type described under clause (f) of the definition thereof) to
a third party that is not an Affiliate of the Company or any Subsidiary of the
Company.
"Asset Sale Offer" has the meaning set forth under "-- Disposition of
Proceeds of Asset Sales."
"Average Life to Stated Maturity" means, with respect to any Indebtedness,
as at any date of determination, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from such date to the date or dates
of each successive scheduled principal payment (including, without limitation,
any sinking fund requirements) of such Indebtedness multiplied by (b) the amount
of each such principal payment by (ii) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights in or other equivalents (however designated)
of such Person's capital stock, any other interest or participation that confers
on a Person the right to receive a share of the profits and losses of, or
distributions of assets of, the
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issuing Person and any rights (other than debt securities convertible into
capital stock), warrants or options exchangeable for or convertible into such
capital stock.
"Capitalized Lease Obligation" means any obligation under a lease of (or
other agreement conveying the right to use) any property (whether real, personal
or mixed ) that is required to be classified and accounted for as a capital
lease obligation under GAAP, and, for the purpose of the Indenture, the amount
of such obligation at any date shall be the capitalized amount thereof at such
date, determined in accordance with GAAP consistently applied.
"Cash Equivalents" means, at any time, (i) any evidence of Indebtedness
with a maturity of not more than one year issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof); (ii) certificates of deposit,
Eurodollar time deposits or bankers' acceptances with a maturity of not more
than one year of any financial institution that is a member of the Federal
Reserve System having combined capital and surplus and undivided profits of not
less than $500.0 million; (iii) commercial paper with a maturity of not more
than one year issued by a corporation that is not an Affiliate of the Company
organized under the laws of any state of the United States or the District of
Columbia and rated at least A-1 by Standard & Poor's Ratings Group, at least P-1
by Moody's Investors Service, Inc. the equivalent of any such category of
Standard & Poor's Ratings Group or Moody's Investor Services, Inc. used by
another nationally recognized Rating Agency; (iv) repurchase obligations with a
term of not more than seven days for underlying securities of the types
described in clauses (i) and (ii) above; and (v) transaction deposit accounts
with domestic commercial banks.
"Change of Control" means the occurrence of any of the following events
(whether or not approved by the Board of Directors of the Company): (i) any
"person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the
Exchange Act) is or becomes the "beneficial owner" (as defined in Rules 13d-3
and 13d-5 under the Exchange Act, except that a Person will be deemed to have
"beneficial ownership" of all securities that such Person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than 35% of the total voting power of
the then outstanding Voting Stock of the Company; (ii) the Company consolidates
with, or merges with or into, another Person or sells, assigns, conveys,
transfers, leases or otherwise disposes of all or substantially all of its
assets to any Person, other than any such transaction where the holders of the
Voting Stock of the Company immediately prior to such transaction own, directly
or indirectly, not less than a majority of the total voting power of the then
outstanding Voting Stock of the surviving or transferee corporation immediately
after such transaction and the preceding clause (i) is not applicable; (iii)
during any consecutive two-year period, individuals who at the beginning of such
period constituted the Board of Directors of the Company (together with any new
directors whose election by such board or whose nomination for election by the
stockholders of the Company was approved by a vote of 66 2/3% of the directors
then still in office who were either directors at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the Board of Directors of the Company
then in office; or (iv) any order, judgment or decree shall be entered against
the Company decreeing the dissolution or liquidation of the Company and such
order shall remain undischarged or unstayed for a period in excess of sixty
days.
"Change of Control Triggering Event" means the occurrence of both a Change
of Control and a Rating Decline.
"Change of Control Offer" has the meaning set forth under "-- Change of
Control Triggering Event."
"Consolidated Cash Flow Available for Fixed Charges" means, for any period,
(i) the sum of, without duplication, the amounts for such period, taken as a
single accounting period, of (a) Consolidated Net Income, (b) to the extent
reducing Consolidated Net Income, Consolidated Non-cash Charges, (c) to the
extent reducing Consolidated Net Income, Consolidated Interest Expense, and (d)
to the extent reducing Consolidated Net Income, Consolidated Income Tax Expense
less (ii)(A) all non-cash items increasing Consolidated Net Income for such
period and (B) all cash payments during such period relating to non-cash charges
that were added back in determining Consolidated Cash Flow Available for Fixed
Charges in any prior period.
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"Consolidated Fixed Charge Coverage Ratio" means the ratio of the aggregate
amount of Consolidated Cash Flow Available for Fixed Charges of the Company for
the four full fiscal quarters immediately preceding the date of the transaction
for which consolidated financial information of the Company is available (the
"Transaction Date") giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (such four full fiscal quarter period being referred to
herein as the "Four Quarter Period") to the aggregate amount of Consolidated
Fixed Charges of the Company for such Four Quarter Period. For purposes of this
definition, "Consolidated Cash Flow Available for Fixed Charges" and
"Consolidated Fixed Charges" will be calculated, without duplication, after
giving effect on a pro forma basis for the period of such calculation to (i) the
incurrence of any Indebtedness of the Company or any of the Restricted
Subsidiaries during the period commencing on the first day of the Four Quarter
Period to and including the Transaction Date (the "Reference Period"),
including, without limitation, the incurrence of the Indebtedness giving rise to
the need to make such calculation, as if such incurrence occurred on the first
day of the Reference Period, (ii) an adjustment to eliminate or include, as
applicable, the Consolidated Cash Flow Available for Fixed Charges and
Consolidated Fixed Charges of the Company directly attributable to assets which
are the subject of any Asset Sale or Asset Acquisition (including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of the Company or one of the Restricted Subsidiaries
(including any Person who becomes a Restricted Subsidiary as a result of the
Asset Acquisition) incurring, assuming or otherwise being liable for Acquired
Indebtedness) occurring during the Reference Period, as if such Asset Sale or
Asset Acquisition occurred on the first day of the Reference Period, (iii) the
retirement of Indebtedness during the Reference Period which cannot thereafter
be reborrowed occurring as if retired on the first day of the Reference Period
and (iv) an adjustment to eliminate the Restructuring Charges. For purposes of
calculating "Consolidated Fixed Charges" for this "Consolidated Fixed Charge
Coverage Ratio," interest on Indebtedness incurred during the Reference Period
under any revolving credit facility which may be borrowed and repaid without
reducing the commitments thereunder shall be the actual interest during the
Reference Period. Furthermore, in calculating "Consolidated Fixed Charges" for
purposes of determining the denominator (but not the numerator) of this
"Consolidated Fixed Charge Coverage Ratio," (1) interest on Indebtedness
determined on a fluctuating basis as of the Transaction Date and which will
continue to be so determined thereafter will be deemed to accrue at a fixed rate
per annum equal to the rate of interest on such Indebtedness in effect on the
Transaction Date; (2) if interest on any Indebtedness actually incurred on the
Transaction Date may optionally be determined on a fluctuating basis like prime
or a similar rate or a factor thereof, a eurocurrency interbank offered rate, or
other rates, then the interest rate in effect on the Transaction Date shall be
deemed to have been in effect during the Reference Period; and (3)
notwithstanding clause (1) above, interest on Indebtedness determined on a
fluctuating basis, to the extent such interest is covered by agreements relating
to Interest Rate Protection Obligations, will be deemed to accrue at the rate
per annum resulting after giving effect to the operation of such agreements. If
the Company or any Restricted Subsidiary directly or indirectly guarantees
Indebtedness of a third Person, the above definition will give effect to the
incurrence of such guaranteed Indebtedness as if the Company or any Restricted
Subsidiary had directly incurred or otherwise assumed such guaranteed
Indebtedness.
"Consolidated Fixed Charges" means, for any period, the sum of, without
duplication, the amounts for such period of (i) Consolidated Interest Expense;
and (ii) the product of (x) the aggregate amount of cash dividends and other
distributions paid, accrued or scheduled to be paid or accrued during such
period in respect of Redeemable Capital Stock times (y) a fraction, the
numerator of which is one and the denominator of which is one minus the
then-current effective consolidated federal, state and local tax rate of such
Person expressed as a decimal.
"Consolidated Income Tax Expense" means, for any period, the provision for
federal, state, local and foreign income taxes payable by the Company and the
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP.
"Consolidated Interest Expense" means, for any period, without duplication,
the sum of (a) the interest expense of the Company and the Restricted
Subsidiaries for such period as determined on a consolidated basis in accordance
with GAAP, including, without limitation, (i) any amortization of debt discount
attributable to such period, (ii) the net cost under Interest Rate Protection
Obligations (including any amortization of
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discounts), (iii) the interest portion of any deferred payment obligation, (iv)
all commissions, discounts and other fees and charges owed with respect to
letters of credit and bankers' acceptance financing and (v) all capitalized
interest and all accrued interest, and (b) the interest component of Capitalized
Lease Obligations paid, accrued and/or scheduled to be paid or accrued by the
Company and the Restricted Subsidiaries during such period and as determined on
a consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, for any period, the consolidated net
income (or net loss) of the Company and the Restricted Subsidiaries for such
period as determined in accordance with GAAP, adjusted, to the extent included
in calculating such net income, by excluding, without duplication, (i) all
extraordinary gains or losses (net of fees and expenses relating to the
transaction giving rise thereto), (ii) income of the Company and the Restricted
Subsidiaries derived from or in respect of Investments in Unrestricted
Subsidiaries, except to the extent that cash dividends or distributions are
actually received by the Company or a Restricted Subsidiary, (iii) the portion
of net income (or net loss) of the Company and the Restricted Subsidiaries
allocable to minority interests in unconsolidated Persons, except to the extent
that cash dividends or distributions are actually received by the Company or one
of the Restricted Subsidiaries, (iv) net income (or net loss) of any Person
combined with the Company or one of the Restricted Subsidiaries on a "pooling of
interests" basis attributable to any period prior to the date of combination,
(v) gains or losses in respect of any Asset Sales by the Company or any of the
Restricted Subsidiaries (on an after-tax basis and net of fees and expenses
relating to the transaction giving rise thereto), and (vi) the net income of any
Restricted Subsidiary to the extent that the declaration of dividends or similar
distributions by that Restricted Subsidiary of that income is not at the time
permitted, directly or indirectly, by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulations applicable to that Restricted Subsidiary or its
stockholders.
"Consolidated Non-cash Charges" means, for any period, the aggregate
depreciation, amortization and other noncash expenses of the Company and the
Restricted Subsidiaries reducing Consolidated Net Income for such period (other
than any non-cash item requiring an accrual or reserve for cash disbursements in
any future period), determined on a consolidated basis in accordance with GAAP.
"covenant defeasance" has the meaning set forth under "-- Defeasance or
Covenant Defeasance of Indenture."
"Credit Facility" means the Credit Agreement dated as of October 11, 1996,
among the Company, NationsBank of Texas, National Association, as Agent, and the
other financial institutions signatory thereto, as in effect on the Issue Date,
and as such agreement may be amended, renewed, extended, substituted,
refinanced, replaced, supplemented or otherwise modified from time to time, and
includes related notes, guarantees and other agreements executed in connection
therewith.
"Currency Agreement" means the obligations of any Person pursuant to any
foreign exchange contract, currency swap agreement or other similar agreement or
arrangement designed to protect the Company or any Restricted Subsidiary against
fluctuations in currency values.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"defeasance" has the meaning set forth under "-- Defeasance or Covenant
Defeasance of Indenture."
"Designation" has the meaning set forth under "-- Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries."
"Designation Amount" has the meaning set forth under "-- Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries."
"Event of Default" has the meaning set forth under "-- Events of Default."
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the Commission thereunder.
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"Fair Market Value" means, with respect to any asset, the price which could
be negotiated in an arm's-length free market transaction, for cash, between a
willing seller and a willing buyer, neither of which is under pressure or
compulsion to complete the transaction. Fair Market Value shall be determined by
the Board of Directors of the Company acting in good faith conclusively
evidenced by a board resolution thereof delivered to the Trustee or, with
respect to any asset valued at up to $1.0 million, such determination may be
made by a duly authorized officer of the Company evidenced by an officer's
certificate delivered to the Trustee.
"Foreign Subsidiary" means a Restricted Subsidiary not organized or
existing under the laws of the United States, any state thereof, the District of
Columbia or any territory thereof.
"Four Quarter Period" has the meaning set forth in the definition of
"Consolidated Fixed Charge Coverage Ratio."
"GAAP" means, at any date of determination, generally accepted accounting
principles in effect in the United States which are applicable at the date of
determination and which are consistently applied for all applicable periods.
"Guarantee" means the guarantee by each of the Subsidiary Guarantors of the
Notes and the Company's obligations under the Indenture.
"guarantee" means, as applied to any obligation, (i) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner, of any part or all of
such obligation and (ii) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit. A guarantee shall include,
without limitation, any agreement to maintain or preserve any other Person's
financial condition or to cause any other Person to achieve certain levels of
operating results.
"Guarantor" means (i) each of G.R. Herberger's Inc., Parisian, Inc.,
McRae's, Inc., McRae's Stores Partnership and McRae's of Alabama, Inc., and
their respective successors and (ii) each other Subsidiary formed, created or
acquired before or after the Issue Date required to become a Guarantor after the
Issue Date pursuant to "-- Certain Covenants -- Limitation on Guarantees by
Restricted Subsidiaries."
"incur" has the meaning set forth in "-- Certain Covenants -- Limitation on
Indebtedness."
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services, excluding any trade payable and other accrued
current liabilities incurred in the ordinary course of business, but including,
without limitation, all obligations, contingent or otherwise, of such Person in
connection with any letters of credit (but excluding obligations with respect to
trade letters of credit to the extent such trade letters of credit are not drawn
upon or, if drawn upon, to the extent such drawing is reimbursed not later than
the third business day following receipt by such Person of a demand for
reimbursement), bankers' acceptances or other similar credit transaction and in
connection with any agreement obligating such Person to purchase, redeem,
exchange, convert or otherwise acquire for value any Capital Stock of such
Person, or any warrants, rights or options to acquire such Capital Stock, now or
hereafter outstanding, (ii) all obligations of such Person evidenced by bonds,
notes, debentures or other similar instruments, (iii) all indebtedness created
or arising under any conditional sale or other title retention agreement with
respect to property acquired by such Person (even if the rights and remedies of
the seller or lender under such agreement in the event of default are limited to
repossession or sale of such property), but excluding trade accounts payable
arising in the ordinary course of business, (iv) all Capitalized Lease
Obligations of such Person, (v) all Indebtedness referred to in the preceding
clauses of other Persons and all dividends of other Persons, the payment of
which is secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien upon
property (including, without limitation, accounts and contract rights) owned by
such Person, even though such Person has not assumed or become liable for the
payment of such Indebtedness (the amount of such obligation being deemed to be
the lesser of the value of such property or asset or the amount of the
obligation so secured), (vi) all guarantees by such Person of Indebtedness of
another Person (other than
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guarantees of operating leases of a Restricted Subsidiary of such Person), (vii)
all Redeemable Capital Stock valued at its involuntary maximum fixed repurchase
price plus accrued and unpaid dividends, (viii) all net payment obligations
under or in respect of Currency Agreements and Interest Rate Protection
Obligations of such Person, and (ix) any amendment, supplement, modification,
deferral, renewal, extension or refunding of any liability of the types referred
to in clauses (i) through (viii) above. For purposes hereof, the "maximum fixed
repurchase price" of any Redeemable Capital Stock which does not have a fixed
repurchase price will be calculated in accordance with the terms of such
Redeemable Capital Stock as if such Redeemable Capital Stock were purchased on
any date on which Indebtedness will be required to be determined pursuant to the
Indenture, and if such price is based upon, or measured by, the Fair Market
Value of such Redeemable Capital Stock, such Fair Market Value to be determined
in good faith by the Board of Directors of the issuer of such Redeemable Capital
Stock. Sales (on a "true-sale" non-recourse basis) and the servicing of
receivables transferred from the Company or a Restricted Subsidiary, or
transfers of cash, to an Accounts Receivable Subsidiary as a capital
contribution or in exchange for Indebtedness of such Accounts Receivable
Subsidiary or cash shall not be deemed Indebtedness hereunder.
"Interest Rate Protection Obligations" means the obligations of any Person
pursuant to any arrangement with any other Person whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such Person
calculated by applying a fixed or a floating rate of interest on the same
notional amount or any other arrangement involving payments by or to such Person
based upon fluctuations in interest rates.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan or other extension of credit (including by means of a guarantee)
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others or otherwise), or any purchase or acquisition by such Person of any
Capital Stock, bonds, notes, debentures or other securities or evidences of
Indebtedness issued by any other Person. Investments shall exclude extensions of
trade credit in accordance with normal trade practices. In addition to the
foregoing, any foreign exchange contract, Currency Agreement, Interest Rate
Protection Obligation or similar agreement shall constitute an Investment.
"Issue Date" means the original issue date of the Notes under the
Indenture.
"Leveraged Subsidiary" means any Restricted Subsidiary that has incurred
Indebtedness (other than Acquired Indebtedness pursuant to the first paragraph
of the covenant "Limitation on Indebtedness" and Indebtedness described in
clauses (iv), (v), (vii), (viii), (ix) and (xi) of the second paragraph of the
covenant "Limitation on Indebtedness" and any permitted refinancings or
replacements thereof incurred under clause (x)) pursuant to such covenant for so
long as such Indebtedness, or any refinancing thereof, is outstanding.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
privilege, security interest, hypothecation, cessation and transfer, assignment
for security, claim, deposit arrangement or other encumbrance upon or with
respect to any property of any kind, whether real, personal or mixed, movable or
immovable, now owned or hereafter acquired. A Person will be deemed to own
subject to a Lien any property which it has acquired or holds subject to the
interest of a vendor or lessor under any conditional sale agreement, Capitalized
Lease Obligation or other title retention agreement.
"Material Subsidiary" means each Restricted Subsidiary of the Company that
is a "significant subsidiary" as defined in Rule 1-02 of Regulation S-X under
the Securities Act and the Exchange Act (as such regulation is in effect on the
Issue Date).
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of cash or Cash
Equivalents (except to the extent that such obligations are financed or sold
with recourse to the Company or any Restricted Subsidiary) net of (i) brokerage
commissions and other reasonable fees and expenses (including fees and expenses
of legal counsel and investment bankers) related to such Asset Sale,
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(ii) provisions for all taxes payable as a result of such Asset Sale, (iii)
amounts required to be paid to any Person (other than the Company or any
Restricted Subsidiary) owning a beneficial interest in the assets subject to the
Asset Sale and (iv) appropriate amounts to be provided by the Company or any
Restricted Subsidiary, as the case may be, as a reserve required in accordance
with GAAP consistently applied against any liabilities associated with such
Asset Sale and retained by the Company or any Restricted Subsidiary, as the case
may be, after such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale (provided that the amount of any such reserves shall be deemed
to constitute Net Cash Proceeds at the time such reserves shall have been
released or are not otherwise required to be retained as a reserve).
"Other Indebtedness" has the meaning set forth under "-- Certain
Covenants -- Limitation on Guarantees of Restricted Subsidiaries."
"Parisian Notes" means the 9 7/8% Senior Subordinated Notes due 2003 of
Parisian.
"Permitted Indebtedness" has the meaning set forth under "-- Certain
Covenants -- Limitation on Indebtedness."
"Permitted Investment" means (a) Cash Equivalents; (b) Investments in
prepaid expenses, negotiable instruments held for collection and lease, utility
and workers' compensation, performance and other similar deposits; (c) loans,
extensions of credit and advances to officers, directors and employees which are
outstanding on the Issue Date or which do not exceed $7.5 million in the
aggregate at any one time outstanding and payroll, travel and similar advances
to cover matters that are expected at the time of such advances ultimately to be
treated as expenses in accordance with GAAP; (d) Interest Rate Protection
Obligations permitted under clause (vii) of the second paragraph under
"-- Limitation on Indebtedness" and Currency Agreements; (e) Investments by any
Restricted Subsidiary in the Company; (f) Investments by the Company or any
Restricted Subsidiary in a Restricted Subsidiary that is a Guarantor or another
Person, if as a result of or in connection with such Investment such other
Person becomes a Restricted Subsidiary; (g) Investments represented by accounts
receivable created or acquired in the ordinary course of business; (h)
Investments in the form of the sale (on a "true-sale" non-recourse basis) or the
servicing of receivables transferred from the Company or any Restricted
Subsidiary, or transfers of cash, to an Accounts Receivable Subsidiary as a
capital contribution or in exchange for Indebtedness of such Accounts Receivable
Subsidiary or cash in the ordinary course of business; (i) Investments
representing capital stock or obligations issued to the Company or any
Restricted Subsidiary in settlement of claims against any other Person by reason
of a composition or readjustment of debt or a reorganization of any debtor of
the Company or such Restricted Subsidiary; (j) loans or other advances to
vendors in connection with in-store merchandising to be repaid either on a
lump-sum basis or over a period of time by delivery of merchandise; (k)
Investments in credit card receivables arising from any proprietary credit card
issued by or for the benefit of the Company or an Affiliate of the Company and
(l) Investments acquired by the Company or any Restricted Subsidiary in
connection with an Asset Sale permitted under "-- Disposition of Proceeds of
Asset Sales" (other than pursuant to the second sentence of the first paragraph
thereof).
"Permitted Liens" means (a) Liens on property of (or on shares of Capital
Stock or debt securities of) a Person existing at the time such Person (i) is
merged into or consolidated with the Company or any Restricted Subsidiary or
(ii) becomes a Restricted Subsidiary; provided, however, that such Liens were in
existence prior to the contemplation of such merger, consolidation or
acquisition and do not secure any property or assets of the Company or any
Restricted Subsidiary other than the property or assets subject to the Liens
prior to such merger, consolidation or acquisition; (b) Liens imposed by law
such as landlords', carriers', warehousemen's and mechanics' Liens and other
similar Liens arising in the ordinary course of business which secure payment of
obligations not more than 60 days past due or which are being contested in good
faith and by appropriate proceedings; (c) Liens existing on the Issue Date; (d)
Liens securing only the Notes; (e) Liens in favor of the Company or Liens on any
property or assets of a Subsidiary (or on shares of Capital Stock or debt
securities of a Subsidiary) in favor of the Company or any Restricted
Subsidiary; (f) Liens for taxes, assessments or governmental charges or claims
that are not yet delinquent for more than 90 days or that are being contested
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in good faith by appropriate proceedings promptly instituted and diligently
concluded; provided, however, that any reserve or other appropriate provision as
shall be required in conformity with GAAP shall have been made therefor; (g)
easements, reservation of rights of way, restrictions and other similar
easements, licenses, restrictions on the use of properties, or imperfections of
title that in the aggregate are not material in amount and do not in any case
materially detract from the properties subject thereto or interfere with the
ordinary conduct of the business of the Company and the Restricted Subsidiaries;
(h) Liens resulting from the deposit of cash or notes in connection with
contracts, tenders or expropriation proceedings, or to secure workers'
compensation, surety or appeal bonds, costs of litigation when required by law,
public and statutory obligations, obligations under franchise arrangements
entered into in the ordinary course of business and other obligations of a
similar nature arising in the ordinary course of business; (i) Liens securing
any revolving credit facility under the Credit Facility; (j) Liens securing
Indebtedness consisting of Capitalized Lease Obligations, Purchase Money
Indebtedness (other than Indebtedness incurred to finance an Asset Acquisition),
mortgage financings, industrial revenue bonds or other monetary obligations, in
each case incurred solely for the purpose of financing all or any part of the
purchase price or cost of construction or installation of assets used in the
business of the Company or the Restricted Subsidiaries, or repairs, additions or
improvements to such assets; provided, however, that (I) such Liens secure
Indebtedness in an amount not in excess of the original purchase price or the
original cost of any such assets or repair, addition or improvement thereto
(plus an amount equal to the reasonable fees and expenses in connection with the
incurrence of such Indebtedness), (II) such Liens do not extend to any other
assets of the Company or the Restricted Subsidiaries (and, in the case of
repair, addition or improvements to any such assets, such Lien extends only to
the assets (and improvements thereto or thereon) repaired, added to or
improved), (III) the incurrence of such Indebtedness is permitted by "-- Certain
Covenants -- Limitation on Indebtedness" above and (IV) such Liens attach prior
to 90 days after such purchase, construction, installation, repair, addition or
improvement; (k) Liens to secure any Refinancings (or successive Refinancings),
in whole or in part, of any Indebtedness secured by Liens referred to in the
clauses above so long as such Lien does not extend to any other property (other
than improvements thereto); (l) Liens securing letters of credit entered into in
the ordinary course of business and consistent with past business practice; (m)
Liens on and pledges of the capital stock of (A) any Unrestricted Subsidiary
securing any Indebtedness of such Unrestricted Subsidiary and (B) an Accounts
Receivable Subsidiary; (n) leases or subleases granted to others that do not
materially interfere with the ordinary course of business of the Company and the
Restricted Subsidiaries, taken as a whole; (o) any interest or title of a lessor
in any property that is (i) subject to any lease or (ii) located on the real
property subject to any lease; (p) Liens arising from the rendering of a final
judgment or order against the Company or any Restricted Subsidiary that does not
give rise to an Event of Default; (q) Liens arising out of conditional sale,
title retention, consignment or similar arrangements for the sale of goods
entered into by the Company or any Restricted Subsidiary in the ordinary course
of business and (r) Liens on the property or assets or Capital Stock of Accounts
Receivable Subsidiaries and Liens arising out of any sale of accounts receivable
in the ordinary course to or by an Accounts Receivable Subsidiary.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Preferred Stock" means, with respect to any Person, means Capital Stock of
any class or classes (however designated) which is preferred as to the payment
of dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over Capital
Stock of any other class of such Person.
"Purchase Money Indebtedness" means Indebtedness of the Company or any
Restricted Subsidiary incurred for the purpose of financing all or any part of
the purchase price or the cost of construction or improvement of any real or
personal property; provided, however, that the aggregate principal amount of
such Indebtedness does not exceed the lesser of the Fair Market Value of such
property or the original purchase price or the original cost of any such assets
or repair, addition or improvement thereto (plus an amount equal to the
reasonable fees and expenses in connection with the incurrence of such
Indebtedness).
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"Rating Agencies" means (i) Standard & Poor's Ratings Group and (ii)
Moody's Investor Service, Inc. or (iii) if Standard & Poor's Ratings Group or
Moody's Investors Service, Inc. or both shall not make a rating of the Notes
publicly available, a nationally recognized securities rating agency or
agencies, as the case may be, selected by the Company, which shall be
substituted for Standard & Poor's Ratings Group, Moody's Investors Service, Inc.
or both, as the case may be.
"Rating Category" means (i) with respect to Standard & Poor's Ratings
Group, any of the following categories: BB, B, CCC, CC, C and D (or equivalent
successor categories); (ii) with respect to Moody's Investors Service, Inc., any
of the following categories: Ba, B, Caa, Ca, C and D (or equivalent successor
categories); and (iii) the equivalent of any such category of Standard & Poor's
Ratings Group or Moody's Investors Service, Inc. used by another Rating Agency.
In determining whether the rating of the Notes has decreased by one or more
gradations, gradations within Rating Categories (+ and - for Standard & Poor's
Ratings Group; 1, 2 and 3 for Moody's Investors Service, Inc.; or the equivalent
gradations for another Rating Agency) shall be taken into account (e.g., with
respect to Standard & Poor's Ratings Group, a decline in a rating from BB- to
BB, as well as from BB- to B+, will constitute a decrease of one gradation).
"Rating Date" means the date which is 90 days prior to the earlier of (i) a
Change of Control and (ii) public notice of the occurrence of a Change of
Control or of the intention by the Company to effect a Change of Control.
"Rating Decline" means the occurrence of the following on, or within 90
days after, the earlier of (i) the occurrence of a Change of Control and (ii)
the date of public notice of the occurrence of a Change of Control or of the
public notice of the intention of the Company to effect a Change of Control
(which period shall be extended so long as the rating of the Notes is under
publicly announced consideration for possible downgrading by any of the Rating
Agencies): (a) in the event that the Notes have an Investment Grade Rating, the
rating of the Notes by both such Rating Agencies shall be reduced below
Investment Grade, or (b) in the event the Notes are rated below Investment Grade
by both such Rating Agencies on the Rating Date, the rating of the Notes by
either Rating Agency shall be decreased by one or more gradations (including
gradations within Rating Categories as well as between Rating Categories).
"Redeemable Capital Stock" means any class or series of Capital Stock to
the extent that, either by its terms, by the terms of any security into which it
is convertible or exchangeable, or by contract or otherwise, is or upon the
happening of an event or passage of time would be, required to be redeemed prior
to the final stated maturity of the Notes or is redeemable at the option of the
holder thereof at any time prior to such maturity, or is convertible into or
exchangeable for debt securities at any time prior to such maturity.
"Reference Period" has the meaning set forth under the definition of
"Consolidated Fixed Charge Coverage Ratio."
"Refinance" means, with respect to any Indebtedness, any refinancing,
redemption, retirement, renewal, replacement, extension or refunding of such
Indebtedness.
"Restricted Payment" has the meaning set forth under "-- Certain
Covenants -- Limitation on Restricted Payments."
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company, by a Board Resolution
delivered to the Trustee, as an Unrestricted Subsidiary pursuant to and in
compliance with the covenant described under "-- Certain Covenants -- Limitation
on Designations of Unrestricted Subsidiaries." Any such designation may be
revoked by a Board Resolution of the Company delivered to the Trustee, subject
to the provisions of such covenant.
"Restructuring Charges" means all nonrecurring charges related to Asset
Acquisitions and Asset Sales, including merger, restructuring and integration
charges incurred or accrued during the last full fiscal year of the Company
ending prior to the Issue Date.
"Revocation" has the meaning set forth under "-- Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries."
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"Securities Act" mean the Securities Act of 1933, as amended, and the rules
and regulations promulgated by the Commission thereunder.
"Stated Maturity" means, with respect to any Note or any installment of
interest thereon, the dates specified in such Note as the fixed date on which
the principal of such Note or such installment of interest is due and payable,
and when used with respect to any other Indebtedness, means the date specified
in the instrument governing such Indebtedness as the fixed date on which the
principal of such Indebtedness or any installment of interest is due and
payable.
"Subsidiary" means, with respect to any Person, (a) any corporation of
which the outstanding shares of Voting Stock having at least a majority of the
votes entitled to be cast in the election of directors shall at the time be
owned, directly or indirectly, by such Person, or (b) any other Person of which
at least a majority of the shares of Voting Stock are at the time, directly or
indirectly, owned by such first named Person.
"Subordinated Indebtedness" means, with respect to the Company,
Indebtedness of the Company which is expressly subordinated in right of payment
to the Notes or, with respect to any Guarantor, Indebtedness of such Guarantor
which is expressly subordinated in right of payment to the Guarantee of such
Guarantor.
"Surviving Entity" has the meaning set forth under "Consolidations,
Mergers, Sale of Assets, Etc."
"Transaction Date" has the meaning set forth in the definition of
"Consolidated Fixed Charge Coverage Ratio."
"Unrestricted Subsidiary" means each Accounts Receivable Subsidiary and
each Subsidiary of the Company (other than a Guarantor) designated as such
pursuant to and in compliance with the covenant described under "-- Certain
Covenants -- Limitation on Designations of Unrestricted Subsidiaries." Any such
Designation may be revoked by a Board Resolution of the Company delivered to the
Trustee, subject to the provisions of such covenant.
"Unutilized Net Available Proceeds" has the meaning set forth under
"-- Certain Covenants -- Disposition of Proceeds of Asset Sales."
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the Board of Directors, managers
or trustees of any Person (irrespective of whether or not, at the time, stock of
any other class or classes shall have, or might have, voting power by reason of
the happening of any contingency).
"Wholly-Owned Restricted Subsidiary" means any Restricted Subsidiary of
which 100% of the outstanding Capital Stock is owned by the Company and/or
another Wholly-Owned Restricted Subsidiary. For purposes of this definition, any
directors' qualifying shares or investments by foreign nationals mandated by
applicable law shall be disregarded in determining the ownership of a Restricted
Subsidiary.
BOOK-ENTRY; DELIVERY AND FORM
Series A Notes
Series A Notes originally offered and sold to QIBs in reliance on Rule 144A
under the Securities Act, are represented by a single, permanent Global Note in
definitive, fully registered book-entry form (the "Rule 144A Global Note") which
has been registered in the name of Cede & Co., as nominee of DTC on behalf of
purchasers of the Series A Notes represented thereby for credit to the
respective accounts of such purchasers (or to such other accounts as they may
direct) at DTC.
Series A Notes originally offered and sold in reliance on Regulation S
under the Securities Act, if any, were initially represented by a single,
permanent Global Note in definitive, fully registered book-entry form (the
"Regulation S Global Note") which was registered in the name of Cede & Co., as
nominee of DTC and deposited on behalf of the purchasers of the Series A Notes
represented thereby with a custodian for DTC for credit to the respective
accounts of such purchasers (or to such other accounts as they directed) at the
Euroclear System ("Euroclear") or Cedel Bank, societe anonyme ("Cedel"). Prior
to the 40th day after the
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later of the commencement of the issuance of the Series A Notes and the Issue
Date, interests in the Regulation S Global Note may only be held through
Euroclear or Cedel.
Series A Notes (a) originally purchased by or transferred to Accredited
Investors who are not QIBs or (b) held by QIBs who elected to take physical
delivery of their certificates instead of holding their interest through the
Rule 144A Global Note (and which are thus ineligible to trade through DTC) (the
"Series A Non-Global Purchasers") will be issued in fully registered form
("Series A Certificated Notes"). Upon the transfer of such Series A Certificated
Notes to a QIB or in an offshore transaction under Rule 903 or 904 of Regulation
S under the Securities Act, such Series A Certificated Notes will, unless such
Rule 144A Global Note has previously been exchanged in whole for Series A
Certificated Notes, be exchanged for an interest in the Rule 144A Global Note
and/or the Regulation S Global Note upon delivery of appropriate certifications
to the Trustee. Transfers of Series A Certificated Notes, any interest in the
Rule 144A Global Note and any interest in the Regulation S Global Note will be
subject to certain restrictions.
Exchange Notes
Exchange Notes issued in exchange for Series A Notes originally offered and
sold (i) to QIBs in reliance on Rule 144A under the Securities Act, (ii) to
Accredited Investors or (iii) in reliance on Regulation S under the Securities
Act will be represented by a single, permanent Global Note in definitive, fully
registered book-entry form (the "Exchange Global Note"; and together with the
Rule 144A Global Note and the Regulation S Global Note, the "Global Notes"),
which will be registered in the name of Cede & Co., as nominee of DTC on behalf
of persons who receive Exchange Notes represented thereby for credit to the
respective accounts of such persons (or to such other accounts as they may
direct) at DTC.
Exchange Notes issued in exchange for Series A Notes will be issued, upon
request, in fully registered form (together with the Series A Certificated
Notes, the "Certificated Notes"), but otherwise such holders will only be
entitled to registration of their respective Exchange Notes in book-entry form
under the Exchange Global Note.
The Global Notes
The Company expects that pursuant to procedures established by DTC (a) upon
deposit of the Global Notes, DTC or its custodian will credit on its internal
system portions of the Global Notes, which shall be comprised of the
corresponding respective amount of the Global Notes to the respective accounts
of persons who have accounts with such depositary and (b) ownership of the Notes
will be shown on, and the transfer of ownership thereof will be effected only
through, records maintained by DTC or its nominee (with respect to interests of
Participants (as defined below) and the records of Participants (with respect to
interests of persons other than Participants)). Ownership of beneficial
interests in the Global Notes will be limited to persons who have accounts with
DTC ("Participants") or persons who hold interests through Participants. Holders
may hold their interests in the Global Notes directly through DTC if they are
Participants in such system, or indirectly through organizations which are
Participants in such system.
So long as DTC or its nominee is the registered owner or holder of any of
the Notes, DTC or such nominee will be considered the sole owner or holder of
such Notes represented by the Global Notes for all purposes under the Indenture
and under the Notes represented thereby. No beneficial owner of an interest in
the Global Notes will be able to transfer such interest except in accordance
with the applicable procedures of DTC in addition to those provided for under
the Indenture.
Payments of the principal of, premium, if any, and interest (including
Additional Interest, if any) on the Global Notes will be made to DTC or its
nominee, as the case may be, as the registered owner thereof. None of the
Company, the Trustee or any Paying Agent under the Indenture will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interest.
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The Company expects that DTC or its nominee, upon receipt of any payment of
the principal of, premium, if any, and interest (including Additional Interest,
if any) on the Global Notes will credit Participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the principal
amount of the Global Notes as shown on the records of DTC or its nominee. The
Company also expects that payments by Participants to owners of beneficial
interests in the Global Notes held through such Participants will be governed by
standing instructions and customary practice as is now the case with Notes held
for the accounts of customers registered in the names of nominees for such
customers. Such payment will be the responsibility of such Participants.
Transfers between Participants in DTC will be effected in accordance with
DTC rules and will be settled in immediately available funds. If a holder
requires physical delivery of a Certificated Note for any reason, including to
sell Notes to persons in states which require physical delivery of such Notes or
to pledge such Notes, such holder must transfer its interest in the Global Notes
in accordance with the normal procedures of DTC and in accordance with the
procedures set forth in the Indenture.
Before the 40th day after the later of the commencement of the issuance of
the Series A Notes and the Issue Date, transfers by an owner of a beneficial
interest in the Regulation S Global Note to a transferee who takes delivery of
such interest through the Rule 144A Global Note will be made only in accordance
with the applicable procedures and upon receipt by the Trustee and the Company
of a written certification from the transferor of the beneficial interest in the
form provided in the Indenture to the effect that such transfer is being made to
a person whom the transferor reasonably believes is a QIB within the meaning of
Rule 144A in a transaction meeting the requirements of Rule 144A and as
permitted consistent with Regulation S.
Transfers by an owner of a beneficial interest in the Rule 144A Global Note
to a transferee who takes delivery of such interest through the Regulation S
Global Note, whether before, on or after the 40th day after the later of the
commencement of the issuance of the Series A Notes and the Issue Date, will be
made only upon receipt by the Trustee and the Company of a certification to the
effect that such transfer is being made in accordance with Regulation S.
Transfers of Series A Certificated Notes held by institutional Accredited
Investors to persons who will hold beneficial interests in the Rule 144A Global
Note or the Regulation S Global Note will be subject to certifications provided
by the Trustee.
Any beneficial interest in one of the Global Notes that is transferred to a
person who takes delivery in the form of an interest in the other Global Note
will, upon transfer, cease to be an interest in such Global Note and become an
interest in the other Global Note and, accordingly, will thereafter be subject
to all transfer restrictions, if any, and other procedures applicable to
beneficial interests in such other Global Note for as long as it remains such an
interest.
DTC has advised the Company that DTC will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more Participants to whose
account the DTC interests in the Global Notes are credited and only in respect
of the aggregate principal amount as to which such Participant or Participants
has or have given such direction. However, if there is an Event of Default under
the Indenture, DTC will exchange the Global Notes for Certificated Notes, which
it will distribute to its Participants and which, in the case of Series A
Certificated Notes, will be legended.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold Notes for
its Participants and facilitate the clearance and settlement of Notes
transactions between Participants through electronic book-entry changes in
accounts of its Participants, thereby eliminating the need for physical movement
of certificates. Participants include Notes brokers and dealers, banks, trust
companies and clearing corporations and certain other organizations. Indirect
access to the DTC system is available to others such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Participant, either directly or indirectly.
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Although DTC, Euroclear and Cedel are expected to follow the foregoing
procedures in order to facilitate transfers of interests in the Global Notes
among Participants of DTC, Euroclear and Cedel, as applicable, they are under no
obligation to perform such procedures, and such procedures may be discontinued
at any time. None of the Company, the Trustee, Registrar or the Paying Agent
will have any responsibility for the performance by DTC, Euroclear or Cedel or
their respective direct or indirect Participants of their respective obligations
under the rules and procedures governing their operations.
Certificated Notes
Interests in Global Notes will be exchanged for Certificated Notes if (i)
DTC notifies the Company that it is unwilling or unable to continue as
depositary for the Global Notes, or DTC ceases to be a "Clearing Agency"
registered under the Exchange Act, and a successor depositary is not appointed
by the Company within 90 days, or (ii) an Event of Default has occurred and is
continuing with respect to the Notes. Upon the occurrence of any of the events
described in the preceding sentence, the Company will cause the appropriate
Certificated Notes to be delivered.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
This summary discusses the material United States federal tax
considerations applicable to persons that acquire the Exchange Notes in exchange
for Series A Notes that were sold to the Initial Purchasers and to subsequent
owners of the Exchange Notes. It is not intended to be tax advice to any person,
nor is it binding upon the Internal Revenue Service (the "IRS"). This summary is
based on the Internal Revenue Code of 1986, as amended (the "Code") and existing
and proposed Treasury Regulations, revenue rulings and judicial decisions now in
effect, all of which are subject to change at any time by legislative, judicial
or administrative action, and such changes may be applied retroactively in a
manner that could adversely affect holders of Exchange Notes. This summary deals
only with Exchange Notes held as capital assets (within the meaning of Section
1221 of the Code) by a holder that is (i) a citizen or resident of the United
States, (ii) a domestic corporation or (iii) otherwise subject to United States
federal income taxation on a net income basis in respect of the Exchange Notes
of such holder (for the purposes of this section only, holders of Notes are
referred to as "Holders"), and does not purport to address all aspects of the
possible federal income tax consequences of ownership of Exchange Notes. In
particular, and without limiting the foregoing, this summary does not address
tax consequences of ownership of an Exchange Note that may be relevant to
investors in special tax situations, such as dealers in securities or
currencies, tax-exempt persons, certain financial institutions, life insurance
companies, persons holding Exchange Notes as part of a "straddle" (as defined in
Section 1092 of the Code), a "hedge" (as defined in Section 1256 of the Code),
or a "conversion transaction" (as defined in Section 1258 of the Code), persons
whose "functional currency" as defined in Section 985 of the Code is not United
States dollars, or foreign persons.
INVESTORS CONSIDERING TENDERING SERIES A NOTES FOR EXCHANGE NOTES PURSUANT TO
THE EXCHANGE OFFER SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE
APPLICATION OF THE UNITED STATES FEDERAL INCOME AND OTHER TAX LAWS TO THEIR
PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF
ANY STATE, LOCAL OR FOREIGN TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX
TREATY.
The Company has not sought and will not seek any rulings from the IRS with
respect to the positions of the Company discussed below. There can be no
assurance that the IRS will not take a different position concerning the tax
consequences of the acquisition, ownership or disposition of the Exchange Notes
or that any such position would not be sustained.
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EXCHANGE OF SENIOR NOTES FOR EXCHANGE NOTES
The exchange of Series A Notes for Exchange Notes pursuant to the Exchange
Offer will not be considered a taxable exchange for U.S. federal income tax
purposes because the Exchange Notes will not be considered to differ materially
in kind or extent from the Series A Notes. Exchange Notes received by a Holder
of Series A Notes will be treated as a continuation of the Series A Notes in the
hands of such Holder. Accordingly, there will not be any U.S. federal income tax
consequences to Holders exchanging Series A Notes for Exchange Notes in the
Exchange Offer. Holders of Exchange Notes will have identical United States
federal income tax consequences to Holders of the Series A Notes.
INTEREST PAYMENTS
Interest on an Exchange Note, other than interest that is not a payment of
"qualified stated interest" (as defined below under "Original Issue Discount"),
will be taxable to a Holder as ordinary income at the time it is received or
accrued, depending on the Holder's method of accounting for tax purposes.
ORIGINAL ISSUE DISCOUNT
The Series A Notes were issued with certain original issue discount
("OID"). The amount of OID is considered de minimus because the stated
redemption price at maturity (100% of par) did not exceed the issue price of the
Series A Notes (99.427% of par) by more than 0.25% of the stated redemption
price at maturity multiplied by the number of complete years to maturity.
Similarly, the Exchange Notes will be treated as having a de minimus amount of
OID. Accordingly, under applicable Treasury Regulations, a Holder of Exchange
Notes must include any such OID in income as stated principal payments are made.
The "issue price" of the Notes is the first price at which a substantial number
of Series A Notes were sold for money, excluding sales to underwriters,
placement agents or wholesalers. The "stated redemption price at maturity" is
the sum of all payments to be made on the Series A Notes other than "qualified
stated interest". The term "qualified stated interest" means, generally, stated
interest that is unconditionally payable in cash or in property (other than debt
instruments of the issuer) at least annually at a single fixed rate or, subject
to certain conditions, based on one or more interest indices. Interest is
payable at a single fixed rate only if the rate appropriately takes into account
the length of the interval between payments.
The OID regulations provide that options relating to a debt instrument may
affect whether an instrument has been issued with OID. In the event of a Change
of Control Triggering Event, the Company is required to offer to redeem all of
the Exchange Notes. The right of Holders of the Exchange Notes to require
redemption of the Exchange Notes upon the occurrence of a Change of Control
Triggering Event should not affect the yield or maturity date of the Exchange
Notes, provided, based on all the facts and circumstances as of the issue date,
the likelihood is remote that a Change of Control Triggering Event giving rise
to the redemption will occur. The Company has no present intention of treating
the redemption provisions of the Exchange Notes as affecting the computation of
the yield to maturity of any Exchange Note. See "Description of the
Notes -- Change of Control Triggering Event."
EXCHANGE NOTES PURCHASED AT A PREMIUM
In general, if a Holder acquires an Exchange Note for an amount in excess
of its principal amount, the Holder may elect to treat such excess as
"amortizable bond premium," in which case the amount required to be included in
the holder's income each year with respect to interest on the Exchange Note is
reduced by the amount of amortizable bond premium allocable to such year based
on the Exchange Note's yield to maturity. Any such election applies to all debt
instruments (other than debt instruments 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 which are acquired thereafter by the Holder,
and such election is irrevocable without the consent of the IRS.
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MARKET DISCOUNT ON RESALE OF EXCHANGE NOTES
A Holder of an Exchange Note should be aware that the acquisition or resale
of an Exchange Note may be affected by the "market discount" provisions of the
Code. The market discount rules generally provide that if a Holder of an
Exchange Note acquires the Exchange Note at a market discount (i.e., a discount
other than at original issue), any gain recognized upon the disposition of the
Exchange Note by the Holder is taxable as ordinary interest income, rather than
as capital gain, to the extent such gain does not exceed the accrued market
discount on the Exchange Note at the time of the disposition. "Market discount"
generally means the excess, if any, of an Exchange Note's stated redemption
price at maturity over the price paid by the holder therefor, subject to a de
minimis exception. A Holder who acquires an Exchange Note at a market discount
also may be required to defer the deduction of a portion of the amount of
interest that the Holder paid or accrued during the taxable year on indebtedness
incurred or maintained to purchase or carry such Exchange Note, if any.
Any principal payment on an Exchange Note acquired by a Holder at a market
discount is included in gross income as ordinary income (generally, as interest
income) to the extent that it does not exceed the accrued market discount at the
time of such payment. The amount of the accrued market discount for purposes of
determining the tax treatment of subsequent payments on, or dispositions of, the
Exchange Note is reduced by the amounts so treated as ordinary income.
A Holder of an Exchange Note acquired at a market discount may elect to
include market discount in gross income, for federal income tax purposes, as
such market discount accrues, either on a straight-line basis or on a constant
interest rate basis. This current inclusion election, once made, applies to all
market discount obligations acquired on or after the first day of the first
taxable year to which the election applies, and may not be revoked without the
consent of the IRS. If a Holder makes such an election, the foregoing rules
regarding the recognition of ordinary interest income on sales and other
dispositions and the receipt of principal payments with respect to such Exchange
Note, and regarding the deferral of interest deductions on indebtedness incurred
or maintained to purchase or carry such Exchange Note, will not apply.
SALE, EXCHANGE OR RETIREMENT OF THE EXCHANGE NOTES
A Holder will generally recognize gain or loss on the sale or retirement of
an Exchange Note equal to the difference between the amount realized on the
sale, exchange or retirement of the Exchange Note and the Holder's adjusted tax
basis in the Exchange Note. A Holder's adjusted tax basis in an Exchange Note is
its cost (or, if applicable, the tax basis of the Series A Note exchanged for
the Exchange Note), increased by the amount of any OID included in the Holder's
income with respect to the Exchange Note and reduced by the amount of any
interest payments on the Exchange Note that are not payments of qualified stated
interest. Except to the extent described above under "Original Issue Discount"
and "Market Discount," and except to the extent attributable to accrued but
unpaid interest, gain or loss recognized on the sale or retirement of an
Exchange Note is capital gain or loss, provided the Exchange Note was a capital
asset in the hands of the Holder, and is long-term capital gain or loss if the
Exchange Note was held for more than one year.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to payments of
principal, premium, if any, and interest on an Exchange Note and payments of the
proceeds of the sale of an Exchange Note to certain noncorporate Holders, and a
31% backup withholding tax may apply to such payments if the Holder (i) fails to
furnish or certify his correct taxpayer identification number to the payor in
the manner required, (ii) is notified by the IRS that he has failed to report
payments of interest and dividends properly or (iii) under certain
circumstances, fails to certify that he has not been notified by the IRS that he
is subject to backup withholding for failure to report interest and dividend
payments. Any amounts withheld under the backup withholding rules from a payment
to a Holder will be allowed as a credit against such Holder's United States
federal income tax and may entitle the Holder to a refund, provided that the
required minimum information is furnished to the IRS.
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ADDITIONAL INTEREST
The Company intends to take the position that Additional Interest, if any,
on the Notes will be taxable to the Holder as ordinary income in accordance with
the Holder's method of accounting for federal income tax purposes. The IRS may
take a different position, however, which could affect the timing of both a
Holder's income and the Company's deduction with respect to such Additional
Interest, if any.
LEGAL MATTERS
The validity of the Exchange Notes and the Exchange Note Guarantees being
offered hereby and certain other legal matters in connection with the Exchange
Offer have been passed upon for the Company by Alston & Bird LLP, Atlanta,
Georgia, and Sommer & Barnard, PC, Indianapolis Indiana.
EXPERTS
The consolidated financial statements of Proffitt's appearing elsewhere
herein as of February 1, 1997 and February 3, 1996 and for each of the three
years in the period ended February 1, 1997, have been audited by Coopers &
Lybrand L.L.P., independent accountants, as set forth in their report thereon
and included herein. Such consolidated financial statements are included herein
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing. The consolidated financial statements included in this
prospectus in the registration statement for the year ended January 28, 1995 as
it relates to Younkers, Inc. and subsidiary, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein and
elsewhere in the registration statement, and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The consolidated financial statements of Parisian, Inc. as of February 3,
1996 and January 28, 1995, and for each of the three years in the period ended
February 3, 1996, appearing herein, have been audited by Coopers & Lybrand
L.L.P., independent accountants, as set forth in their report thereon, included
herein. Such consolidated financial statements are included herein in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
94
<PAGE> 95
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements of Proffitt's, Inc.:
Report of Independent Accountants -- Coopers & Lybrand
L.L.P.................................................. F-2
Independent Auditors' Report -- Deloitte & Touche LLP..... F-3
Consolidated Statements of Income for the fiscal years
ended February 1, 1997, February 3, 1996 and January
28, 1995............................................... F-4
Consolidated Balance Sheets as of February 1, 1997 and
February 3, 1996....................................... F-5
Consolidated Statements of Shareholders' Equity for the
fiscal years ended February 1, 1997, February 3, 1996,
and February 28, 1995.................................. F-6
Consolidated Statements of Cash Flows for the fiscal years
ended February 1, 1997, February 3, 1996 and January
28, 1995............................................... F-7
Notes to Consolidated Financial Statements................ F-8 to F-22
Condensed Consolidated Financial Statements of Proffitt's,
Inc.:
Condensed Consolidated Balance Sheets as of May 3, 1997,
February 1, 1997 and May 4, 1996 (unaudited)........... F-23
Condensed Consolidated Statements of Income for the three
months ended May 3, 1997 and May 4, 1996 (unaudited)... F-24
Condensed Consolidated Statements of Cash Flows for the
three months ended May 3, 1997 and May 4, 1996
(unaudited)............................................ F-25
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................ F-26 to F-27
Consolidated Financial Statements of Parisian, Inc.:
Report of Independent Accountants......................... F-28
Consolidated Balance Sheets as of January 28, 1995 and
February 3, 1996....................................... F-29
Consolidated Statements of Operations for the fiscal years
ended January 29, 1994, January 28, 1995 and February
3, 1996................................................ F-30
Consolidated Statements of Changes in Shareholders' Equity
for the fiscal years ended January 29, 1994, January
28, 1995 and February 3, 1996.......................... F-31
Consolidated Statements of Cash Flows for the fiscal years
ended January 29, 1994, January 28, 1995 and February
3, 1996................................................ F-32
Notes to Consolidated Financial Statements................ F-33 to F-42
</TABLE>
F-1
<PAGE> 96
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Proffitt's, Inc.
We have audited the accompanying consolidated balance sheets of Proffitt's,
Inc. and Subsidiaries as of February 1, 1997 and February 3, 1996, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended February 1, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The consolidated financial statements give retroactive effect to the
merger with Younkers, Inc., which has been accounted for as a pooling of
interests as described in Note 2 to the consolidated financial statements. We
did not audit the financial statements of Younkers for the year ended January
28, 1995. Such statements reflect total revenues constituting 39.6% of the
related consolidated totals in 1994. Those statements were audited by other
auditors, whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for Younkers, Inc., is based solely on the
report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Proffitt's, Inc. and
Subsidiaries as of February 1, 1997 and February 3, 1996 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended February 1, 1997, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
March 20, 1997
F-2
<PAGE> 97
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Younkers, Inc.
We have audited the accompanying consolidated balance sheet of Younkers,
Inc. and subsidiary as of January 28, 1995, and the related consolidated
statements of earnings, shareholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The Company's financial statements as of January
29, 1994 and January 30, 1993 were audited by other auditors whose report, dated
March 3, 1994, expressed an unqualified opinion on those financial statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1995 consolidated financial statements present fairly,
in all material respects, the consolidated financial position of Younkers, Inc.
and subsidiary at January 28, 1995, and the consolidated results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Des Moines, Iowa
March 3, 1995
F-3
<PAGE> 98
PROFFITT'S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES.............................................. $1,889,779 $1,661,056 $1,513,444
COSTS AND EXPENSES
Cost of sales........................................ 1,230,454 1,087,619 986,028
Selling, general and administrative expenses......... 440,502 398,999 352,448
Other operating expenses
Property and equipment rentals.................... 60,684 50,609 47,857
Depreciation and amortization..................... 41,037 43,013 40,305
Taxes other than income taxes..................... 40,403 36,938 34,421
Expenses related to hostile takeover defense......... 3,182
(Gains) losses from long-lived assets................ (1,094) 19,121
Merger, restructuring and integration costs.......... 15,929 20,822
---------- ---------- ----------
OPERATING INCOME............................. 61,864 753 52,385
OTHER INCOME (EXPENSE)
Finance charge income, net........................... 32,305 31,273 27,934
Interest expense..................................... (26,756) (29,389) (23,286)
Other income, net.................................... 1,572 4,051 4,826
---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES AND
EXTRAORDINARY LOSS......................... 68,985 6,688 61,859
Provision for income taxes............................. 31,586 6,047 24,411
---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY LOSS............. 37,399 641 37,448
Extraordinary loss on early extinguishment of debt (net
of tax).............................................. (2,060)
---------- ---------- ----------
NET INCOME (LOSS)............................ 37,399 (1,419) 37,448
Preferred stock dividends.............................. 796 1,950 1,694
Payment for early conversion of preferred stock........ 3,032
---------- ---------- ----------
NET INCOME (LOSS) AVAILABLE TO COMMON
SHAREHOLDERS............................... $ 33,571 $ (3,369) $ 35,754
========== ========== ==========
Earnings (loss) per common share
Primary.............................................. $ 1.31 $ (0.15)* $ 1.55
========== ========== ==========
Fully diluted........................................ $ 1.41 $ (0.15)* $ 1.52
========== ========== ==========
Weighted average common shares
Primary.............................................. 25,564 23,157 23,046
========== ========== ==========
Fully diluted........................................ 28,204 23,166 26,301
========== ========== ==========
</TABLE>
- ---------------
* Loss per share before extraordinary item was $.06, and the loss per share
attributable to the extraordinary item was $.09.
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 99
PROFFITT'S, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 3,382 $ 29,178
Residual interest in trade accounts receivable............ 85,400 44,878
Accounts receivable -- other.............................. 20,659 12,158
Merchandise inventories................................... 447,164 329,733
Other current assets...................................... 27,658 10,106
Deferred income taxes..................................... 11,700 4,961
---------- --------
Total current assets.............................. 595,963 431,014
Property and equipment, net of depreciation................. 510,502 410,256
Goodwill and tradenames, net of amortization................ 277,472 52,838
Other assets................................................ 19,859 24,905
---------- --------
Total assets...................................... $1,403,796 $919,013
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable.................................... $ 116,434 $ 87,026
Accrued expenses.......................................... 86,220 60,516
Accrued compensation and related items.................... 19,188 16,155
Sales taxes payable....................................... 17,196 12,005
Current portion of long-term debt......................... 12,515 20,118
---------- --------
Total current liabilities......................... 251,553 195,820
Senior debt................................................. 276,810 168,937
Deferred income taxes....................................... 62,000 53,171
Other long-term liabilities................................. 47,768 14,328
Subordinated debt........................................... 225,767 100,505
Redeemable common stock held in ESOP........................ 58,881
Commitments and contingencies
Shareholders' equity
Preferred stock........................................... 28,850
Common stock.............................................. 2,802 2,711
Additional paid-in capital................................ 378,016 243,822
Retained earnings......................................... 168,858 73,469
Treasury stock at cost (6,811 shares in 1995)............. (21,481)
Deferred ESOP compensation................................ (9,778)
---------- --------
Total shareholders' equity........................ 539,898 327,371
---------- --------
Total liabilities and shareholders' equity........ $1,403,796 $919,013
========== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 100
PROFFITT'S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ADDITIONAL DEFERRED TOTAL
PREFERRED COMMON PAID-IN RETAINED TREASURY ESOP SHAREHOLDERS'
STOCK STOCK CAPITAL EARNINGS STOCK COMPENSATION EQUITY
--------- ------ ---------- -------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 29, 1994............. $ -- $2,651 $223,829 $ 62,701 $(14,076) $ -- $275,105
Net income............................ 37,448 37,448
Issuance of common stock.............. 53 9,941 9,994
Issuance of Series B preferred
stock............................... 3,296 3,296
Issuance of Series A preferred
stock............................... 28,850 28,850
Income tax benefits related to
exercised stock options............. 112 112
Purchase of treasury stock............ (3,361) (3,361)
Increase in stock held in ESOP........ (30) (11,588) (11,618)
Conversion of Series B preferred
stock............................... (3,296) 16 3,280
Preferred stock dividends............. (1,694) (1,694)
Unrealized gain on released ESOP
shares.............................. 1 1
Common stock dividends, $.28 per
Herberger's share................... (1,126) (1,126)
-------- ----- -------- -------- -------- ------- --------
Balance at January 28, 1995............. 28,850 2,690 237,163 85,741 (17,437) -- 337,007
Net loss.............................. (1,419) (1,419)
Issuance of common stock.............. 36 6,241 6,277
Income tax benefits related to
exercised stock options............. 373 373
Purchase of treasury stock............ (4,044) (4,044)
Increase in stock held in ESOP........ (15) (7,857) (7,872)
Preferred stock dividends............. (1,950) (1,950)
Unrealized gain on released ESOP
shares.............................. 45 45
Common stock dividends, $.28 per
Herberger's share................... (1,046) (1,046)
-------- ----- -------- -------- -------- ------- --------
Balance at February 3, 1996............. 28,850 2,711 243,822 73,469 (21,481) -- 327,371
Net income............................ 37,399 37,399
Issuance of common stock.............. 348 117,437 117,785
Income tax benefits related to
exercised stock options............. 3,818 3,818
Purchase of treasury stock............ (2,056) (2,056)
Retirement of treasury stock.......... (689) (15,789) (7,059) 23,537
Reclassification of ESOP stock........ 290 (57) 69,907 (9,778) 60,362
Unrealized gain on released ESOP
shares.............................. 122 122
Preferred stock dividends............. (796) (796)
Payment for early conversion of
preferred stock..................... (3,032) (3,032)
Conversion of Series A preferred
stock............................... (28,850) 142 28,663 (45)
Common stock dividends, $.28 per
Herberger's share................... (1,030) (1,030)
-------- ----- -------- -------- -------- ------- --------
Balance at February 1, 1997............. $ -- $2,802 $378,016 $168,858 $ -- $(9,778) $539,898
======== ====== ======== ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 101
PROFFITT'S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Operating activities
Net income (loss)......................................... $ 37,399 $ (1,419) $ 37,448
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary loss on extinguishment of debt........... 3,433
Depreciation and amortization.......................... 41,257 43,626 41,013
Deferred income taxes.................................. 17,802 (13,477) 4,480
(Gains) losses from long-lived assets.................. (1,094) 19,121
Amortization of deferred compensation.................. 1,481 1,363 1,034
Changes in operating assets and liabilities:
Trade accounts receivable............................ 3,162 5,608 52,580
Merchandise inventories.............................. 17,940 (7,411) 1,219
Other current assets................................. (14,351) 710 (952)
Accounts payable and accrued expenses................ (20,709) 15,553 5,861
Other................................................ (375) (503) 580
--------- -------- ---------
Net cash provided by operating activities......... 82,512 66,604 143,263
Investing activities
Purchases of property and equipment, net.................. (61,031) (51,469) (53,293)
Proceeds from sale of assets.............................. 5,410
Acquisition of Parisian (1996)/Parks-Belk (1995)/McRae's
(1994)................................................. (119,070) (10,483) (184,067)
Other..................................................... (1,719)
--------- -------- ---------
Net cash used in investing activities............. (174,691) (61,952) (239,079)
Financing activities
Proceeds from long-term borrowings........................ 113,037 32,273 90,983
Payments on long-term debt................................ (49,318) (20,345) (35,161)
Proceeds from issuance of stock........................... 9,578 2,210 29,166
Purchase of treasury stock................................ (2,056) (4,043) (3,361)
Payments to preferred and common shareholders............. (4,858) (3,139) (1,954)
--------- -------- ---------
Net cash provided by financing activities......... 66,383 6,956 79,673
--------- -------- ---------
(Decrease) increase in cash and cash
equivalents..................................... (25,796) 11,608 (16,143)
Cash and cash equivalents at beginning of year.............. 29,178 17,570 33,713
--------- -------- ---------
Cash and cash equivalents at end of year.................... $ 3,382 $ 29,178 $ 17,570
========= ======== =========
</TABLE>
- ---------------
Noncash investing and financing activities are further described in the
accompanying notes.
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 102
PROFFITT'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 -- ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The Company is a retail organization operating regional department store
divisions under the store names of Proffitt's, McRae's, Younkers, Parisian, and
Herberger's. The Company's fiscal year ends on the Saturday nearest January 31.
Years 1996 and 1994 consisted of 52 weeks and ended on February 1, 1997 and
January 28, 1995, respectively. Year 1995 consisted of 53 weeks and ended on
February 3, 1996. The financial statements include the accounts of Proffitt's
and its subsidiaries. All significant intercompany balances and transactions
have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with
maturities of three months or less to be cash equivalents.
RESIDUAL INTEREST IN TRADE ACCOUNTS RECEIVABLE
Residual interest in trade accounts receivable represents an owned residual
interest in two special purpose subsidiaries that own the Company's proprietary
revolving charge accounts. In some cases, the account's terms provide for
payments exceeding one year. In accordance with usual industry practice, such
receivables are included in current assets. A portion of the finance charge
income on these receivables is earned by financial institutions in connection
with the sales of interests in accounts receivable (see Note 4).
INVENTORIES
Inventories are valued at the lower of cost or market as determined by the
retail inventory method using last-in, first-out (LIFO) costs for approximately
69% and 86% of the inventories at February 1, 1997 and February 3, 1996,
respectively, and using first-in, first-out (FIFO) costs for the balance. At
February 3, 1996 the LIFO value of inventory exceeded market, and as a result,
inventory was stated at the lower market amount. At February 1, 1997 the LIFO
value approximated the FIFO value.
Inventory costs include invoice cost, freight, and certain purchasing and
distribution costs.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed principally using the straight-line method over the
estimated useful lives of the assets for financial reporting purposes. Gains or
losses on the sales of assets are recorded at disposal. At each balance sheet
date, the Company evaluates recoverability of property and equipment based upon
expectations of nondiscounted cash flows and operating income.
F-8
<PAGE> 103
PROFFITT'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GOODWILL AND TRADENAMES
The Company has allocated substantially all the cost in excess of fair
value of net tangible assets acquired in purchase transactions to goodwill and
tradenames, which is being amortized on a straight-line method over 15 to 40
years. The Company recognized amortization charges of $3,369, $1,523 and $1,100
for 1996, 1995 and 1994, respectively. As of February 1, 1997, the accumulated
amortization of intangible assets was $6,206. At each balance sheet date, the
Company evaluates the recoverability of intangible assets based upon
expectations of nondiscounted cash flows and operating income. Based upon its
most recent analysis, the Company believes that no impairment of intangible
assets exists at February 1, 1997.
EMPLOYEE STOCK OWNERSHIP PLANS
Shares acquired after January 30, 1994 are accounted for in accordance with
SOP 93-6, "Employers' Accounting for Employee Stock Ownership Plans." All other
unreleased shares are accounted for in accordance with SOP 76-3, "Accounting
Practices for Certain Employee Stock Ownership Plans."
STOCK-BASED COMPENSATION
Compensation cost is measured under the intrinsic value method in
accordance with Accounting Principles Bulletin No. 25. Pro forma disclosures of
net income and earnings per share are presented, as if the fair value method had
been applied, as required by SFAS No. 123.
REVENUES
Retail sales are recorded on the accrual basis and profits on installment
sales are recognized in full when the sales are recorded. Sales are net of
returns which are reflected as a period cost at the time of return.
LEASED DEPARTMENT SALES
The Company includes leased department sales as part of net sales. Leased
department sales were $62,804, $73,977 and $71,369 for 1996, 1995 and 1994,
respectively.
STORE PRE-OPENING COSTS
Store pre-opening costs are expensed when incurred.
ADVERTISING COSTS
Advertising and sales promotion costs are expensed as incurred. Advertising
and sales promotion costs were $68,602, $60,232 and $52,206, for 1996, 1995 and
1994, respectively.
INCOME TAXES
Deferred income taxes reflect the impact of "temporary differences" between
the amount of assets and liabilities for financial reporting purposes and such
amounts as measured by enacted tax rules and regulations.
EARNINGS PER COMMON SHARE
Primary earnings per common share have been computed based on the weighted
average number of common shares outstanding, including common stock equivalents,
after recognition of preferred stock dividends of $796, $1,950 and $1,694 for
1996, 1995 and 1994, respectively, and a payment of $3,032 for early conversion
of the preferred stock in 1996.
F-9
<PAGE> 104
PROFFITT'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's convertible subordinated debentures are not common stock
equivalents and are therefore considered only in fully diluted earnings per
share when dilutive.
Common stock issued upon the conversion of the preferred stock in June 1996
has been included in the weighted average number of shares outstanding
subsequent to that date for computing primary earnings per share. Fully diluted
earnings per share for 1996 have been presented based upon an "as if the shares
issued in the conversion were outstanding from the beginning of the year" basis.
Common shares acquired after January 30, 1994 and held by the ESOP are not
considered outstanding for earnings per share calculations until the shares are
committed to be released and the related compensation expense recognized.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." The new standard, which
was effective for all sales of accounts receivable beginning January 1, 1997,
requires that a gain be recognized at the time of sale to the extent the fair
value of the undivided interest in the receivables sold and the servicing rights
retained exceed the carrying value of the receivables. Historically, the Company
has recognized the excess interest earned on sold receivables over the life of
the receivables. The effect of this accounting change was immaterial to 1996.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share." The new
standard changes the presentation and method in which earnings per share are
computed and is effective for the Company's year ending January 31, 1998. The
new standard will be applied on a "retroactive restatement of all prior periods"
basis. The Company is currently in the process of ascertaining the impact the
new standard will have on its earnings per share amounts for 1996 and prior
periods.
NOTE 2 -- MERGERS WITH HERBERGER'S AND YOUNKERS
On February 1, 1997, Proffitt's, Inc. ("Proffitt's") issued 4,000 shares of
its common stock for all the outstanding common stock of G.R. Herberger's, Inc.
("Herberger's") (collectively, the "Company"). Herberger's operated 39 stores in
the Midwest. The merger has been accounted for as a pooling of interests and,
accordingly, these consolidated financial statements have been restated for all
periods to include the results of operations and financial position of
Herberger's.
F-10
<PAGE> 105
PROFFITT'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Separate results of the combined entities were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Proffitt's................................... $1,567,995 $1,333,498 $1,216,498
Herberger's.................................. 321,784 327,558 296,946
---------- ---------- ----------
1,889,779 1,661,056 1,513,444
Extraordinary loss:
Proffitt's................................... 0 (2,060) 0
Herberger's.................................. 0 0 0
---------- ---------- ----------
0 (2,060) 0
========== ========== ==========
Net income (loss):
Proffitt's................................... 43,598 (8,459) 29,744
Herberger's.................................. (6,199) 7,040 7,704
---------- ---------- ----------
$ 37,399 $ (1,419) $ 37,448
========== ========== ==========
</TABLE>
Herberger's financial statements have been restated to conform to
Proffitt's accounting methods and to reflect certain reclassifications with an
immaterial effect on Herberger's previously reported income and shareholders'
equity.
On February 3, 1996, Proffitt's issued 8,816 shares of its common stock for
all the outstanding common stock of Younkers, Inc. ("Younkers"). Younkers
operated 51 stores in the Midwest. The merger was accounted for as a pooling of
interests and, accordingly, the consolidated financial statements were restated
for all periods to include the results of operations and financial position of
Younkers.
NOTE 3 -- ACQUISITIONS OF MCRAE'S, PARKS-BELK AND PARISIAN
MCRAE'S
On March 31, 1994, Proffitt's acquired McRae's, Inc. ("McRae's") which
operated 28 stores in the Southeast. The total acquisition price was
approximately $212 million and is detailed below. The McRae's transaction was
accounted for as a purchase and, accordingly, the results of the operations of
McRae's have been included in the Company's results of operations since the date
of acquisition. The purchase price has been allocated to McRae's tangible assets
and liabilities based on their estimated fair values at the date of acquisition,
with the remaining $45,574 allocated principally to goodwill.
PARKS-BELK
In April 1995, Proffitt's acquired the Parks-Belk Company, which operated
four department stores in northeast Tennessee. Consideration of less than $20
million was paid in Proffitt's, Inc. common stock and cash. Three of the
Parks-Belk locations were converted into Proffitt's Division stores, and one was
permanently closed.
PARISIAN
On October 11, 1996, Proffitt's acquired Parisian, Inc. ("Parisian"), which
operated 38 stores in the Southeast and Midwest. The total purchase price of the
Parisian transaction was approximately $224,000 (detailed below) plus the
assumption of Parisian's liabilities aggregating $289,000.
F-11
<PAGE> 106
PROFFITT'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Parisian transaction was accounted for as a purchase and, accordingly,
the financial results of the operations of Parisian have been included in the
Company's results of operations since the acquisition date. The purchase price
has been allocated to Parisian's tangible assets and liabilities based on their
estimated fair values at the date of acquisition, with the remaining $225,000
allocated to its tradename and goodwill.
The following unaudited pro forma summary presents the consolidated results
of operations as if the Parisian acquisition had occurred at the beginning of
the periods presented and does not purport to be indicative of what would have
occurred had the acquisition been made as of those dates or results which may
occur in the future.
<TABLE>
<CAPTION>
1996 1995
---------- ----------
(UNAUDITED)
<S> <C> <C>
Pro forma:
Net sales................................................. $2,320,955 $2,324,884
Income before extraordinary loss.......................... 29,768 2,425
Net income................................................ 29,768 365
Earnings (loss) per common share:
Primary earnings before extraordinary loss............. 0.94 0.02
Primary earnings (loss)................................ 0.94 (0.06)
Fully diluted earnings before extraordinary loss....... 1.05 0.02
Fully diluted earnings (loss).......................... 1.05 (0.06)
</TABLE>
The purchase price of the Parisian and McRae's acquisitions consisted of
the following consideration paid plus the assumption of Parisian's and McRae's
liabilities:
<TABLE>
<CAPTION>
PARISIAN MCRAE'S
-------- --------
<S> <C> <C>
Cash payments and transaction costs......................... $119,000 $184,000
Issuance of 2,947 and 436 shares of common stock,
respectively.............................................. 101,000 10,000
Issuance of Series B preferred stock........................ 3,000
Issuance of promissory notes................................ 2,000
Issuance of subordinated debt............................... 13,000
Issuance of 406 replacement stock options................... 4,000
-------- --------
Consideration Paid.......................................... $224,000 $212,000*
======== ========
</TABLE>
- ---------------
* In connection with the acquisition, the Company purchased four regional mall
stores owned by McRae family partnerships for $18.5 million.
NOTE 4 -- ACCOUNTS RECEIVABLE SECURITIZATION
In April 1994, the Company began selling an undivided ownership interest in
its accounts receivable. In January 1997, the Company, through its subsidiary
Proffitt's Credit Corporation (a qualifying special purpose entity), entered
into an agreement to sell a revolving undivided ownership interest in the
accounts receivable of the Proffitt's, McRae's and Parisian Divisions. The
agreement, which expires in January 1998, provides for the sales of receivables
up to $300,000 and contains certain covenants requiring the maintenance of
various financial ratios.
Prior to February 3, 1996, Younkers utilized an accounts receivable
securitization program under which its receivables were used as collateral for
commercial paper issued by a wholly-owned special purpose subsidiary. Effective
with the February 3, 1996 merger, Younkers, through its subsidiary Younkers
Credit Corporation (a qualifying special purpose entity), replaced amounts
borrowed under the securitization
F-12
<PAGE> 107
PROFFITT'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
program by selling a revolving undivided ownership interest in its accounts
receivable. The agreement expires in 2000 and provides for the sales of
receivables up to $125,000, of which $75,000 is a fixed ownership interest and
remains fixed until 2000 at which time a portion of collections of outstanding
receivables will be retained by the purchaser until the $75,000 is extinguished.
The ownership interest transferred to the purchasers was $324,000 and
$220,229 at February 1, 1997 and February 3, 1996, respectively.
Finance charges earned by the purchasers were $16,013, $8,809 and $5,567
for 1996, 1995 and 1994, respectively.
NOTE 5 -- PROPERTY AND EQUIPMENT
A summary of property and equipment was as follows:
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
<S> <C> <C>
Land and land improvements................................. $ 59,140 $ 39,442
Buildings.................................................. 178,265 146,792
Leasehold improvements..................................... 98,697 91,795
Fixtures and equipment..................................... 304,479 286,225
Construction in progress................................... 8,242 17,134
--------- ---------
648,823 581,388
Accumulated depreciation................................... (159,668) (171,132)
--------- ---------
489,155 410,256
Stores held for sale, net of accumulated depreciation...... 21,347
--------- ---------
$ 510,502 $ 410,256
========= =========
</TABLE>
The Company realized gains (losses) from store sales or closings and
impairment charges as follows:
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C>
Write-down in carrying value of operating stores (3
Proffitt's, 1 McRae's and 2 Younkers in 1995; 1
Herberger's in 1996) due to recurring poor operating
results................................................... $(1,010) $(15,897)
Abandonment of stores and duplicate warehouses related to
the Parks-Belk acquisition and the Younkers merger........ (1,797)
Gain (loss) related to closed or sold stores, net........... 2,104 (1,427)
------- --------
$ 1,094 $(19,121)
======= ========
</TABLE>
F-13
<PAGE> 108
PROFFITT'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- INCOME TAXES
The components of income tax expense were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
---------------------------------------
FEBRUARY 1, FEBRUARY 3, JANUARY 28,
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal............................................. $10,026 $ 14,432 $15,753
State............................................... 3,758 3,719 4,178
------- -------- -------
13,784 18,151 19,931
Deferred:
Federal............................................. 16,272 (10,962) 3,858
State............................................... 1,530 (2,515) 622
------- -------- -------
17,802 (13,477) 4,480
------- -------- -------
$31,586 $ 4,674 $24,411
======= ======== =======
</TABLE>
Components of the net deferred tax asset or liability recognized in the
consolidated balance sheets were as follows:
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
<S> <C> <C>
Current:
Deferred tax assets:
Trade accounts receivable.............................. $ 3,350 $ 2,400
Accrued expenses....................................... 18,700 10,972
Other.................................................. 250 552
-------- --------
22,300 13,924
Deferred tax liabilities:
Inventory.............................................. (9,100) (8,463)
Other.................................................. (1,500) (500)
-------- --------
(10,600) (8,963)
-------- --------
Net current deferred tax asset.................... $ 11,700 $ 4,961
======== ========
Noncurrent:
Deferred tax assets:
Capital leases......................................... $ 950 $ 900
Other long-term liabilities............................ 21,150 4,021
Deferred compensation.................................. 2,200 950
-------- --------
24,300 5,871
Deferred tax liabilities:
Property and equipment................................. (77,000) (52,342)
Other assets........................................... (8,100) (5,400)
Junior subordinated debentures......................... (1,200) (1,300)
-------- --------
(86,300) (59,042)
-------- --------
Net noncurrent deferred tax liability............. $(62,000) $(53,171)
======== ========
</TABLE>
F-14
<PAGE> 109
PROFFITT'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense varies from the amount computed by applying the
statutory federal income tax rate to income before taxes. The reasons for this
difference were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ----- ----
<S> <C> <C> <C>
Expected tax rate......................................... 35.0% 35.0% 35.0%
State income taxes, net of federal benefit................ 4.0 (6.5) 4.4
Nondeductible merger related costs........................ 2.7 92.1
Amortization of goodwill.................................. 1.9 15.9
Other items, net.......................................... 2.2 7.1 0.1
---- ----- ----
Actual tax rate........................................... 45.8% 143.6% 39.5%
==== ===== ====
</TABLE>
The Company made income tax payments, net of refunds received, of $33,884,
$12,263 and $16,882 during 1996, 1995 and 1994, respectively.
NOTE 7 -- SENIOR DEBT
A summary of senior debt was as follows:
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
<S> <C> <C>
Real estate and mortgage notes, interest ranging from 3.6%
to 10.38%, maturing 1998 to 2007, collateralized by
property and equipment.................................... $120,317 $ 97,365
Revolving credit agreement.................................. 154,437 41,400
Capital lease obligations, implicit interest ranging from
8.63% to 12.05%........................................... 10,735 11,318
Notes payable, interest ranging from 7.88% to 13.0%,
maturing 1997 to 2000..................................... 3,836 38,972
-------- --------
289,325 189,055
Current portion............................................. (12,515) (20,118)
-------- --------
$276,810 $168,937
======== ========
</TABLE>
Effective with the February 3, 1996 merger, Younkers replaced debt
collateralized by its trade accounts receivable with the sale of a revolving
undivided interest in its accounts receivable and canceled its revolving credit
facility. As a result of this early extinguishment of debt, certain deferred
debt costs aggregating $3,433 ($2,060 net of income taxes) were written off as
an extraordinary item.
In conjunction with a real estate mortgage note having a balance of $5,850
at February 1, 1997, the Company has an interest rate swap agreement for the
management of interest rate exposure. This agreement extends to June 30, 2003
and swaps the variable rate for a fixed rate of 5.7%. The differential to be
paid or received is included in interest expense.
In connection with the Parisian merger, the Company amended and restated
its existing revolving credit agreement ("Revolver") with certain banks. The
agreement provides for borrowings limited to 55% of merchandise inventories up
to an aggregate principal amount of $275,000, including a standby letter of
credit facility of $15,000. The Revolver includes interest rate options of prime
and Eurodollar. The agreement, which expires in 1999, requires the Company to
meet specific covenants related to net worth, capitalization, fixed charges,
capital expenditures, indebtedness and earnings.
Certain other notes also impose restrictions and financial covenants.
F-15
<PAGE> 110
PROFFITT'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At February 1, 1997, maturities of senior debt for the next five years and
thereafter, giving consideration to lenders' call privileges, were as follows:
<TABLE>
<S> <C>
1997........................................................ $ 12,515
1998........................................................ 35,010
1999........................................................ 185,524
2000........................................................ 10,192
2001........................................................ 23,304
Thereafter.................................................. 22,780
--------
$289,325
========
</TABLE>
The Company made interest payments of $28,304, $29,516 and $20,494 during
1996, 1995 and 1994, respectively. Capitalized interest was $368, $285 and $467
during 1996, 1995 and 1994, respectively.
NOTE 8 -- SUBORDINATED DEBT
Subordinated debt represents uncollateralized obligations subordinated in
right of payment to all senior debt and was composed of the following:
<TABLE>
<CAPTION>
FEBRUARY 1, FEBRUARY 3,
1997 1996
----------- -----------
<S> <C> <C>
Convertible debentures, interest at 4.75%, maturing November
2003...................................................... $ 86,250 $ 86,250
Notes, interest at 9.875%, maturing July 2003............... 125,000
Junior debentures, interest at 7.5%, maturing March 2004.... 14,517 14,255
-------- --------
$225,767 $100,505
======== ========
</TABLE>
The subordinated convertible debentures are convertible into the Company's
common stock at any time prior to maturity, unless previously redeemed, at a
conversion price of $42.70 per share. The debentures are redeemable for cash at
the option of the Company at specified redemption prices.
Effective with the Parisian acquisition, the Company assumed the existing
Parisian 9.875% subordinated notes. The notes are redeemable at the option of
the Company, in whole or in part, after July 15, 1998, 1999 and 2000 at
approximately 105%, 102.5% and 100% of face value, respectively. The notes
contain certain covenants, the most restrictive of which limits indebtedness,
dividends and transactions with Proffitt's and its other subsidiaries.
The 7.5% junior subordinated debentures were discounted at the date of
issue to reflect their fair value and are being accreted to a face value of
$17,500.
NOTE 9 -- OPERATING LEASES
The Company is committed under long-term leases primarily for the rentals
of retail stores. The leases generally provide for minimum annual rentals
(including executory costs such as real estate taxes and insurance) and
contingent rentals based on a percentage of sales in excess of stated amounts.
Generally, the leases have primary terms ranging from 20 to 30 years and include
renewal options ranging from 10 to 15 years.
F-16
<PAGE> 111
PROFFITT'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At February 1, 1997, minimum rental commitments under operating leases with
terms in excess of one year were as follows:
<TABLE>
<S> <C>
1997........................................................ $ 58,821
1998........................................................ 56,592
1999........................................................ 54,252
2000........................................................ 50,988
2001........................................................ 49,338
Thereafter.................................................. 445,972
--------
$715,963
========
</TABLE>
Total rental expense for operating leases was $60,684, $50,609 and $47,857
during 1996, 1995 and 1994, respectively, including contingent rents of
approximately $7,400, $5,600 and $4,800.
NOTE 10 -- RETIREMENT AND SAVINGS PLAN
The Company sponsors various profit sharing and savings plans that cover
substantially all full-time employees. Company contributions charged to expense
under these plans, or similar predecessor plans, excluding the Herberger's
employee stock ownership plan ("ESOP"; Note 12) for 1996, 1995 and 1994 were
$735, $1,382 and $1,106, respectively.
As a part of a 1987 acquisition, Younkers assumed certain obligations under
a frozen defined benefit pension plan. During 1996, the Company terminated the
plan realizing non-cash expenses of $1,362.
NOTE 11 -- SHAREHOLDERS' EQUITY
PREFERRED STOCK
On March 31, 1994, Proffitt's issued 600 shares of Series A Cumulative
Convertible Exchangeable Preferred Stock in a private offering (10,000 total
shares authorized). Net proceeds to the Company were approximately $28.9 million
after offering expenses. Dividends were cumulative and were paid at $3.25 per
annum per share. On June 28, 1996, the holder converted the preferred stock into
1,422 shares of common stock. The Company paid $3,032 to the holder of the
preferred stock to induce early conversion.
The Company has available 33 shares of authorized, unissued Series B
Preferred Stock.
COMMON STOCK
The Company has 100,000 shares of $.10 par value common shares authorized
of which 28,016 and 23,206 shares were issued and outstanding at February 1,
1997 and February 3, 1996, respectively.
Each outstanding share of common stock has one preferred stock purchase
right attached. The rights generally become exercisable ten days after an
outside party acquires, or makes an offer for, 20% or more of the common stock.
Each right entitles its holder to buy 1/100 share of Series C Junior Preferred
Stock at an exercise price of $85. Once exercisable, if the Company is involved
in a merger or other business combination or an outside party acquires 20% or
more of the common stock, each right will be modified to entitle its holder
(other than the acquiror) to purchase common stock of the acquiring company or,
in certain circumstances, common stock of the Company having a market value of
twice the exercise price of the right. The rights expire on March 28, 2005.
TREASURY STOCK
Previously, Herberger's was required to repurchase shares from inactive
participants of the ESOP at fair value. Treasury stock transactions were
accounted for under the cost method with gains or losses on
F-17
<PAGE> 112
PROFFITT'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
transactions credited or charged to additional paid-in capital. Total shares
purchased in 1996, 1995 and 1994 were 85, 179 and 164, respectively. In
connection with the rescission of the put option on the ESOP shares (see Note
12), the Company retired all 6,897 shares of the Company's common stock held in
treasury.
NOTE 12 -- EMPLOYEE STOCK PLANS
ESOP
Herberger's sponsors an employee stock ownership plan ("ESOP") for the
benefit of its employees. Contributions to the ESOP are made at the discretion
of the Board of Directors and were $3,670, $3,418 and $3,103 in 1996, 1995 and
1994, respectively. At various times, the ESOP has purchased shares of the
Company's common stock using the proceeds of ESOP loans (leveraged shares).
These shares are initially held in a suspense account by the Plan Trustee
(unallocated shares). As contributions are made and dividends are paid and the
ESOP debt is repaid, leveraged shares are released from suspense and allocated
to the accounts of participants, and the Company recognizes compensation
expense. Dividends earned on all shares acquired prior to January 30, 1994 are
recorded as a reduction of retained earnings, while dividends on unallocated
shares acquired after January 30, 1994 are reflected as a reduction of
compensation expense. Dividends on ESOP shares used for debt service were $264,
$226 and $130 in 1996, 1995 and 1994, respectively. For shares acquired after
January 30, 1994, expense is recorded equal to the estimated fair value of
shares allocated and those shares become outstanding for earnings per share
computations. For all other shares, expense is recorded equal to the cost of the
shares released. All shares acquired prior to January 30, 1994 are considered
outstanding for earnings per share calculations. Total ESOP expense recognized
was $4,130, $4,013 and $3,287 for 1996, 1995 and 1994, respectively, and
compensation expense recognized in 1996 reflects the increase in value of
Herberger's stock related to its merger with Proffitt's.
As of February 1, 1997, the number of shares held by the ESOP was as
follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
------------------------
ALLOCATED UNALLOCATED
--------- -----------
<S> <C> <C>
Shares acquired on or prior to January 30, 1994............. 387 152
Shares acquired after January 30, 1994...................... 68 332
</TABLE>
Prior to the merger, Herberger's shares distributed from the ESOP could be
put to Herberger's at fair value for cash under certain conditions. As such, the
shares were carried at fair value and not reflected on the balance sheet in
shareholders' equity. Effective with the merger, the put option was rescinded,
and accordingly, the ESOP shares are reflected in shareholders' equity.
STOCK OPTIONS AND GRANTS
The Company utilizes the intrinsic value method of accounting for stock
option grants. As the option exercise price is generally equal to or above fair
value of the common shares at the date of the option grant, no compensation cost
is recognized.
Had compensation cost for the two stock-based compensation plans been
determined under the fair value method provided in SFAS No. 123 (using the
Black-Scholes option-pricing model), the Company's net income (loss) and
earnings (loss) per share would have been reduced (increased) to the pro forma
amounts indicated below.
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net income (loss).................................. $37,399 $35,756 $(1,419) $(2,540)
Primary earnings (loss) per share.................. 1.31 1.25 (0.15) (0.19)
Fully diluted earnings (loss) per share............ 1.41 1.36 (0.15) (0.19)
</TABLE>
F-18
<PAGE> 113
PROFFITT'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The assumptions for determining compensation costs under the fair value
method included (i) a risk-free interest rate based on zero-coupon governmental
issues on each grant date with the maturity equal to the expected term of the
option (6.84% and 5.74% for 1996 and 1995, respectively), (ii) an expected term
of five years, (iii) an expected volatility of 37.1% and 39.9% for 1996 and
1995, respectively, and (iv) no expected dividend yield.
The Company maintains stock option plans for the granting of options, stock
appreciation rights and restricted shares to officers, key employees and
Directors. At February 1, 1997 the Company has available for grant 350 shares of
common stock. Options granted generally vest over a four-year period after issue
and have an exercise term of ten years from the grant date. Restricted shares
generally vest ten years after grant date with accelerated vesting if the
Company meets certain performance objectives.
A summary of the stock option plans for 1996, 1995 and 1994 is presented
below:
<TABLE>
<CAPTION>
1996
-------------------------
WEIGHTED-AVERAGE
EXERCISE 1995 1994
SHARES PRICE SHARES SHARES
------ ---------------- ------ ------
<S> <C> <C> <C> <C>
Outstanding at beginning of year............... 1,840 $19.25 1,652 1,030
Granted........................................ 490 34.00 455 783
Converted in acquisition....................... 406 22.50
Exercised...................................... (487) 19.67 (178) (118)
Forfeited...................................... (84) 25.00 (89) (43)
------ ------- ------ ------
Outstanding at end of year..................... 2,165 22.88 1,840 1,652
====== ======= ====== ======
Options exercisable at year end................ 1,466 $20.76
====== =======
Weighted average fair value of options granted
during the year.............................. $12.62 $11.71
====== ======
</TABLE>
Contemporaneous with the Parisian acquisition, outstanding Parisian stock
options were converted into Proffitt's options.
The following table summarizes information about stock options outstanding
at February 1, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------------
WEIGHTED-
AVERAGE
NUMBER REMAINING WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
RANGE OF AT FEBRUARY 1, LIFE EXERCISE AT FEBRUARY 1, EXERCISE
EXERCISE PRICES 1997 (YEARS) PRICE 1997 PRICE
- --------------- -------------- ----------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
$7.50 to $11.25................ 266 5 $ 9.40 266 $ 9.40
$11.26 to $16.88................ 39 6 12.00 39 12.00
$16.89 to $25.31................ 1,374 7 23.26 1,015 22.97
$25.32 to $37.97................ 467 8 29.64 142 28.30
$37.98 to $39.88................ 19 9 39.88 4 39.88
----- ------ ----- ------
2,165 $22.88 1,466 $20.76
===== ====== ===== ======
</TABLE>
The Company also granted restricted stock awards of 129, 20 and 8 shares to
certain employees in 1996, 1995 and 1994, respectively. The fair value of these
awards on the dates of grants was $3,763, $499 and $120 for 1996, 1995 and 1994,
respectively. During 1996, 1995 and 1994, compensation cost of $2,239, $449 and
$120, respectively, has been recognized in connection with these awards.
F-19
<PAGE> 114
PROFFITT'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK PURCHASE PLAN
The stock purchase plan (the "Plan") provides that an aggregate of 350
shares of the Company's common stock is available for purchase. Under the Plan,
an eligible employee may elect to participate by authorizing limited payroll
deductions to be applied toward the purchase of common stock at a 15% discount
to market value. Under the Plan, 14 and 13 shares of the Company's common stock
were purchased by employees in 1996 and 1995, respectively. At January 31, 1997
the Plan has available 323 shares for future offerings.
NOTE 13 -- RELATED PARTY TRANSACTIONS
In 1989, an unsecured $500 interest-free loan was made as a supplement to
the Chairman of the Board and Chief Executive Officer's base compensation. The
loan is due January 31, 1999.
During 1996, 1995 and 1994, the Company paid $796, $1,950 and $1,694 of
preferred stock dividends and a $3,032 payment for early conversion of the
preferred stock to an investment group in which a Director is a partner.
NOTE 14 -- FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
The fair values of cash and cash equivalents and short-term debt
approximates cost due to the immediate or short-term maturity of these
instruments.
For variable rate notes that reprice frequently, fair value
approximates carrying value. The fair value of fixed rate notes are
estimated using discounted cash flow analyses with interest rates currently
offered for loans with similar terms and credit risk. As of February 1,
1997, the fair value of fixed rate notes approximated the carrying value.
The fair values of the 4.75% convertible debentures and the 9.875%
notes are based on quoted market prices. For the junior debentures, the
fair value is estimated using discounted cash flow analyses with interest
rates currently offered for financial instruments with similar terms and
credit risk.
The fair values of the Company's aforementioned financial instruments at
February 1, 1997 were as follows:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
4.75% convertible debentures................................ $ 86,250 $ 84,525
9.875% notes................................................ $125,000 $127,500
7.5% junior debentures...................................... $ 14,517 $ 14,517
</TABLE>
F-20
<PAGE> 115
PROFFITT'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 15 -- MERGER, RESTRUCTURING AND INTEGRATION COSTS
Merger, restructuring and integration costs incurred in 1996 and 1995 were
as follows:
<TABLE>
<CAPTION>
1996
-------
<S> <C>
Merger transaction costs, principally investment banking,
legal and other direct merger costs -- Herberger's........ $ 2,649
Severance and related benefits -- Herberger's............... 3,129
Conversion and consolidation of information systems and
administrative operations -- Herberger's.................. 3,355
Abandonment of duplicate data processing equipment and
software and other assets -- Herberger's.................. 885
Termination of Younkers benefit plan........................ 1,362
Conversion and consolidation of management information
systems -- Younkers....................................... 4,549
-------
$15,929
=======
</TABLE>
<TABLE>
<CAPTION>
1995
-------
<S> <C>
Merger transaction costs, principally investment banking,
legal and other direct merger costs -- Younkers........... $ 8,778
Severance and related benefits -- Younkers.................. 3,235
Abandonment of duplicate administrative office space and
property and duplicate data processing equipment and
software (including leases) -- Younkers................... 7,422
Other costs -- Younkers..................................... 1,387
-------
$20,822
=======
</TABLE>
A reconciliation of the above charges to the amounts remaining unpaid at
February 1, 1997 was as follows:
<TABLE>
<CAPTION>
1996 1995
------- --------
<S> <C> <C>
Merger, restructuring and integration charges............... $15,929 $ 20,822
Amounts representing non-cash write-offs.................... (2,417) (4,086)
Amounts paid in 1995........................................ (1,636)
Amounts paid in 1996........................................ (7,308) (11,913)
------- --------
Amounts unpaid at February 1, 1997.......................... $ 6,204 $ 3,187
======= ========
</TABLE>
The significant amount of charges remaining unpaid from 1995 relate
principally to the lease payments related to the abandoned Younkers
administrative office space.
NOTE 16 -- HOSTILE TAKEOVER DEFENSE
In 1995, prior to the Proffitt's and Younkers merger, Younkers was
subjected to a hostile takeover attempt by Carson Pirie Scott. In defending
itself against this takeover attempt, Younkers incurred legal fees and
investment banking advisory fees aggregating $3,182.
F-21
<PAGE> 116
PROFFITT'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 17 -- QUARTERLY FINANCIAL INFORMATION
In the following summary of quarterly financial information, all
adjustments necessary for a fair presentation of each period were included.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
Fiscal year ended February 1, 1997
Net sales........................................... $365,179 $343,359 $453,256 $727,985
Gross margin........................................ 127,978 122,320 162,789 246,238
Net income.......................................... 6,308 3,533 12,141 15,417
Primary earnings per common share................... 0.25 0.01 0.47 0.54
Fully diluted earnings per common share............. 0.25 0.14 0.45 0.53
Primary -- pro forma(a)............................. 0.25 0.14 0.47 0.54
Fiscal year ended February 3, 1996
Net sales........................................... 353,809 351,419 412,148 543,680
Gross margin........................................ 123,080 124,837 146,098 179,422
Income (loss) before extraordinary item............. 3,125 2,866 10,130 (15,480)
Net income (loss)................................... 3,125 2,866 10,130 (17,540)
Primary earnings (loss) per common share:
Before extraordinary item........................ 0.11 0.10 0.42 (0.69)
Extraordinary item............................... (0.09)
Earnings (loss) per common share................. 0.11 0.10 0.42 (0.78)
</TABLE>
- ---------------
(a) Pro forma amounts represent primary earnings per common share assuming the
conversion of the preferred stock had occurred as of the beginning of the
year.
In addition to the extraordinary loss on the early extinguishment of debt,
the impairment of long-lived assets and the merger, restructuring and
integration charges recorded in the fourth quarters of 1996 and 1995, the
Company also revised certain estimates and recorded other charges related to
Herberger's and Younkers in the fourth quarters of 1996 and 1995, respectively.
In 1995, those charges were comprised principally of a strengthened provision
for bad debts of $2,000, litigation of $5,000, conversion of leased shoe
operations of $2,400, vendor chargebacks of $800 and depreciation of $700. In
1996, those charges were comprised principally of $1,000 of store closing and
conversion costs and $1,700 to strengthen various accruals.
F-22
<PAGE> 117
PROFFITT'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MAY 3, FEBRUARY 1, MAY 4,
1997 1997 1996
---------- ----------- --------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents............................. $ 15,011 $ 3,382 $ 4,907
Residual interest in trade accounts receivable........ 79,711 85,400 32,038
Merchandise inventories............................... 499,396 447,164 373,663
Deferred income taxes................................. 18,663 11,700 4,953
Other current assets.................................. 42,373 48,317 21,421
---------- ---------- --------
Total current assets.......................... 655,154 595,963 436,982
Property and equipment, net............................. 505,413 510,502 408,238
Goodwill and tradenames, net............................ 275,658 277,472 52,450
Other assets............................................ 20,569 19,859 23,936
---------- ---------- --------
$1,456,794 $1,403,796 $921,606
========== ========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Trade accounts payable................................ $ 157,123 $ 116,434 $105,041
Accrued expenses and other current liabilities........ 110,813 122,604 74,806
Current portion of long-term debt..................... 11,870 12,515 30,774
---------- ---------- --------
Total current liabilities..................... 279,806 251,553 210,621
Senior debt............................................. 279,268 276,810 146,969
Deferred income taxes................................... 66,501 62,000 54,878
Other long-term liabilities............................. 50,220 47,768 15,008
Subordinated debt....................................... 225,840 225,767 100,568
Redeemable common stock held in ESOP.................... 59,168
Shareholders' equity.................................... 555,159 539,898 334,394
---------- ---------- --------
$1,456,794 $1,403,796 $921,606
========== ========== ========
</TABLE>
See notes to condensed consolidated financial statements.
F-23
<PAGE> 118
PROFFITT'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
MAY 3, 1997 MAY 4, 1996
----------- -----------
<S> <C> <C>
NET SALES................................................... $526,370 $365,179
COSTS AND EXPENSES
Cost of sales............................................. 335,882 237,201
Selling, general and administrative expenses.............. 127,079 88,485
Other operating expenses.................................. 42,568 30,719
Store pre-opening costs................................ 824 279
Merger, restructuring and integration costs............ 1,468 2,763
Losses (gains) from long-lived assets.................. 27 (2,260)
ESOP expenses.......................................... 726 188
-------- --------
OPERATING INCOME.................................. 17,796 7,804
OTHER INCOME (EXPENSE):
Finance charge income..................................... 15,237 10,634
Finance charge income allowed to purchaser of accounts
receivables............................................ (4,359) (3,474)
Interest expense.......................................... (10,692) (4,706)
Other income, net......................................... 136 498
-------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES.......... 18,118 10,756
Provision for income taxes.................................. 7,574 4,448
-------- --------
NET INCOME........................................ 10,544 6,308
Preferred stock dividends................................... 488
-------- --------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS....... $ 10,544 $ 5,820
======== ========
Earnings per share:
Primary................................................... $ 0.37 $ 0.25
======== ========
Fully diluted............................................. $ 0.37 $ 0.25
======== ========
Weighted average common shares:
Primary................................................... 28,451 23,466
======== ========
Fully diluted............................................. 30,539 23,655
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
F-24
<PAGE> 119
PROFFITT'S, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------
MAY 3, MAY 4,
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 10,544 $ 6,308
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 10,898 10,174
Deferred income taxes.................................. (2,462) 1,715
Losses (gains) from long-lived assets.................. 27 (2,260)
Amortization of deferred compensation.................. 316 287
Other non-cash charges................................. 491 --
Changes in operating assets and liabilities, net....... (8,390) (23,277)
-------- --------
Net cash provided by (used in) operating
activities....................................... 11,424 (7,053)
INVESTING ACTIVITIES
Purchases of property and equipment, net.................. (24,090) (9,944)
Proceeds from sale of assets.............................. 21,347 5,000
Other, net................................................ (876) (42)
-------- --------
Net cash used in investing activities............. (3,619) (4,986)
FINANCING ACTIVITIES
Proceeds from long-term borrowings........................ 8,663 11,025
Payments on long-term debt................................ (6,850) (22,337)
Proceeds from issuance of stock........................... 3,135 1,202
Dividends paid to shareholders............................ (1,124) (2,122)
-------- --------
Net cash provided by (used in) financing activities.... 3,824 (12,232)
Increase (decrease) in cash and cash equivalents....... 11,629 (24,271)
Cash and cash equivalents at beginning of period....... 3,382 29,178
-------- --------
Cash and cash equivalents at end of period............. $ 15,011 $ 4,907
======== ========
</TABLE>
Cash paid (refunded) during the three months ended May 3, 1997 for interest
and income taxes totaled $7,241 and ($1,930), respectively. Cash paid during the
three months ended May 4, 1996 for interest and income taxes totaled $6,168 and
$2,662, respectively.
See notes to condensed consolidated financial statements.
F-25
<PAGE> 120
PROFFITT'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A -- BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of the Regulation S-K. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three month period
ended May 3, 1997 are not necessarily indicative of the results that may be
expected for the year ending January 31, 1998. The financial statements include
the accounts of Proffitt's, Inc. and its subsidiaries. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's Annual Report on Form 10-K for the year ended February 1, 1997.
The accompanying balance sheet at February 1, 1997 has been derived from the
audited financial statements at that date.
NOTE B -- BUSINESS COMBINATIONS
On October 11, 1996, Proffitt's, Inc. ("Proffitt's" or the "Company")
acquired Parisian, Inc. ("Parisian"), a specialty department store chain
currently operating 40 stores in the southeast and midwest. The Parisian
transaction was accounted for as a purchase, and accordingly, financial results
of the operations of Parisian have been included in the Company's results of
operations since the acquisition date. The following unaudited pro forma summary
presents the consolidated results of operations as if the Parisian acquisition
had occurred at the beginning of the period presented and does not purport to be
indicative of what would have occurred had the acquisition been made as of this
date or results which may occur in the future.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MAY 4, 1996
---------------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C>
Pro forma:
Net sales................................................... $531,226
Net income.................................................. $ 8,977
Earnings per common share:
Primary................................................... $ .32
Fully diluted............................................. $ .32
</TABLE>
Effective February 1, 1997, immediately before the Company's fiscal year
end, Proffitt's combined its business with G.R. Herberger's, Inc.
("Herberger's"), a retail department store chain currently operating 39 stores
in the midwest. The merger has been accounted for as a pooling of interests, and
accordingly, the consolidated financial statements have been restated for the
prior year to include the results of operations and financial position of
Herberger's. In the quarters ended May 3, 1997 and May 4, 1996, the Company
incurred certain integration costs related to its business combinations with
Younkers, Parisian, and Herberger's. These pre-tax charges totaled $1.5 million
and $2.8 million, respectively, for the quarters ended May 3, 1997 and May 4,
1996, respectively.
A reconciliation of the aforementioned charges to the amounts of merger,
restructuring, and integration costs remaining unpaid at May 3, 1997 was as
follows (in thousands):
<TABLE>
<S> <C>
Amounts unpaid at February 1, 1997.......................... $ 9,391
Adjustments to amounts unpaid at February 1, 1997........... 0
Amounts related to continuing integration efforts during the
quarter................................................... 1,468
Amounts paid during the quarter............................. (5,067)
-------
Amounts unpaid at May 3, 1997............................... $ 5,792
</TABLE>
F-26
<PAGE> 121
PROFFITT'S, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
NOTE C -- INCOME TAXES
The difference between the actual income tax expense and the amount
expected by applying the statutory federal income tax rate is due to the
inclusion of state income taxes and the amortization of goodwill and tradenames,
which is not deductible for income tax purposes. The deferred income tax asset
and liability amounts reflect the impact of temporary differences between values
recorded for assets and liabilities for financial reporting purposes and values
utilized for measurement in accordance with tax laws. The major components of
these amounts result from the allocation of the purchase price to the assets and
liabilities related to the McRae's acquisition in March 1994 and the Parisian
acquisition in October 1996.
NOTE D -- RECENT FINANCING
On May 21, 1997, the Company completed the sale of $125 million of 8.125%
Senior Notes, due 2004 (the "Senior Notes"). The Senior Notes were offered in a
private placement to qualified institutional buyers. Proceeds from the Senior
Notes were used to repay existing mortgage notes and other unsecured obligations
and to reduce amounts outstanding under the Company's revolving credit facility.
The Company also intends to increase its existing $275 million revolving credit
facility and issue approximately $200 million of term asset-backed securities
against the Company's proprietary credit card receivables, replacing existing
commercial paper-based financing. In May and June 1997, the Company repurchased
approximately $32 million of the existing 9 7/8% Parisian Senior Subordinated
Notes which will result in an extraordinary loss from the early extinguishment
of debt of approximately $.9 million after tax. In connection with the Company's
Senior Notes offering and the anticipated issuance of the term asset-backed
securities, the Company entered into forward interest rate lock agreements in an
aggregate notional amount of $95 million as of May 3, 1997. The agreements are
settled contemporaneously with the completion of the financing. The Company's
policy is to use financial derivatives only to reduce risk in conjunction with
specific financing arrangements. Gains and losses on these hedges are included
in the respective debt and deferred financing cost amounts. Gains and losses
related to the hedges of firm commitments or anticipated transactions are
deferred and recognized in operating results over the lives of the related
assets or liabilities.
F-27
<PAGE> 122
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
Parisian, Inc.
We have audited the accompanying consolidated balance sheets of Parisian,
Inc. and subsidiaries as of January 28, 1995 and February 3, 1996, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for the years ended January 29, 1994, January 28, 1995, and
February 3, 1996. These financial statement are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Parisian, Inc.
and subsidiaries as of January 28, 1995 and February 3, 1996, and the
consolidated results of their operations and their cash flows for the years
ended January 29, 1994, January 28, 1995 and February 3, 1996, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Birmingham, Alabama
March 22, 1996
F-28
<PAGE> 123
PARISIAN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 28, 1995 AND FEBRUARY 3, 1996
<TABLE>
<CAPTION>
JANUARY 28, FEBRUARY 3,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 394,377 $ 1,858,541
Restricted cash and short-term investments.................. 2,190,000 2,020,000
Accounts receivable, net.................................... 34,953,764 39,205,613
Merchandise inventory....................................... 119,924,513 143,045,118
Prepaid expenses............................................ 4,103,356 5,375,343
Deferred income taxes....................................... 3,412,662 3,668,660
Federal and state income tax receivable..................... 3,876,996
------------ ------------
Total current assets.............................. 168,855,668 195,173,275
============ ============
Property and equipment, less accumulated depreciation and
amortization.............................................. 74,479,814 71,469,103
Goodwill, net............................................... 62,137,207 60,268,477
Deferred financing costs, net............................... 4,239,446 3,686,542
Other....................................................... 13,409,614 13,608,883
------------ ------------
Total assets...................................... $323,121,749 $344,206,280
============ ============
LIABILITIES
Short-term debt, including current portion of long-term
debt...................................................... $ 8,549,410 $ 2,863,604
Accounts payable............................................ 40,949,864 42,305,004
Accrued store rent.......................................... 1,026,703 1,842,683
Federal and state income tax payable........................ 1,184,949
Sales tax payable........................................... 6,188,263 6,476,474
Other....................................................... 10,836,673 11,901,969
------------ ------------
Total current liabilities......................... 67,550,913 66,574,683
Long-term debt, less current portion above.................. 158,792,902 159,869,298
Deferred income taxes....................................... 8,170,795 8,167,214
Store opening reimbursements................................ 14,011,239 26,026,488
Other....................................................... 3,443,067 3,637,760
------------ ------------
Total liabilities................................. 251,968,916 264,275,443
------------ ------------
SHAREHOLDERS' EQUITY
Convertible preferred stock, par value $.01 per share,
12,000,000 shares, none issued............................
Common stock, par value $.01 per share, authorized
65,000,000 shares, issued and outstanding 7,355,846 shares
at January 28, 1995 and February 3, 1996.................. 73,558 73,558
Paid-in capital............................................. 87,959,792 87,959,792
Accumulated deficit......................................... (16,880,517) (8,102,513)
------------ ------------
Total shareholders' equity........................ 71,152,833 79,930,837
------------ ------------
Total liabilities and shareholders' equity........ $323,121,749 $344,206,280
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-29
<PAGE> 124
PARISIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JANUARY 29, 1994, JANUARY 28, 1995, AND FEBRUARY 3, 1996
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
------------------------------------------
JANUARY 29, JANUARY 28, FEBRUARY 3,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net sales, including leased departments.............. $517,667,748 $606,716,896 $663,827,999
Costs and expenses:
Cost of sales...................................... 328,505,911 393,948,510 419,055,866
Selling, general, and administrative expenses...... 137,110,373 159,987,520 165,236,749
Other operating expenses:
Property and equipment rentals.................. 14,436,483 21,583,330 29,787,936
Depreciation and amortization................... 12,850,190 12,855,933 12,618,367
Taxes other than income taxes................... 10,497,041 12,699,576 13,542,117
Reengineering costs............................. 3,184,725 304,369
------------ ------------ ------------
Operating income........................... 14,267,750 2,457,302 23,282,595
Other income (expense):
Finance charge income.............................. 9,930,691 8,046,347 7,125,115
Interest expense................................... (21,617,385) (18,051,210) (17,651,879)
Other, net......................................... 155,901 411,194 2,407,349
------------ ------------ ------------
Income (loss) before provision (benefit)
for income taxes and extraordinary
item..................................... 2,736,957 (7,136,367) 15,163,180
Provision (benefit) for income taxes................. 1,704,530 (1,673,554) 6,385,176
------------ ------------ ------------
Income (loss) before extraordinary item.... 1,032,427 (5,462,813) 8,778,004
Extraordinary loss from early retirement of debt (net
of income tax benefit of $3,092,179)............... (5,402,819)
------------ ------------ ------------
Net income (loss).......................... $ (4,370,392) $ (5,462,813) $ 8,778,004
============ ============ ============
Income (loss) per common and common equivalent share
before extraordinary item.......................... $ .17 $ (.78) $ 1.19
Extraordinary loss per common and common equivalent
share.............................................. (.87)
------------ ------------ ------------
Net income (loss) per common and common equivalent
share.............................................. $ (.70) $ (.78) $ 1.19
============ ============ ============
Weighted average common and common equivalent
shares............................................. 6,208,180 6,986,952 7,355,846
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE> 125
PARISIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED JANUARY 29, 1994, JANUARY 28, 1995, AND FEBRUARY 3, 1996
<TABLE>
<CAPTION>
TOTAL
PREFERRED COMMON PAID-IN ACCUMULATED SHAREHOLDERS'
STOCK STOCK CAPITAL DEFICIT EQUITY
--------- ------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance, January 30, 1993............. $0 $62,082 $73,052,973 $ (7,047,312) $66,067,743
Net loss.............................. (4,370,392) (4,370,392)
-- ------- ----------- ------------ -----------
Balance, January 29, 1994............. 0 62,082 73,052,973 (11,417,704) 61,697,351
Issuance of common stock, net of
$81,705 in issuance costs, 1,147,666
shares.............................. 11,476 14,906,819 14,918,295
Net loss (5,462,813) (5,462,813)
-- ------- ----------- ------------ -----------
Balance, January 28, 1995............. 0 73,558 87,959,792 (16,880,517) 71,152,833
Net Income............................ 8,778,004 8,778,004
-- ------- ----------- ------------ -----------
Balance, February 3, 1996............. $0 $73,558 $87,959,792 $ (8,102,513) $79,930,837
== ======= =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
<PAGE> 126
PARISIAN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JANUARY 29, 1994, JANUARY 28, 1995, AND FEBRUARY 3, 1996
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
-------------------------------------------
JANUARY 29, JANUARY 28, FEBRUARY 3,
1994 1995 1996
------------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ (4,370,392) $ (5,462,813) $ 8,778,004
------------- ------------ ------------
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 12,850,190 12,855,933 12,618,367
Amortization of deferred financing costs................ 1,022,338 1,099,532 1,191,496
Proceeds from the initial sale of accounts receivable... 90,500,000
Provision for losses on accounts receivable............. 2,869,546 2,827,348 3,986,023
Loss (gain) on disposal of property and equipment....... 370,174 443,649 (1,814,341)
Deferred compensation................................... 231,544 114,887 198,091
Write-off of unamortized financing costs (net of tax)... 2,063,819
Loss from redemption of debt (net of tax)............... 3,339,000
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable................................ (6,301,365) (1,937,633) (8,237,872)
Merchandise inventory.............................. (14,002,448) (18,061,935) (23,120,605)
Prepaid expenses................................... 1,151,554 (247,182) (1,271,987)
Other.............................................. (10,433,472) (7,316,879) (5,294,953)
Increase (decrease) in:
Accounts payable................................... (3,765,665) 5,037,697 1,551,362
Accrued store rent................................. (234,160) 59,726 815,980
Federal and state income taxes..................... (2,850,263) (1,442,785) 5,061,945
Sales tax payable.................................. 589,857 152,475 288,211
Deferred income taxes.............................. 439,040 (1,734,382) (259,579)
Other liabilities.................................. 799,686 2,875,671 2,199,993
------------- ------------ ------------
Total adjustments................................ 78,639,375 (5,273,878) (12,087,869)
------------- ------------ ------------
Net cash provided by (used in) operating
activities..................................... 74,268,983 (10,736,691) (3,309,865)
------------- ------------ ------------
Cash flows from investing activities:
(Increase) decrease in restricted cash and short-term
investments............................................. 1,711,731 (270,000) 170,000
Proceeds from sale of property and equipment.............. 29,325 1,085 9,937,589
Increase in cash value of life insurance.................. (338,775) (364,613) (337,110)
Capital expenditures...................................... (14,974,339) (5,729,644) (10,735,276)
Store opening reimbursements.............................. 2,000,000 2,600,000 10,986,827
------------- ------------ ------------
Net cash provided by (used in) investing
activities....................................... (11,572,058) (3,763,172) 10,022,030
------------- ------------ ------------
Cash flows from financing activities:
Borrowings under revolving credit agreements.............. 28,200,000 38,500,000 36,905,343
Payments under revolving credit agreements................ (105,200,000) (36,500,000) (38,905,343)
Principal payments of long-term debt...................... (2,242,248) (2,395,323) (6,549,410)
Proceeds from the issuance of subordinated notes.......... 125,000,000
Redemption of subordinated debentures..................... (100,000,000)
Payment of financing costs................................ (5,575,969) (204,361) (638,591)
Premium paid on redemption of debentures (net of tax)..... (3,339,000)
Proceeds from issuance of common stock.................... 14,918,295
Proceeds from bond refunding.............................. 3,940,000
------------- ------------ ------------
Net cash provided by (used in) financing
activities....................................... (63,157,217) 14,318,611 (5,248,001)
------------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents...................................... (460,292) (181,252) 1,464,164
Cash and cash equivalents, beginning of period.............. 1,035,921 575,629 394,377
------------- ------------ ------------
Cash and cash equivalents, end of period.................... $ 575,629 $ 394,377 $ 1,858,541
============= ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................................ $ 23,065,471 $ 17,089,008 $ 17,001,105
============= ============ ============
Income taxes............................................ $ 2,203,733 $ 2,003,555 $ 4,991,703
============= ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE> 127
PARISIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Company.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, Parisian Services, Inc. (Parisian Services),
Parisian Management Company, Inc., Parisian of Tennessee, Inc., and Hess
Specialty Department Store, L.L.C. Parisian Services was formed for the purpose
of financing customer accounts receivable of the Company and financing future
credit purchases by the Company's customers. All material intercompany accounts
and transactions have been eliminated.
The Company currently operates thirty-six specialty department stores
located in Alabama, Florida, Georgia, Tennessee, South Carolina, Ohio, Indiana,
and Michigan and one clearance center in Alabama. The Company sells moderate to
better-priced fashion merchandise including apparel, cosmetics, shoes,
accessories, and gifts for the family. The Company performs ongoing credit
evaluations of its customers and maintains reserves for potential credit losses.
The value of merchandise inventory is determined by the retail inventory
method, using last-in, first-out (LIFO) cost, which is lower than market for
approximately 18% and 17% of the inventory and the lower of average cost or
market for the balance of the inventory for 1995 and 1996, respectively. If
average cost had been used for all inventory, the January 28, 1995 and February
3, 1996 merchandise inventory would have been higher by approximately $2,439,000
and $2,709,000, respectively.
Certain expenditures incurred prior to the opening of new stores are
deferred and charged to income on the straight-line basis over a twelve-month
period following the date the related store is opened.
Property and equipment is recorded at cost and depreciation and
amortization are computed using the straight-line method. All property and
equipment, except improvements to leased premises and land, is depreciated over
its estimated useful life. Improvements to leased premises are amortized over
the noncancelable terms of the leases. Costs for repairs and maintenance are
expensed as incurred.
Expenditures for certain computer software and related customization are
recorded at cost and amortized using the straight-line method over the expected
life of the licensing agreement. Additionally, certain related leased computer
hardware and supporting software are being amortized using the straight-line
method from the beginning amortization dates of the licensing agreement to the
end of the hardware lease term. Such expenditures, included in other assets,
totaled $8,304,722 and $9,885,824 as of January 28, 1995 and February 3, 1996,
respectively. As of January 28, 1995 and February 3, 1996, accumulated
amortization of expenditures related to software systems implemented was
$1,035,794 and $2,542,732, respectively.
Store opening reimbursements represent amounts received from developers in
reimbursement of certain expenses incurred during the opening of a new store.
Store opening reimbursements are amortized over the noncancelable term of the
lease.
Goodwill, the excess of purchase price over the fair value of the net
assets acquired arising from a 1988 leveraged buy-out transaction, is being
amortized on a straight-line basis over 40 years. As of January 28, 1995 and
February 3, 1996, the accumulated amortization of goodwill is $12,611,997 and
$14,480,727, respectively.
Deferred financing costs represent fees and costs directly related to the
issuance of debt. These costs are amortized using the straight-line method over
the terms of the specific borrowings or commitments to which they relate and are
included in interest expense.
The Company expenses advertising cost when the advertising takes place.
Advertising expense was $10,570,390, $14,814,426, and $19,470,129 in 1994, 1995,
and in 1996, respectively.
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
F-33
<PAGE> 128
PARISIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes are recorded to reflect the tax consequences on
future years of differences between the tax bases of assets and liabilities and
their financial reporting amounts in accordance with Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes.
Reengineering costs include implementation of cost containment measures
primarily directed at payroll as well as customer surveys to refine the
Company's market focus.
Net income (loss) per common and common equivalent share is computed by
dividing net income (loss) by the weighted average number of common and common
equivalent shares outstanding during the periods. The effect of common stock
options on net income (loss) per common and common equivalent share for all
years presented is insignificant or antidilutive.
During the year ended February 3, 1996, the Company adopted SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. The adoption of this accounting standard had no impact on the
Company's financial statements. SFAS No. 123, Accounting for Stock-Based
Compensation was issued during 1995. The Company anticipates that the adoption
of this accounting standard will not be material to its financial condition.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Certain reclassifications have been made in the previously reported
financial statements and accompanying notes to make the prior year amounts
comparable to those of the current year. Such reclassifications had no effect on
previously reported net income, total assets, or stockholders' equity.
2. ACCOUNTS RECEIVABLE
Accounts receivable is shown net of allowances for doubtful accounts and
return sales of $2,805,934 and $3,058,088 for January 28, 1995 and February 3,
1996, respectively. The provision for losses from bad debts, less recoveries, is
included in selling, general, and administrative expenses and amounted to
$2,869,546, $2,827,348, and $3,986,023 for the years ended January 29, 1994,
January 28, 1995, and February 3, 1996, respectively.
On March 31, 1993, the Company entered into an agreement through its
subsidiary, Parisian Services, with Sheffield Receivables Corporation
(Sheffield), whereby Sheffield agreed to provide up to $160 million in capital
against eligible accounts receivable generated by holders of the Company's
proprietary credit card accounts (the Receivables) pursuant to a nonrecourse
facility (the Receivables Facility), which expires in July 1998. As of such
date, Parisian Services sold an undivided interest in the Receivables to
Sheffield and utilized the proceeds from such sale to repay in full Parisian
Services' then outstanding indebtedness under the receivables loan agreement,
which was then terminated. At January 28, 1995 and February 3, 1996, $109.5 and
$101.0 million, respectively, of the available receivables had been sold to
Sheffield and accounted for as a reduction of accounts receivable. Parisian
Services retains a residual undivided interest in the Receivables equal to the
undivided interest not purchased by Sheffield. Sheffield undivided interest and,
accordingly, Parisian Services' undivided interest fluctuate each business day
based upon the amount of capital invested in relation to the pool of eligible
Receivables. The Company services and collects the Receivables. A cash reserve
equal to 2% of aggregate capital is required under the agreement and is included
in the restricted cash and short-term investments balance.
Sheffield finances the purchase of its undivided interest in the
Receivables primarily through the issuance of commercial paper or alternatively,
the obtaining of revolving loans from the Liquidity Facility (defined
F-34
<PAGE> 129
PARISIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
below). The discount and interest costs are funded from the Receivables. The
Receivables Facility receives liquidity support from a consortium of five banks
(the Liquidity Facility) which have agreed to provide standby funding under
certain specified conditions. Repayment of the amounts due under the commercial
paper or revolving loans is without recourse to Parisian Services and is made
solely through collections of Sheffield's undivided interest in Receivables.
3. PROPERTY AND EQUIPMENT
A summary of property and equipment is as follows:
<TABLE>
<CAPTION>
JANUARY 28, FEBRUARY 3,
1995 1996
----------- -----------
<S> <C> <C>
Land........................................................ $ 920,903 $ 893,474
Buildings................................................... 57,442,129 51,734,084
Furniture, fixtures, and equipment.......................... 52,297,250 53,018,433
Leasehold improvements...................................... 6,088,111 6,585,766
Transportation equipment.................................... 2,524,363 268,285
----------- -----------
119,272,756 112,500,042
Less accumulated depreciation and amortization.............. 44,792,942 41,030,939
----------- -----------
$74,479,814 $71,469,103
=========== ===========
</TABLE>
In November 1995, the Company sold its store location in Sarasota, Florida,
resulting in a gain of $1,725,783. The Sarasota store remained open throughout
most of January 1996 and closed prior to February 3, 1996. In connection with
this sale, the Company acquired the right to assume the lease for a store
location in Columbia, South Carolina and also received certain additional
consideration. The Company airplane was sold in 1995 resulting in a gain of
$1,180,090. In conjunction with the expansion and remodeling of one store, the
Company disposed of furniture, fixtures, and equipment with a net book value of
$893,269.
F-35
<PAGE> 130
PARISIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SHORT-TERM AND LONG-TERM DEBT
Short-term and long-term debt consist of the following:
<TABLE>
<CAPTION>
JANUARY 28, 1995 FEBRUARY 31, 1996
----------------------- -----------------------
YEAR-END YEAR-END
AMOUNT RATE AMOUNT RATE
------------ -------- ------------ --------
<S> <C> <C> <C> <C>
Short-term debt:
Bank revolving credit agreement..... $ 2,000,000 9.75% $ 0
Tax-exempt promissory note -- On
April 1, 1995, the note became
payable on demand and was paid in
May 1995......................... 4,109,749 7.22% 0
Current portion of long-term debt... 2,439,661 Various 2,863,604 Various
------------ ------------
Total short-term debt....... $ 8,549,410 $ 2,863,604
============ ============
Long-term debt:
Senior subordinated notes........... $125,000,000 9.875% $125,000,000 9.875%
Mortgage loans -- five separate
loans, payments due monthly,
based on an original 27-year
amortization, principal payments
totaling $18,791,733 due in
1998............................. 19,258,204 10.5% 19,037,150 10.5%
Tax-exempt promissory
note -- payable in annual
installments ranging from
$185,000 to $525,000 through
April 1, 2007 plus interest at a
variable rate as determined on a
weekly basis..................... 3,755,000 5.25%
Obligations under capitalized
leases: Headquarters and
distribution center -- payable in
quarterly installments
aggregating $3,615,288 in the
year ended 1996, varying in each
year to $3,548,327 in the year
ended 2000, including interest at
prime rate within the range of
4.75% to 15.25%.................. 14,487,900 8.5% 12,072,900 8.25%
Other capitalized leases............ 46,798 Various 4,248 12.05%
------------ ------------
$158,792,902 $159,869,298
============ ============
</TABLE>
Under a bank credit agreement, the Company may borrow through August 31,
1997 up to an amount such that the sum of loans outstanding and certain letters
of credit issued thereunder (Total Commitment Amount) may not exceed
$50,000,000. At February 3, 1996, $36,778,879 was available under this agreement
as the Company had $13,221,121 in standby letters of credit outstanding under
this agreement. The agreement requires that there be no aggregate principal
amount outstanding on the loans for a period of thirty consecutive days during
each calendar year. The bank credit loans bear interest at the bank's base rate
plus 1.25%, payable monthly, with the rate adjustable to as low as the base rate
plus .75% if certain debt to equity ratios are met. Bank credit loans may
alternatively bear interest, at the request of the Company, at LIBOR plus a
margin of 2.5% per annum. Certain commitment fees are also payable based upon
unused commitment amounts. The Company has pledged all of the capital stock of
its subsidiaries and certain notes receivable of the Company from Parisian
Services as collateral for the bank credit loans.
F-36
<PAGE> 131
PARISIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Under the bank credit agreement, the Company is subject to certain
affirmative and negative covenants. Some of the restrictive covenants are as
follows:
Negative covenants in the bank credit agreement include agreements
that the Company will not permit the current ratio at the end of any fiscal
quarter to be less than a range of 1.75 to 2.25, dependent on the fiscal
quarter, to 1.0; the ratio of long-term debt to equity at the end of any
fiscal quarter to be greater than a range of 2.6-2.15, dependent on the
fiscal quarter, to 1.0; earnings before interest, taxes, depreciation, and
amortization (EBITDA) to total debt service ratio at the end of any fiscal
quarter to be less than a range of 1.10 to 2.00, dependent on the fiscal
quarter, to 1.0; net worth, as defined, at the end of any fiscal quarter to
be less than the sum of (A) $55 million, (B) 80% of net income for each
fiscal year closed subsequent to January 29, 1995 for which net income was
positive, (C) certain capital contributions and (D) certain other
adjustments. Additionally, the Company may not declare, pay, or make any
dividend or distribution of any class of capital stock.
Information concerning the bank revolving credit agreements is as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ----------- ----------
<S> <C> <C> <C>
Bank credit agreement:
Weighted average interest rate based on
daily amounts outstanding.............. 8% 8.63% 10.25%
Average daily borrowings outstanding...... $ 361,000 $ 4,292,000 $ 827,820
Maximum borrowings outstanding at any
month end.............................. $7,500,000 $29,000,000 $9,500,000
</TABLE>
On July 15, 1993, the Company issued $125.0 million of 9.875% Senior
Subordinated Notes due 2003 (the Notes) and notified the holders of its Senior
Subordinated Debentures in the aggregate principal amount of $100.00 million
(the Debentures) of its intention to redeem, as of August 14, 1993, all of its
outstanding Debentures at the stated redemption price of 105.25%. One July 15,
1993, in order to effect such redemption, the Company deposited $107.25 million
representing the $100.0 million principal of Debentures to be redeemed at the
stated redemption price of 105.25% plus accrued and unpaid interest thereon to
August 14, 1993, with AmSouth Bank, as escrow agent. The Company utilized
proceeds from the issuance of the Notes to effect such redemption.
The Company recorded an extraordinary loss of $5.4 million after taxes for
the early retirement of debt. The extraordinary loss consists of the redemption
premium paid to holders of the Debentures and the write-off of the unamortized
portion of deferred financing fees associated with the retired Debentures.
On or after July 15, 1998, the Notes are redeemable at the option of the
Company, in whole or in part, at the redemption prices below plus accrued
interest at the redemption date.
<TABLE>
<CAPTION>
IF REDEEMED DURING THE TWELVE-MONTH PERCENTAGE OF
PERIOD BEGINNING JULY 15 PRINCIPAL
----------------------------------- -------------
<S> <C>
1998............................................ 104.938%
1999............................................ 102.469
2000 and thereafter............................. 100.00
</TABLE>
The Notes are uncollateralized obligations and are subordinated in right of
payment to all senior indebtedness, as defined. Senior indebtedness was
approximately $45,390,540 at February 3, 1996.
The Company is subject to certain covenants set forth in the indenture to
the Notes including, among others, the following: limitations on certain
restricted payments; limitations on certain indebtedness; limitations on liens;
limitations on dividends and other payment restrictions affecting subsidiaries;
limitations on transactions with affiliates; limitations on preferred stock of
subsidiaries; and limitations on future senior subordinated indebtedness.
F-37
<PAGE> 132
PARISIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Indebtedness outstanding under the tax-exempt promissory note bears
interest at a floating rate based on prime, but in no event is the rate to be
less than 6% or greater than 10%. During the years ended January 29, 1994,
January 28, 1995, and February 3, 1996 the interest rate ranged from 6% per
annum to 74.6% of prime. The interest charged changes within limits to protect
the lender's yield when there is a change in the maximum federal corporate
income tax rate. In May 1995, the Company purchased the tax-exempt bond with
funds available under the Receivables Facility. On October 19, 1995, the bond
was refunded, with credit enhancement provided by a financial institution. The
outstanding indebtedness bears interest at a floating rate.
At February 3, 1996, property and equipment with a net book value of
approximately $45,085,127 was pledged as collateral on the mortgage loans,
obligations under capitalized leases, equipment loan and security agreement, and
mortgage note. Substantially all of the Company's bank accounts are pledged as
collateral on the bank revolving credit agreement, described above.
The noncurrent portion of long-term debt at February 3, 1996 is payable as
follows:
<TABLE>
<S> <C>
Second succeeding year...................................... $ 445,416
Third succeeding year....................................... 19,016,734
Fourth succeeding year...................................... 245,000
Fifth succeeding year....................................... 270,000
Thereafter.................................................. 127,815,000
------------
147,792,150
Capitalized lease obligations:
Payable in monthly, semi-annual and annual installments... 12,077,148
------------
$159,869,298
============
</TABLE>
The future minimum lease payments required under capitalized lease
obligations are disclosed in Note 6.
Based on the borrowing rates currently available to the Company for
long-term debt with similar terms and average maturities, the fair value of
long-term debt is approximately $137,359,119 at February 3, 1996.
5. INCOME TAXES
The components of the current deferred income tax asset are:
<TABLE>
<CAPTION>
JANUARY 28, FEBRUARY 3,
1995 1996
----------- -----------
<S> <C> <C>
Inventory capitalization.................................... $1,406,435 $1,829,259
Allowances for doubtful accounts and return sales........... 910,319 1,148,056
Compensation accruals....................................... 633,794 622,579
Other....................................................... 462,114 68,766
---------- ----------
$3,412,662 $3,688,660
========== ==========
</TABLE>
F-38
<PAGE> 133
PARISIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the noncurrent deferred income tax liability are:
<TABLE>
<CAPTION>
JANUARY 28, FEBRUARY 3,
1995 1996
----------- -----------
<S> <C> <C>
Property and equipment...................................... $ 7,094,128 $ 6,095,988
Computer software costs..................................... 2,318,070 2,567,467
Store pre-opening costs..................................... 734,011 477,852
Compensation accruals....................................... (632,739) (727,915)
Alternative minimum tax credit.............................. (1,330,723)
Other....................................................... (11,952) (246,178)
----------- -----------
$ 8,170,795 $ 8,167,214
=========== ===========
</TABLE>
The provision (benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 28, FEBRUARY 3,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Federal:
Current......................................... $ 727,846 $ (58,003) $5,646,129
Deferred........................................ 1,055,992 (1,929,800) (243,627)
---------- ----------- ----------
1,783,838 (1,987,803) 5,402,502
---------- ----------- ----------
State:
Current......................................... 537,644 118,831 998,626
Deferred........................................ (616,952) 195,418 (15,952)
---------- ----------- ----------
(79,308) 314,249 982,674
---------- ----------- ----------
Provision for income taxes........................ $1,704,530 $(1,673,554) $6,385,176
========== =========== ==========
</TABLE>
In addition, an income tax benefit of $3,092,179 was recognized during the
year ended January 29, 1994 related to the extraordinary loss from early
retirement of debt.
The provision (benefit) for income taxes is different from the amount
computed by applying the federal income tax statutory rate to income (loss)
before provision (benefit) for income taxes. The reasons for this difference, as
a percentage of pretax income (loss), as follows:
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 28, FEBRUARY 3,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Federal income tax statutory rate..................... 34% (34)% 35%
Amortization of goodwill.............................. 23 9 5
State income taxes.................................... (3) 3 3
Other................................................. 8 (1) (1)
-- --- --
Effective income tax rate................... 62% (23)% 42%
== === ==
</TABLE>
F-39
<PAGE> 134
PARISIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Details of the deferred tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 28, FEBRUARY 3,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Inventory capitalization.......................... $ (41,639) $ (256,801) $ (422,824)
Property and equipment............................ (722,505) (210,083) (998,140)
Computer software costs........................... 583,534 249,397
Store pre-opening costs........................... 1,309,414 (154,624) (256,159)
Compensation accruals............................. (291,515) (6,076) (83,961)
Alternative minimum tax credit.................... (1,330,723) 1,330,723
Other, net........................................ 185,285 (359,609) (78,615)
---------- ----------- ----------
Deferred tax provision (benefit)........ $ 439,040 $(1,734,382) $ (259,579)
========== =========== ==========
</TABLE>
6. LEASES
The Company leases its headquarters and distribution center and another
facility under capitalized leases which expire in 2001 and 1996, respectively.
At expiration, the Company has the option to purchase the leased properties for
nominal amounts. In addition, the Company leases computer equipment under
capitalized leases expiring over the next three years.
The following is a summary of the leased property under capitalized leases
by major classes of property:
<TABLE>
<CAPTION>
JANUARY 28, FEBRUARY 3,
1995 1996
----------- -----------
<S> <C> <C>
Classes of Property
Buildings.............................................. $17,218,881 $17,219,894
Transportation equipment............................... 145,028
Furniture, fixtures, and equipment..................... 10,772,832 10,593,735
----------- -----------
28,136,741 27,813,629
Less accumulated amortization.......................... 10,871,026 11,119,920
----------- -----------
17,265,715 16,693,709
Land................................................... 711,507 711,507
----------- -----------
$17,977,222 $17,405,216
=========== ===========
</TABLE>
Future minimum lease payments required under capitalized lease obligations
together with the present value of the net minimum lease payments at February 3,
1996 are as follows:
<TABLE>
<S> <C>
First succeeding year....................................... $ 3,619,446
Second succeeding year...................................... 3,616,481
Third succeeding year....................................... 3,658,634
Fourth succeeding year...................................... 3,707,527
Fifth succeeding year....................................... 3,503,255
Thereafter..................................................
-----------
18,105,343
Less amount representing interest........................... 3,577,443
-----------
Present value of net minimum lease payments................. $14,527,900
===========
Current portion of above.................................... $ 2,455,000
===========
Noncurrent portion of above................................. $12,072,900
===========
</TABLE>
F-40
<PAGE> 135
PARISIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, the Company conducts a substantial portion of its operations
from thirty-one leased stores. The leases are operating leases and expire at
various times during the next 20 years. The Company can, at its option, renew
most of these leases at predetermined fair rental values for periods of five to
fifteen years. The rental payments under the store leases are based on a minimum
rental plus a percentage of the stores' sales in excess of stipulated amounts.
The Company also leases certain computer equipment, vehicles, and loss
prevention equipment under operating leases. The future minimum rental payments
under operating leases having initial or remaining noncancelable lease terms in
excess of one year as of February 3, 1996 are as follows:
<TABLE>
<S> <C>
First succeeding year....................................... $ 26,705,012
Second succeeding year...................................... 26,335,196
Third succeeding year....................................... 24,720,623
Fourth succeeding year...................................... 23,539,730
Fifth succeeding year....................................... 22,210,711
Thereafter.................................................. 251, 487,144
------------
Total minimum payments required................... $374,998,416
============
</TABLE>
The following schedule shows total rental expense for all operating leases:
<TABLE>
<CAPTION>
JANUARY 29, JANUARY 28, FEBRUARY 3,
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Minimum rentals................................. $12,548,820 $20,319,741 $27,553,590
Contingent rentals.............................. 1,785,982 1,270,191 2,231,259
----------- ----------- -----------
$14,334,802 $21,589,932 $29,784,849
=========== =========== ===========
</TABLE>
The Company leases one of its stores from a limited partnership which
includes certain officers of the Company. Rental expense related to the lease
amounted to $568,213 for the year ended January 29, 1994, $565,574 for the year
ended January 28, 1995 and $556,453 for the year ended February 3, 1996. The
future minimum lease payments required under the lease as of February 3, 1996
are $8,917,082.
In addition, the Company has entered into a lease for a future store
opening. The future minimum rental payments under this operating lease having an
initial noncancelable lease term in excess of one year as of February 3, 1996 is
as follows:
<TABLE>
<S> <C>
First succeeding year....................................... $ 0
Second succeeding year.................................... 875,160
Third succeeding year....................................... 875,160
Fourth succeeding year...................................... 875,160
Fifth succeeding year....................................... 875,160
Thereafter.................................................. 15,590,700
-----------
Total minimum payments required................... $19,091,340
===========
</TABLE>
7. EMPLOYEE BENEFIT PLANS
The Company has a combined profit-sharing and Section 401(k) plan which
provides death, disability, termination, and retirement benefits to its eligible
employees who are at least 21 years of age and have completed one year and 1,00
hours of service with the Company. The profit-sharing portion and the Section
401(k) portion of the plan provides for discretionary contributions by the
Company as determined by resolutions of the Board of Directors.
F-41
<PAGE> 136
PARISIAN, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Beginning in 1993, the Company's contribution to the profit-sharing portion
of the plan was terminated. With the Company's growth, the number of
participants in the plan had grown and the amount allocated to each participant
became diluted. Existing accounts will remain and continue to be invested.
The Company contribution to the Section 401(k) plan totaled $700,00 for the
year ended January 29, 1994. No company contribution was made to the plan for
the year ended January 28, 1995. The Company contribution to the Section 401(k)
plan totaled $600,000 for the year ended February 3, 1996.
8. STOCK OPTION PLANS
The Company's stock option plan for officers, as amended, allows for the
grant of options to purchase 405,882 shares of common stock to certain officers.
During April 1988 and March 1992, 345,000 and 20,000 options to purchase common
shares were granted, respectively. An additional 17,037 options to purchase
common shares were granted during September 1995. The exercise price for all
such options is $20.40 per share. These options were granted at an exercise
price that was equal to or above fair value as determined by a committee
consisting of the Participant Representatives under the plan. As of February 3,
1996, 324,667 of these options were outstanding; 57,370 options have been
forfeited in accordance with the provisions of the Plan. The options generally
began to vest at the rate of 20% per year from February 3, 1990. Participants
may exercise their vested options following the date such options become fully
vested. At February 3, 1996, 314,445 options are vested and became exercisable
during the month of May 1994. In the case of certain specified events, the
options would become immediately fully vested and exercisable subject to certain
regulatory requirements.
The Company's Management Incentive Plan allows for the grant of options to
purchase 101,471 shares of common stock to certain managers of the Company.
During July 1990 and March 1992, 60,250 and 5,750 options to purchase common
shares were granted, respectively, at an exercise price of $20.40 per share.
These options were granted at an exercise price that was equal to or above fair
value as determined by a committee consisting of the Participant Representatives
under the plan. The options generally began to vest at the rate of 20% per year
from February 2, 1991. Participants may exercise their vested options following
the date such options become fully vested. At February 3, 1996, 56,850 options
are vested and became exercisable during the month of May 1994. In the case of
certain specified events, the options would become immediately fully vested and
exercisable subject to certain regulatory requirements. Since the year ended
February 2, 1991 grant, 9,150 nonvested options have been forfeited in
accordance with the provisions of the Plan; consequently, as of January 28, 1995
and February 3, 1996, 57,050 and 56,850, respectively, of these options were
outstanding.
F-42
<PAGE> 137
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY THE INITIAL PURCHASERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR SOLICITATION OF AN OFFER TO
BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD
BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Explanatory Note...................... 2
Available Information................. 3
Cautionary Notice Regarding
Forward-Looking Statements.......... 3
Prospectus Summary.................... 4
Risk Factors.......................... 13
The Exchange Offer.................... 15
Plan of Distribution.................. 26
Use of Proceeds....................... 27
Capitalization........................ 27
Selected Financial Data............... 28
Pro Forma Combined Statement of Income
(unaudited)......................... 30
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 32
Business.............................. 41
Management............................ 50
Executive Compensation................ 53
Certain Transactions.................. 56
Principal Shareholders................ 58
Description of Other Indebtedness..... 60
Receivables Securitization
Facilities.......................... 62
Description of The Notes.............. 64
Certain Federal Income Tax
Considerations...................... 91
Legal Matters......................... 94
Experts............................... 94
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
[PROFFITT'S LOGO]
OFFER TO EXCHANGE
$125,000,000 in aggregate
principal amount of
8 1/8% Senior Notes
Due 2004, Series B
for all $125,000,000 in
aggregate outstanding
principal amount of
8 1/8% Senior Notes
Due 2004, Series A
------------------------
PROSPECTUS
------------------------
July 9, 1997
======================================================
